Hitachi Solutions India had excluded the amortization of goodwill from operating costs when conducting its comparability study, claiming it was an extraordinary, non-operating item unrelated to its normal service functions. The tax authorities disagreed, arguing that since the goodwill arose from the acquisition of the taxpayer’s business, the related amortization was a recurring cost reflected in the profit and loss account and should be considered part of the operating expenses. They included it in the operating cost base, which reduced the taxpayer’s profit level indicator and affected the arm’s length analysis. An appeal was then filed by Hitachi with the Income Tax Appellate Tribunal. Decision The Income Tax Appellate Tribunal held that amortization of goodwill stems from a capital transaction, not routine operations, and including it would distort comparability with independent companies performing similar services. It concluded that such costs must be excluded from operating expenses and treated as non-operating for transfer pricing purposes. Click here for other translation ... Read more

“Metal KtF”‘s main activity was the production of metal parts for the automotive industry. It had been making losses since 2012, while the group to which it belonged was profitable as a whole. The tax authorities conducted an audit and classified “Metal KtF” as a low-risk manufacturing company (contract manufacturer) because the functions and business risks assumed were not the same as those of an independent manufacturing company and the losses were partly the result of decisions taken by the parent company. The tax authorities concluded that “Metal KtF” provided a hidden service to the parent company by tolerating loss-making production. An assessmet was issued where the difference between the operating result (loss) reported by “Metal KtF” and the calculated arm’s length operating result had been added to the taxable income. “Metal KtF” filed an appeal, which was mostly dismissed by the Administrative Court, and an appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court ... Read more

Futaba Czech s.r.o. is a Czech company that has been operating since 2005 as a manufacturer and supplier of components for the automotive industry and is part of the Japanese Futaba group. Futaba had been loss making in FY 2016-2017. Following a transfer pricing audit, the tax authorities found that Futaba had provided “comprehensive production service”, which should have compensated by the group. An assessment was issued based on the TNMM with NCP as Profit Level Indicator. Futaba Czech contested the assessment on several grounds. It argued that no instructions or pricing directives from the parent had been proven; that it in fact bore most business functions, risks and financing decisions; that the tax authorities had wrongly reallocated the functional‐and‐risk profile in a value‐chain analysis (for example assigning research and development 50 percent weight versus only 15 percent to production); that the choice of the transaction‐net‐margin method and aggregation over individual‐transaction methods was unjustified; that the reference period (2014–16) and ... Read more

BASF ARGENTINA S.A. is an Argentine company that manufactures and distributes chemical products, paints, plastics and agricultural inputs. For the 2008 tax year it filed a transfer pricing study applying the TNMM to most transactions with related parties abroad and the CUP method for interest on loans, using external comparables and BASF’s global income statement as the tested data. Following an audit focused on this study, the tax authorities determined income tax ex officio for 2008, increasing taxable income by ARS 5,625,444.17 on the basis that BASF’s profitability, especially in its chemical manufacturing activity, was below the range of independent comparables. The tax authorities did not dispute the choice of TNMM, the multi year period or the set of external comparables, but challenged BASF’s implementation of TNMM and certain comparability adjustments. They rejected BASF’s aggregation of all business segments and functions into a single operating margin, and instead used segmented information by function that BASF later provided, concluding that the ... Read more

The Administrative Court had annulled an income assessment issued by the tax authorities to Yazaki Bulgaria in FY 2014, 2015 and 2016. An appeal was filed by the tax authorities with the Supreme Administrative Court for annulment of the judgment. In the assessment, the tax authorities had accepted the comparability analysis carried out by Yazaki Bulgaria in respect of transactions relating to the manufacture of automotive products, including the calculated interquartile range of market values established on the basis of data for 25 comparable companies. According to the benchmark study the Net Cost Plus margins of the comparable companies for the three-year period were as follows: 2014 weighted average Net Cost Plus – lower quartile 2.27%, median 4.16% and upper quartile 7.02%; 2015 weighted average Net Cost plus 2015 – lower quartile 1.68%, median 4.31% and top quartile 6.80%; 2016 weighted average Net Cost plus for 2016 – lower quartile – 2.22%, median 3.95% and top quartile 7.66%; The actual ... Read more

“A Bottler S.R.L.” carried out intra-group transactions in two main areas: producing (bottling) soft drinks and purchasing finished products for local distribution. In its transfer pricing file, it had used the transactional net margin method (TNMM) and analyzed data on a multi-year basis. It also adjusted certain large, one-off expenses (such as revaluation of land and buildings and reorganization costs) on grounds they were non-recurring items that should be excluded to ensure a proper like-for-like comparison. During the tax audit, however, the authorities recalculated the company’s results using annual figures (instead of multi-year averages) and reversed A. S.R.L.’s exclusion of those one-off expenses. They also changed how certain comparables were included or excluded in the benchmarking sample. The audit concluded that A. S.R.L.’s profits in the bottling and distribution segments were below the arm’s length range, leading to significant upward adjustments for corporate income tax. A. S.R.L. challenged these adjustments, arguing that the multi-year approach was justified under the OECD ... Read more

TRMSB is a company incorporated in Malaysia and part of the Thomson Reuters Group. Thomson Reuters Global Resources (“TRGR”) entered into the Local Distribution Agreement with TRMSB. Pursuant to the agreements, TRMSB was appointed to market and sell TRGR’s products in the form of “Information Services” and “Dealing Services” in Malaysia. The arm’s length remuneration for its distribution activities was determined to an operating margin of 2% by applying the TNMM where nine companies had been selected as comparables. Following an audit, the tax authorities (DGIR) rejected five of the nine selected companies and replaced them with three new comparables. The tax authorities also rejected TRMSB’s target operating margin of 2% by including SG&A costs in the calculation of TRMSB’s margin. Not satisfied with the assessments, TRMSB appealed to the Special Commissioner of Income Tax (SCIT). It argued that paragraph 2.80 of the OECD Guidelines provides that non-operating income and expenses should be considered as “exceptional and extraordinary” and should ... Read more

Rotary Drilling Tools Colombia (RTD Colombia) applied the transactional net margin method (TNMM) to assess whether its income complied with the arm’s length principle. As part of this analysis, the company made a comparability adjustment by excluding a bad debt expense of COP 918,088,000 from its administrative costs. This exclusion of costs increased its operating margin, bringing it within the interquartile range of the selected comparables. The Colombian tax authorities rejected this adjustment, arguing that the comparable companies used in the benchmark analysis also included bad debt expenses in their accounts. They recalculated RTD Colombia’s operating margin by including the bad debt expense and concluded that the margin fell outside the interquartile range. As a result, they made an adjustment to align the company’s margin with the median of the comparables. RTD Colombia appealed the adjustment before the Administrative Court, which largely upheld the position of the tax authorities. The company subsequently appealed to the Supreme Administrative Court. Judgment The ... Read more

“Spare Parts S.A. had transactions with related parties abroad for the purchase of inventory, administrative services, technical services, commissions, purchase of fixed assets, royalties and provision of administrative services. “Spare Parts S.A.” had used the Transaction Net Margin Method (TNMM) to determine the transfer prices for these transactions. Following an audit, the tax authorities found inconsistencies between the income tax returns and the transfer pricing reports. The tax authorities found that “Spare Parts S.A.” had excluded USD 6 million 956 thousand 967 from its general and administrative expenses in the calculation of the profit margin, by classifying these ordinary costs as extraordinary expenses. When the costs were included in the calculation, the profit of “Spare Parts S.A.” was below the range established in its transfer pricing study. The tax authorities therefore adjusted its operating margin to the median of 4.39%. Not satisfied with the adjustment, Spare Parts S.A. filed a complaint. Decision of the Court The Tax Court ruled in ... Read more

Yazaki Bulgaria Ltd is active in the automotive industry and is part of the Japanese Yazaki Group. It had used the transactional net margin method (TNMM) to demonstrate that prices for the sale of products to related parties were at arm’s length. Following an audit, the tax authorities found that the company’s profit was outside the arm’s length range and issued an assessment of additional income for FY2014-2016. According to the tax authorities, Yazaki Bulgaria Ltd had not included all its costs when calculating its profit margin. Administrative Court Judgment The Administrative Court annulled the tax authority’s assessment and ruled in favour of Yazaki Bulgaria Ltd. Excerpt “It is undisputed in this case that the adjustments made by the appellant for comparability with the amounts of additional labour costs in individual years are as follows: For 2014, the reported operating loss of £2,192,845.67 was adjusted upwards to a net profit of £4,837,402.79 as a result of the elimination for comparability ... Read more

Following an audit of “Tin Cup Ltd” for FY 2016 and 2017 an assessment was issued by the tax authorities regarding excessive amounts of waste materials and pricing of intra-group transactions. On the issue of excessive amounts of waste materials, tax deductions was denied by the authorities as the costs was not considered to have been held in the interest of the company, i.e. it did not take place with the purpose of increasing “Tin Cup Ltd” income. On the second issue, the tax authorities found that the most appropriate method for the transactions in question (sales to a related party) was the CUP method. Applying the CUP to the controlled transactions (instead of the TNMM) resulted in additional income of approximately 392.000 EUR in total for FY 2016 and 2017. A complaint was filed by “Tin Cup Ltd” with the Dispute Resolution Board. Decision of the Board The Board upheld the assessment of the tax authorities both in regards ... Read more

The Danish tax authorities had made a discretionary assessment on the taxable income of Tetra Pak Processing Systems A/S due to inadequate transfer pricing documentation and ongoing losses. The Supreme Court’s ruling. The Supreme Court found that the TP documentation provided by the company did not meet the required standards. The TP documentation did not show how the prices between Tetra Pak and the sales companies had been determined and did not contain a comparability analysis as required by the current § 3 B, para. 5 of the Tax Control Act and Section 6 of the Danish administrative regulation on transfer pricing documentation. Against this background, the Supreme Court found that the TP documentation was deficient to such an extent that it had to be equated with a lack of documentation. The Supreme Court agreed that Tetra Pak’s taxable income for the years 2005-2009 could be determined on a discretionary basis. According to the Supreme Court, Tetra Pak had not ... Read more

Second, it will be necessary to consider how exceptional, non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties.19 These costs should be allocated based on an assessment of how independent enterprises under comparable circumstances operate. Separately, as extraordinary costs may be recognised as either operating or non-operating items, comparability adjustments may be necessary to improve the reliability of a comparability analysis. It is important to keep in mind that the treatment in a transfer pricing analysis of “exceptional,” “non-recurring,” or “extraordinary” costs incurred as a result of the pandemic will not be dictated by the label applied to such costs, but by an accurate delineation of the transaction, an analysis of the risks assumed by the parties to the intercompany transaction, an understanding of how independent enterprises may reflect such costs in arm’s length prices, and ultimately how such costs may impact prices charged in transactions between the associated enterprises (see OECD TPG paragraph ... Read more

In this case, a Romanian manufacturer and distributor (A. SA) in the Electrolux group (C) had been loss making while the group as a whole had been profitable. The tax authorities issued an assessment, where the profit of A. SA had been determined based on a comparison to the profitability of independent traders in households appliances. When calculating the profit margin of A. SA certain adjustments was made to the costs – depreciations, extraordinary costs etc. When comparing A. SA’s net profit to financial results with those of the group to which it belongs, it emerged that, during the period under review, the applicant was loss-making while C. made a profit. With reference to paragraphs 1.70 and 1.71 of the OECD Transfer Pricing Guidelines, when an affiliated company consistently makes a loss while the group as a whole is profitable, the data may call for a special analysis of the transfer pricing elements, as this loss-making company may not receive ... Read more

Following an audit, the Colombian tax authorities issued a notice of additional taxable income for FY 2006. The notice was based on an assessment in which they concluded that Vidrio Andino S.A.’s profit margin was below the interquartile range established in the benchmark study, and the result was therefore adjusted to the median. An appeal was filed with the Administrative Court, which later ruled in favour of the tax authorities. An appeal was then filed with the Council of State. According to Vidrio Andino S.A., the results were within the range when a comparability adjustment was made to the results for extraordinary administrative expenses. Judgment of the Court The Council of State overturned the decision of the Administrative Court and ruled in favour of Vidrio Andino S.A. Excerpt in English “The Chamber then departs from the Tribunal’s conclusion, as it considers that the applicant demonstrated the existence of a higher value of administrative expenses assumed by Vidrio Andino due to ... Read more