Delmonte Kenya ran an integrated pineapple business in Kenya, covering the cultivation, harvesting, processing, packing and export of finished pineapple products. Its controlled transactions included the sale of fresh and processed pineapple products to foreign group distributors, intercompany charges and recharges for agricultural inputs and other production-related costs, and intra-group financing through related-party loan arrangements. Delmonte argued that it should be characterised as a cost-plus service-type producer with a routine return, while key market-facing functions and residual profits should belong to related parties abroad. Following an audit, the tax authority argued that the pricing and documentation did not reflect the economic reality of where the value was created. They claimed that Delmonte Kenya performed the core functions and bore key risks, meaning it had understated the taxable profits in Kenya. According to the tax authority Delmonte Kenya should not be the tested party when applying the transfer pricing method. Furthermore, they asserted that Del Monte had not provided sufficient documentation ... Read more

A Korean subsidiary of a Dutch multinational electronics group imported medical equipment, small household appliances, and lighting products from related parties and sold them in Korea. The company also provided after-sales maintenance services for medical equipment. For FY 2012 to 2015, the company applied the transactional net margin method separately to each business division and reported its corporate tax accordingly, using operating profit margin as the profit level indicator. Following an audit the tax authorities reclassified the company’s activities into four segments. They concluded that in the medical equipment, small household appliances, and automotive lighting segments, the transfer prices paid to foreign related parties exceeded arm’s length levels, while no upward adjustment was needed for the general lighting segment. On that basis, they issued a tax assessment. The authorities treated maintenance service activities in the medical equipment segment as closely linked to product sales and selected comparable companies largely based on similarity to domestic maintenance service businesses. The taxpayer challenged ... Read more

Nestlé Zambia Limited (NZL) had made continuous losses during the period in question. Following an audit, the Zambia Revenue Authority (ZRA) issued an assessment adjusting NZL’s income, resulting in additional taxable income. While the Tax Appeals Tribunal found that the ZRA was justified in initiating a transfer pricing audit of NZL, it held that the resulting assessment was invalid due to the ZRA applying inappropriate transfer pricing methods and using comparables from unsuitable jurisdictions. NZL filed a cross-appeal, arguing that the Tribunal had erred in categorising it as a low-risk distributor and that the Tribunal had exceeded its jurisdiction by directing the ZRA to reassess. The ZRA filed an appeal and NZL filed a cross-appeal against the decision of the Tax Appeals Tribunal. In their appeal, the ZRA argued that the Tribunal had misinterpreted the law, incorrectly criticised the ZRA’s use of methods and comparables, and overlooked NZL’s obligation to demonstrate that its transactions were conducted at arm’s length. The ... Read more

A Korean subsidiary of a multinational electronics group imported medical equipment, small household appliances and lighting products from related parties abroad and sold them in Korea. It also provided after-sales maintenance services for medical equipment. The taxpayer segmented its activities by business line, applying the transactional net margin method separately to each segment and using operating profit margin as the profit level indicator. Maintenance services relating to medical equipment were treated either as a distinct activity or as a routine function with limited profitability. Following an audit, the tax authorities rejected the taxpayer’s segmentation and functional analysis. They reclassified the taxpayer’s activities into four segments, treating the maintenance services for medical equipment as economically integrated with the sale of medical equipment. Based on this, they concluded that the prices paid to foreign related parties for medical equipment, small household appliances and automotive lighting products exceeded arm’s length price, while no adjustment was required for the general lighting segment. The authorities ... Read more

Procter & Gamble Sdn. Bhd., is a Malaysian company engaged in the marketing and distribution of consumer goods, which purchased products from a related Singapore entity, Procter & Gamble International Operations Pte. Ltd., under a distribution agreement. The agreement guaranteed the Malaysian entity a margin of 2.25 percent. For the years of assessment 2004 to 2008, the taxpayer characterised itself as a limited risk distributor and supported the margin with transfer pricing documentation based on regional and local comparable companies. Following a transfer pricing audit, the tax authorities rejected the taxpayer’s characterisation as a limited risk distributor and recharacterised it as a full fledged distributor. The tax authority relied on contractual clauses, the taxpayer’s control over marketing and advertising activities, and its bearing of certain commercial risks. It selected a new set of comparables, adjusted the taxpayer’s results to the median, disallowed certain grant payments, and imposed additional tax and penalties amounting to approximately RM 44.6 million, invoking section 140(6) ... Read more

Circular on transfer pricing – profitability rates and ranges for certain transactions – Limited Risk Distributors (LRDs) ... Read more