“Fertilizer B.V.” is part of a Norwegian group that produces, sells and distributes fertiliser (products). “Fertilizer B.V.” is the parent company of a several subsidiaries, including the intermediate holding company [C] BV and the production company [D] BV. The case before the Dutch Supreme Court involves two points of dispute: (i) is a factually highly effective hedge sufficient for mandatory connected valuation of USD receivables and payables? (ii) is the transfer prices according to the supply and distribution agreements between [D] and a Swiss group company (AG) at arm’s length? (i) Factual hedge of receivables and payables “Fertilizer B.V.” had receivables, forward foreign exchange contracts and liabilities in USD at the end of 2012 and 2013. It values those receivables and payables at acquisition price or lower value in use. It recognised currency gains as soon as they were realised and currency losses as soon as a receivable was valued lower or a debt higher. The court has measured dollar ... Read more

S, a Country X corporation, manufactures small motors that it sells to P, its U.S. parent. P incorporates the motors into various products and sells those products to uncontrolled customers in the United States. The contract price for the motors is expressed in U.S. dollars, effectively allocating the currency risk for these transactions to S for any currency fluctuations between the time the contract is signed and payment is made. As long as S has adequate financial capacity to bear this currency risk (including by hedging all or part of the risk) and the conduct of S and P is consistent with the terms of the contract (i.e., the contract price is not adjusted to reflect exchange rate movements), the agreement of the parties to allocate the exchange risk to S will be respected ... Read more

Cargill Argentine SA channelled 98% of its commodity exports through a branch in Uruguay. Cargill Argentine SA invoiced the exports to the branch, but shipped the goods directly to the customers. The prices charged by the branch to its customers could be the same, lower or higher than the price charged by Cargill Argentine SA to the branch, hence it would assume the price risks from the time of purchase from Cargill Argentine SA until the final sale to each customer. Following an audit, the Argentine Revenue Service issued a transfer pricing assessment for FY 2000 to 2003. According to the tax authorities the pricing of the transactions between Cargill Argentine SA and the Branch in Uruguay had not been at arm’s length. Instead of pricing the commodities on the contract date, the tax authorities priced the transactions on the date of shipping – based on the so called sixth Method. An appeal was filed by Cargill Argentine SA with ... Read more

In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €133,076,615. In November 2019 the district court ruled predominantly in favor of the tax authorities but reduced the adjustment to €78.294.312. An appel was filed by Fertilizer BV with the Court of Appeal. Judgement of the Court of Appeal Various issues related to the assessment was disputed before the Court. Dispute 1: Allocation of debt and equity capital to a permanent establishment in Libya in connection with the application of the object exemption. More specifically, the dispute is whether the creditworthiness of the head office was correctly taken as a starting point and a sufficient adjustment was made for the increased risk profile of the permanent establishment. The Court of Appeal answered this question in the affirmative, referring to the capital allocation approach that is regarded as the preferred method for the application of Article 7 ... Read more

More difficult transfer pricing issues may arise, however, if the contract instrument is entered into by the treasury entity or another MNE group entity, with the result that the positions are not matched within the same entity, although the MNE group position is protected. Where off-setting hedging contract instruments exist within the MNE group but not within the same entity, or where contract instruments do not exist within the MNE group but the MNE group position is protected (as may be the case with a natural hedge, for example), it would be inappropriate to match the hedges within the same entity or recognise hedging transactions where written contracts do not exist without a comprehensive analysis of the accurate delineation of the actual transactions under Section D.1 of Chapter I (for example, the existence of a deliberate concerted action to engage in a hedge of a specific risk) and the commercial rationality of the transactions under Section D.2 of Chapter I ... Read more

Where the centralised treasury function arranges a hedging contract that the operating entity enters into, that centralised function can be seen as providing a service to the operating entity, for which it should receive compensation on arm’s length terms ... Read more

Possible mechanisms by which an MNE group may centralise the hedging of risk include: delegation of responsibility for hedging to an MNE group treasury entity, with the hedging contracts arranged for and in the name of the relevant operating companies; delegation of responsibility for hedging to an MNE group treasury entity, with the hedging contracts made by and in the name of another MNE group entity; identification of the existence of natural hedges within the MNE group, in which case no formal hedging contracts are made ... Read more

Often an MNE group will centralise treasury functions and implement risk mitigation strategies relating to interest rate and currency risks in order to improve efficiency and effectiveness with the result that individual entities may not contractually enter into hedging arrangements although their risk is hedged from the perspective of the MNE as a whole ... Read more

Intra-group financial transactions may include instruments by which risk is transferred within the MNE group. For example, hedging arrangements are frequently used, in the ordinary course of business, as a means of mitigating exposure to risks such as foreign exchange or commodity price movements. An independent entity may decide to assume such risks or hedge against them according to its own policies. However, in an MNE group, such risks might be treated differently depending on the MNE group’s approach to risk management and hedging ... Read more

In considering whether a charge for the provision of services would be made between independent enterprises, it would also be relevant to consider the form that an arm’s length consideration would take had the transaction occurred between independent enterprises dealing at arm’s length. For example, in respect of financial services such as loans, foreign exchange and hedging, all of the remuneration may be built into the spread and it would not be appropriate to expect a further service fee to be charged if such were the case. Similarly, in some buying or procurement services a commission element may be incorporated in the price of the product or services procured, and a separate service fee may not be appropriate ... Read more

DIGITEX INFORMATICA S.L. had entered into a substantial service contract with an unrelated party in Latin America, Telefonica, according to which the DIGITEX group would provide certain services for Telefonica. The contract originally entered by DIGITEX INFORMATICA S.L. was later transferred to DIGITEX’s Latin American subsidiaries. But after the transfer, cost and amortizations related to the contract were still paid – and deducted for tax purposes – by DIGITEX in Spain. The tax authorities found that costs (amortizations, interest payments etc.) related to the Telefonica contract – after the contract had been transferred to the subsidiaries – should have been reinvoiced to the subsidiaries, and an assessment was issued to DIGITEX for FY 2010 and 2011 where these deductions had been disallowed. DIGITEX on its side argued that by not re-invoicing the costs to the subsidiaries the income received from the subsidiaries increased. According to the intercompany contract, DIGITEX would invoice related entities 1% of the turnover of its own ... Read more

Following an audit of Mopani Copper Mines Plc. the Zambian Revenue Authority (ZRA) found that the price of copper sold to related party Glencore International AG had been significantly lower than the price of copper sold to third parties. A tax assessment was issued where the ZRA concluded that the internal pricing had not been determined in accordance with the arm’s length principle, and further that one of the main purposes for the mis-pricing had been to reduce tax liabilities. Mopani Copper Mines Plc. first appealed the decision to Zambia’s Tax Appeal Tribunal, and after a decision was handed down by the Tribunal in favor of the ZRA, a new appeal was filed with the Supreme Court. The Supreme Court dismissed Mopani’s appeal and ruled in favor of the ZRA. App-024-2017-Mopani-Copper-Mines-Plc-Vs-Zambia-Revenue-Authority-20th-May-2020-Mambilima-Cj-Malila-And-Mutuna-JJS ... Read more

Today, the OECD has released the report Transfer Pricing Guidance on Financial Transactions. The guidance in the report describes the transfer pricing aspects of financial transactions and includes a number of examples to illustrate the principles discussed in the report. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E address specific issues related to the pricing of financial transactions (e.g. treasury functions, ... Read more

More difficult transfer pricing issues may arise, however, if the contract instrument is entered into by the treasury entity or another MNE group entity, with the result that the positions are not matched within the same entity, although the MNE group position is protected. Where off-setting hedging contract instruments exist within the MNE group but not within the same entity, or where contract instruments do not exist within the MNE group but the MNE group position is protected (as may be the case with a natural hedge, for example), it would be inappropriate to match the hedges within the same entity or recognise hedging transactions where written contracts do not exist without a comprehensive analysis of the accurate delineation of the actual transactions under Section D.1 of Chapter I (for example, the existence of a deliberate concerted action to engage in a hedge of a specific risk) and the commercial rationality of the transactions under Section D.2 of Chapter I ... Read more

Where the centralised treasury function arranges a hedging contract that the operating entity enters into, that centralised function can be seen as providing a service to the operating entity, for which it should receive compensation on arm’s length terms ... Read more

Possible mechanisms by which an MNE group may centralise the hedging of risk include: delegation of responsibility for hedging to an MNE group treasury entity, with the hedging contracts arranged for and in the name of the relevant operating companies; delegation of responsibility for hedging to an MNE group treasury entity, with the hedging contracts made by and in the name of another MNE group entity; identification of the existence of natural hedges within the MNE group, in which case no formal hedging contracts are made ... Read more

Often an MNE group will centralise treasury functions and implement risk mitigation strategies relating to interest rate and currency risks in order to improve efficiency and effectiveness with the result that individual entities may not contractually enter into hedging arrangements although their risk is hedged from the perspective of the MNE as a whole ... Read more

Intra-group financial transactions may include instruments by which risk is transferred within the MNE group. For example, hedging arrangements are frequently used, in the ordinary course of business, as a means of mitigating exposure to risks such as foreign exchange or commodity price movements. An independent entity may decide to assume such risks or hedge against them according to its own policies. However, in an MNE group, such risks might be treated differently depending on the MNE group’s approach to risk management and hedging ... Read more

In considering whether a charge for the provision of services would be made between independent enterprises, it would also be relevant to consider the form that an arm’s length consideration would take had the transaction occurred between independent enterprises dealing at arm’s length. For example, in respect of financial services such as loans, foreign exchange and hedging, all of the remuneration may be built into the spread and it would not be appropriate to expect a further service fee to be charged if such were the case. Similarly, in some buying or procurement services a commission element may be incorporated in the price of the product or services procured, and a separate service fee may not be appropriate ... Read more

This case is about extensive tax evasion set up by the tax manager of the Asian Agri Group. According to the tax authorities income from export sales had been manipulated. Products were sent directly to the end buyer, whereas the invoices recorded that the products were first sold to companies in Hong Kong and then sold to a company in Macau or the British Virgin Islands before they were finally sold to the end buyer. The intermediary companies were proven to have been used only for the purpose of lowering the taxable income by under-invoicing the sales prices compared to the sales price to the end buyer. Various fees had also been deducted from the companies income to further lower the tax payment. These included a “Jakarta fee”, a Hedging fee and a Management fee. Judgement of the Supreme Court The court ruled that the tax manager was guilty of submitting an incorrect or incomplete tax return. On that basis ... Read more