In no case should transactional profit methods be used so as to result in over-taxing enterprises mainly because they make profits lower than the average, or in under-taxing enterprises that make higher than average profits. There is no justification under the arm’s length principle for imposing additional tax on enterprises that are less successful than average or, conversely, for under-taxing enterprises that are more successful than average, when the reason for their success or lack thereof is attributable to commercial factors ... Read more

In no case should transactional profit methods be used so as to result in over-taxing enterprises mainly because they make profits lower than the average, or in under-taxing enterprises that make higher than average profits. There is no justification under the arm’s length principle for imposing additional tax on enterprises that are less successful than average or, conversely, for under-taxing enterprises that are more successful than average, when the reason for their success or lack thereof is attributable to commercial factors ... Read more

All methods that apply the arm’s length principle can be tied to the concept that independent enterprises consider the options realistically available to them and in comparing one option to another they consider any differences between the options that would significantly affect their value. For instance, before purchasing a product at a given price, independent enterprises normally would be expected to consider whether they could buy an equivalent product on otherwise comparable terms and conditions but at a lower price from another party. Therefore, as discussed in Chapter II, Part II, the comparable uncontrolled price method compares a controlled transaction to similar uncontrolled transactions to provide a direct estimate of the price the parties would have agreed to had they resorted directly to a market alternative to the controlled transaction. However, the method becomes a less reliable substitute for arm’s length transactions if not all the characteristics of these uncontrolled transactions that significantly affect the price charged between independent enterprises ... Read more

A German company, A & W AG, operated a permanent establishment in Austria providing software distribution and support services. The Austrian tax authority applied a cost-plus mark-up of 7.5–9.5% to attribute profits to the PE, citing industry averages. The Unabhängiger Finanzsenat ruled predominantly in favour of the taxpayer in 2010, finding the authority's empirical references insufficiently specific and accepting the taxpayer's proposed 2% mark-up as appropriate ... Read more

A German company operating a software distribution and support permanent establishment in Austria contested tax authority assessments applying cost-plus mark-ups of 7.5–9.5% for FY 1998–2002. The Austrian Administrative Court found the mark-ups incomprehensible and insufficiently supported by comparable company data, remanding the case for re-examination. On remand, a 2% cost mark-up was ultimately accepted as appropriate ... Read more