Tag: Internal comparables

Comparable transactions between the considered taxpayer (or another entity of its group) and an unrelated party

Denmark vs. ECCO A/S , October 2020, High Court, Case No SKM2020.397.VLR

Denmark vs. ECCO A/S , October 2020, High Court, Case No SKM2020.397.VLR

ECCO A/S is the parent company of a multinational group, whose main activity is the design, development, production and sale of shoes. The group was founded in 1963, and has since gone from being a small Danish shoe manufacturer to being a global player with about 20,000 employees and with sales and production subsidiaries in a large number of countries. ECCO purchased goods from both internal and external producers, and at issue was whether transactions with it’s foreign subsidiaries had been conducted at arm’s length terms. ECCO had prepared two sets of two transfer pricing documentation, both of which were available when the tax authorities issued its assessment. The transfer pricing documentation contained a review of the parent company’s pricing and terms in relation to both internal and external production companies, and a comparability analyzes. The High Court issued a decision in favor of the ECCO A/S. The Court found that the transfer pricing documentation was not deficient to such ... Continue to full case
Portugal vs A S.A., October 2019, Tribunal Arbitral Coletivo, Case No 511/2018-T

Portugal vs A S.A., October 2019, Tribunal Arbitral Coletivo, Case No 511/2018-T

Company A is a Portuguese company in Group G (with an Indian parent) engaged in the production and sale of footwear and fashion accessories. Company C and Company D are also subsidiaries of the Group. Company A sold raw materials and goods to Company C and Company D, but also to unrelated parties. Company A had determined the pricing of the controlled transactions using the TNMM. External comparables were found using a commercial database. The Portuguese tax authority instead applied the TNMM using exclusively internal comparables, and on that basis it was concluded that the pricing of the controlled transactions had not been at arm’s length. The Tribunal found that the method applied by the tax authority was the most appropriate method for pricing the controlled transactions. Part 1 – Click here for translation Part 2 – Click here for translation P511_2018-T - 2019-10-10 - JURISPRUDENCIA ... Continue to full case
Argentina vs. Nike, June 2019, Court of Appeal, Case No TF 24495-I

Argentina vs. Nike, June 2019, Court of Appeal, Case No TF 24495-I

The tax authorities had partly disallowed amounts deducted by Nike Argentina for three expenses; royalties for use of trademarks and technical assistance, promotional expenses for sponsorship of the Brazilian Football Confederation, and commissions of Nike Inc. for purchasing agents. Issue one and two was dropped during the process and the remaining issue before the tribunal was expenses related to commissions for purchases according to a contract signed between Nike Argentina and Nike Inc. The tax authorities (AFIP) had found that the 7% commission rate paid by Nike Argentina had not been determined in accordance with the arm’s length principle. The tax authorities stated that the purchase management services were provided by NIAC, and that Nike Inc.’s participation was merely an intermediary, and therefore it charged a much higher percentage than the one invoiced by the company performing the actual management. The Court of Appeal ruled in favor of Nike Argentina. The analysis in the Transfer Price Study based on external ... Continue to full case
Argentina vs. Nike, August 2017, Tribunal Fiscal de la Nación, Case No 24.495-I

Argentina vs. Nike, August 2017, Tribunal Fiscal de la Nación, Case No 24.495-I

The tax authorities had partly disallowed amounts deducted by Nike Argentina for three expenses; royalties for use of trademarks and technical assistance, promotional expenses for sponsorship of the Brazilian Football Confederation, and commissions of Nike Inc. for purchasing agents. Issue one and two was dropped during the process and the remaining issue before the tribunal was expenses related to commissions for purchases according to a contract signed between Nike Argentina and Nike Inc. The tax authorities (AFIP) had found that the 7% commission rate paid by Nike Argentina had not been determined in accordance with the arm’s length principle. The tax authorities stated that the purchase management services were provided by NIAC, and that Nike Inc.’s participation was merely an intermediary, and therefore it charged a much higher percentage than the one invoiced by the company performing the actual management. The Tribunal Fiscal ruled in favor of Nike Argentina. The analysis in the Transfer Price Study based on external comparables ... Continue to full case

TPG2017 Chapter III paragraph 3.28

On the other hand, internal comparables are not always more reliable and it is not the case that any transaction between a taxpayer and an independent party can be regarded as a reliable comparable for controlled transactions carried on by the same taxpayer. Internal comparables where they exist must satisfy the five comparability factors in the same way as external comparables, see paragraphs 1.33-1.118. Guidance on comparability adjustments also applies to internal comparables, see paragraphs 3.47-3.54. Assume for instance that a taxpayer manufactures a particular product, sells a significant volume thereof to its foreign associated retailer and a marginal volume of the same product to an independent party. In such a case, the difference in volumes is likely to materially affect the comparability of the two transactions. If it is not possible to make a reasonably accurate adjustment to eliminate the effects of such difference, the transaction between the taxpayer and its independent customer is unlikely to be a reliable ... Continue to full case

TPG2017 Chapter III paragraph 3.27

Step 4 of the typical process described at paragraph 3.4 is a review of existing internal comparables, if any. Internal comparables may have a more direct and closer relationship to the transaction under review than external comparables. The financial analysis may be easier and more reliable as it will presumably rely on identical accounting standards and practices for the internal comparable and for the controlled transaction. In addition, access to information on internal comparables may be both more complete and less costly ... Continue to full case

TPG2017 Chapter III paragraph 3.24

A comparable uncontrolled transaction is a transaction between two independent parties that is comparable to the controlled transaction under examination. It can be either a comparable transaction between one party to the controlled transaction and an independent party (“internal comparable”) or between two independent enterprises, neither of which is a party to the controlled transaction (“external comparable”) ... Continue to full case

TPG2017 Chapter II paragraph 2.64

The transactional net margin method examines the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realises from a controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particular that the net profit indicator of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) should ideally be established by reference to the net profit indicator that the same taxpayer earns in comparable uncontrolled transactions, i.e. by reference to “internal comparables” (see paragraphs 3.27-3.28). Where this is not possible, the net margin ... Continue to full case

TPG2017 Chapter II paragraph 2.46

The cost plus mark-up of the supplier in the controlled transaction should ideally be established by reference to the cost plus mark-up that the same supplier earns in comparable uncontrolled transactions (“internal comparable”). In addition, the cost plus mark-up that would have been earned in comparable transactions by an independent enterprise may serve as a guide (“external comparable”) ... Continue to full case

TPG2017 Chapter II paragraph 2.28

The resale price margin of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchased and sold in comparable uncontrolled transactions (“internal comparable”). Also, the resale price margin earned by an independent enterprise in comparable uncontrolled transactions may serve as a guide (“external comparable”). Where the reseller is carrying on a general brokerage business, the resale price margin may be related to a brokerage fee, which is usually calculated as a percentage of the sales price of the product sold. The determination of the resale price margin in such a case should take into account whether the broker is acting as an agent or a principal ... Continue to full case
France vs. Sté Amycel France, 16 March 2016, CE, No 372372),

France vs. Sté Amycel France, 16 March 2016, CE, No 372372),

In Sté Amycel France the Court held that the Tax Administration must use an “appropriate” comparable when making transfer pricing adjustments. The French company was selling goods to both group companies and unrelated final customers. The tax administration had used a transaction with the third party customers as an internal comparable. However, as the related companies were acting as distributors, the comparison with the pricing applied to a third party customers was considered inappropriate for the purposes of assessing an arm’s length dealing. The court found that the pricing difference actually reflected the fact that the contractual relationship in the two situations was not comparable. Click here for other translation France vs Amycel France _16_03_2016_CE no 372372 ... Continue to full case
Chile vs "MMM Limitada", July 2015, Tax Court, Case N° RIT GR-12-00069-2013

Chile vs “MMM Limitada”, July 2015, Tax Court, Case N° RIT GR-12-00069-2013

The Tax Court accepted a claim filed against an assessments resulting from the application of transfer pricing rules. MMM Limitada indicated that the Internal Revenue Service was unable to exercise its powers to challenge the prices of exports made, since the companies participating in the disputed transactions were not related. It added that the Revenue Service had not used the system of reasonable profitability, nor that of reasonable margin on production costs, nor the comparison with international prices, lacking a logical analysis in the determination of prices, since these did not consider the factors that differentiate the quality of the chips, thus violating the rule of Article 38 of the Income Tax Law. The Revenue Service based its analysis on a comparison of the terms of an intercompany transaction with the terms of a transaction between independent companies, using factors including the characteristics of the good being traded, the functions performed by the companies involved in the transaction, the contractual ... Continue to full case
Italy vs. Solvay s.a., October 2013, Supreme Court, 24005

Italy vs. Solvay s.a., October 2013, Supreme Court, 24005

Following an audit of the Italian company Solvay Italia, the tax authorities adjusted the amounts charged for sales of goods (soda ash and sodium bicarbonate) by that company to foreign companies belonging to the same group and, in particular, to the parent company Solvay s. a. a. in Belgium. According to the tax authorities the prices charged in relation to the aforesaid intra-group sales were considerably lower than the “normal value” of the sales determined in accordance with the CUP method and in particular, the prices charged in Italy by the seller company itself when dealing with independent parties, which were over 44% higher than those resulting from the aforesaid intra-group transactions. The tax authorities issue notice of assessment for FY 1997, in an amount of EUR 1,023,862. Solvay s.a. appealed against the notice of assessment and the appeal was upheld by both the first and second instance courts. The tax authorities then filed an appeal to the Supreme Court ... Continue to full case
Poland vs Lender S.A, October 2013, Supreme Administrative Court, Case No II FSK 2297/11 - Wyrok NSA

Poland vs Lender S.A, October 2013, Supreme Administrative Court, Case No II FSK 2297/11 – Wyrok NSA

At issue in this case is the choice of method for determening interest rates on an intra group loan – More precisely whether or not internal comparables existed that were in fact independent. It is also discussed whether a intra group loan is comparable to a bank loan or not. Click here for translation II FSK 2297-11 - Wyrok ... Continue to full case
Canada vs Alberta Printed Circuits Ltd., April 2011, Tax Court of Canada, Case No 2011 TCC 232

Canada vs Alberta Printed Circuits Ltd., April 2011, Tax Court of Canada, Case No 2011 TCC 232

Alberta Printed Circuits Ltd (APC, the taxpayer) was a Canadian manufacturer of custom prototype circuit boards. The manufacturing process was initially manual and later automated. In 1996, a Barbados company, APCI Inc.,  was formed via a complex ownership structure. The Barbados company provided services to Alberta Printed Circuits Ltd. by performing setup functions, software and website development, and maintenance services. APCI charged the appellant a fixed fee for the setup services and a square-inch fee for non-setup services. Alberta Printed Circuits Ltd charged the same fee for the same services to third-party customers. The tax authorities asserted that the Alberta Printed Circuits Ltd overpaid APCI $3.4 million because the terms and conditions of the agreements differed from those that would have been entered at arm’s length. Alberta Printed Circuits Ltd provided evidence of internal comparable transactions and transfer prices were determined by the comparable uncontrolled price (CUP) method. The court held that the price paid to APCI for the setup fees was arm’s length. It ... Continue to full case
Australia vs. Roche July 2008, Administrative Appeals Tribunal NT 2005/7 & 56-65

Australia vs. Roche July 2008, Administrative Appeals Tribunal NT 2005/7 & 56-65

The Applicant is an Australian subsidiary of the Roche Group, the parent company of which is a resident of Switzerland. Roche is a major pharmaceutical corporation with integrated operations in many countries. It carries on research and development, manufacturing, marketing, selling and distribution of pharmaceuticals, vitamins, chemicals, diagnostic and other products. During the 1993 to 2003 income years (the relevant income years) the Applicant carried on business in Australia marketing, selling and distributing Roche products through three divisions: the Prescription Division (dealing in prescribed drugs), the Consumer Health Division (dealing in over the counter pharmaceuticals) and Diagnostic Products (dealing in diagnostic equipment and supplies). Australia-vs-ROCHE-PRODUCTS-PTY-LTD-July-2008-Administrative-Appeals-Tribunal ... Continue to full case
Turkey vs Headquarter Corp, September 2007, Danıştay Üçüncü Dairesi, E. 2007/89 K. 2007/2446, T. 20.09.2007

Turkey vs Headquarter Corp, September 2007, Danıştay Üçüncü Dairesi, E. 2007/89 K. 2007/2446, T. 20.09.2007

Headquarter Corp had transaction with it’s branch in the Turkish Mersin Free Zone. The branch imported the goods subject to the transaction from abroad for $ 2,298,137.79 and these goods were then transferred from the branch to the Headquarter Corps for US $ 3,214,135.00 without any special processing, production process or added value by the branch. The tax office issued an assessment where the price of the controlled transactions were adjusted based on the import price (internal CUP). Headquarter Corp brought the assessment to court. The tax court stated, that because the branch does not have a separate legal entity from the company, profits were not transferred out of the company as a result of the high-priced transaction. Therefor there was no hidden distribution of income. However, it was also concluded that the reason behind the sale of the goods sold to the Headquarter from the branch in the free zone of Mersin, at a price that was above market prices for ... Continue to full case