SAS Sames Kremlin marketed its products abroad through subsidiaries or independent agents, depending on the territory. In Argentina, Brazil, India, Portugal and Russia it sold its products through subsidiaries under either a buy/sell distributor agreement or a commissionaire agreement. In Iran, Turkey and South Korea it sold the goods through independent agents to whom it paid a commission. The tax authorities considered that the commission paid to the independent agents was a CUP and determined the commission paid to the subsidiaries on that basis. The remuneration of the subsidiaries in excess of the commission (margin) paid to the independent agents was considered to be a transfer of profits abroad. SAS Sames Kremlin appealed against the assessment, arguing that the subsidiaries performed much more important functions than independent agents and that there were also significant geographical differences. The Administrative Court rejected the appeal and the case was then brought before the Administrative Court of Appeal. Judgement of the Court The Court ... Read more

SA Exel Industries marketed its products abroad through subsidiaries or independent agents, depending on the territory. In Brazil, India, Argentina, Russia and Portugal it sold its products through subsidiaries under either a buy/sell distributor agreement or a commissionaire agreement. In Iran, Turkey and South Korea it sold through independent agents to whom it paid a commission. The tax authorities considered that the commission paid to the independent agents was a CUP and determined the commission paid to the subsidiaries on that basis. The remuneration of the subsidiaries in excess of the commission (margin) paid to the independent agents was considered to be a transfer of profits abroad. SA Exel Industries appealed against this assessment, arguing that the subsidiaries performed much more important functions than independent agents. It also argued that there were significant market differences, since the subsidiaries operated in highly strategic markets where the major car manufacturers were dominant, while the other markets in which the independent agents operated ... Read more

Comparable Sales of Same Product. USM, a U.S. manufacturer, sells the same product to both controlled and uncontrolled distributors. The circumstances surrounding the controlled and uncontrolled transactions are substantially the same, except that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. USM’s factory. Differences in the contractual terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price, and adjustments are made to the results of the uncontrolled transaction to account for such differences. No other material difference has been identified between the controlled and uncontrolled transactions. Because USM sells in both the controlled and uncontrolled transactions, it is likely that all material differences between the two transactions have been identified. In addition, because the comparable uncontrolled price method is applied to an uncontrolled comparable with no product differences, and there are only minor contractual differences that have a definite and reasonably ascertainable effect on price, the results of ... Read more

At issue was an interest free loan granted by “L…. Engenharia e Construções, S.A.” to a related party. The loan had been granted before the parties became related following an acquisition in 2007. The tax authorities had issued an assessment where the interest had been determined to 1.4% based on the interest rate that would later apply to the loan according to the agreement. An appeal was filed by “L…. Engenharia e Construções, S.A.” with the Administrative Court, where the assessment was later set aside. An appeal was then filed by the tax authorities with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the decision of the administrative court, dismissed the appeal of the tax authorities and annulled the assessment. Excerpt “In this regard, it cannot be ignored that the contract entered into by the Claimant with the company Construtora do L…. SGPS, SA, on 21 September 2004, is not a true shareholder ... 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

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same ... Read more

GlaxoSmithKline Costa Rica S.A. manufactures pharma products which is sold to both independent customers in the region and to group companies abroad. For FY 2004 and 2005 pricing of the controlled transactions had been determined based on the TNMM method using return on total costs (ROTC) as PLI. GSK said the range of return on total costs “for the comparable independent companies ranges from 4.7 per cent to 14.5 per cent, with a median of 9.6 per cent. GSK CR obtained an average ROTC of 50.6 percent during fiscal years 2004 and 2005, which was not below the range identified for comparable independent companies. Accordingly, the transfer prices used by GSK CR in its controlled transactions did not distort GSK CR’s profitability and satisfied the arm’s length principle set out in the OECD Guidelines. In 2009 the tax authorities issued an assessment for FY 2004 and 2005 based on the internal CUP method. “…between the transactions under study, namely sales ... Read more

DELSEY España distributes and sells suitcases and other travel accessories of the DESLEY brand on the Spanish market and belongs to the French multinational group of the same name. The Spanish distributor had declared losses for FY 2005-2010 and was subject to a transfer pricing audit for FY 2011 to 2014. Based on the audit, the tax authorities concluded that the losses in FY 2005-2010 was a result of controlled transactions not being priced at arm’s length. The same was concluded for FY 2011 and 2012. The CUP method and RPM method applied by the taxpayer was found to be inappropriate and was replaced with the TNMM by the tax authorities. An appeal was filed by Delsey España S.A. Judgement of the Court The Court dismissed the appeal and upheld the assessment. Click here for English translation Click here for other translation ... Read more

Whereas it is unlikely that an MNE group’s average interest rate paid on its external debt meets the comparability requirements to be considered as an internal CUP, it may be possible to identify potential comparable loans within the borrower’s or its MNE group’s financing with an independent lender as the counterparty. As with external CUPs, it may be necessary to make appropriate adjustments to improve comparability. See Example 1 at 1.164 – 1.166 ... Read more

When considering issues of comparability, the possibility of internal CUPs should not be overlooked ... Read more

Lender GmbH acquired all shares in T GmbH from T in 2012 (year in dispute) for a purchase price of … €. To finance the purchase price of the shares, Lender GmbH took out a loan from its sole shareholder, D GmbH, a loan in the amount of … €, which bore interest at 8% p.a. (shareholder loan). The interest was not to be paid on an ongoing basis, but only on expiry of the loan agreement on 31.12.2021. No collateral was agreed. D GmbH, for its part, borrowed funds in the same amount and under identical terms and conditions from its shareholders, among others from its Dutch shareholder N U.A. In addition Lender GmbH received a bank loan in the amount of … €, which had an average interest rate of 4.78% p.a. and was fully secured. Finally Lender GmbH also received a vendor loan from the vendor T in the amount of … €, which bore an interest ... Read more

31 March 2021 the Polish Ministry of Finance published tax explanations on transfer pricing No. 3 regarding the CUP method The explanations covers: the rationale for using the comparable uncontrolled price method, variants of the comparable uncontrolled price method, comparison of the comparable uncontrolled price method with other methods, typical areas of application of the comparable uncontrolled price method, difficulties in applying the comparable uncontrolled price method, example of using the comparable uncontrolled price method. Click here for unofficial English translation ... Read more

Transactions had taken place between E.I. S.r.l. and a related Spanish company, S. SA, where the pricing had been determined based on the cost plus method. An assessment was issued by the tax authorities on the basis of a “comparable” transactions (internal CUP) between the E.I. S.r.l. and an independent third company where the price had been higher. An appeal was filed by E.I. S.r.l. with the Provincial Tax Commission where E.I S.r.l. argued that the price difference was due to volume discounts. The Provincial Tax Commission held in favour of E.I S.r.l. An appeal was then filed by the tax authorities with the Regional Tax Commission. Judgement of the Regional Tax Commission The Regional Commission dismissed the appeal of the tax authorities and decided in favour of E.I. S.r.l. Excerpts: “The Commission observes that the judges at first instance correctly and in detail reasoned their decisions, with a wealth of detail and a careful examination of all the circumstances ... 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

Gulbrandsen Chemicals manufactures chemicals for industrial customers in the petrochemical and pharmaceutical industry. The Indian Subsidiary, Gulbrandsen India also sold these products to its affiliated enterprises, namely Gulbrandsen Chemicals Inc, USA, and Gulbrandsen EU Limited. In regards of the controlled transactions, the tax authorities noticed that Gulbrandsen India had shifted from use of the internal CUP method to pricing based on the Transactional Net Margin Method (TNMM). The tax authorities were of the view that, given the facts of the case, the internal CUP was the most appropriate method. It was noted that Gulbrandsen India had sold 40% of its products to the associated enterprises, and earned a margin of PBIT/Cost at 2.07%, as against the sale of 70% of its products in the prior year and earning margin of PBIT/Cost at 3.26%. Following a decision of the Tax Tribunal, where the assessment of the tax authorities was set aside, the tax authorities filed an appeal with the High Court, ... Read more

A Swiss bank had a subsidiary in Guernsey that administered a number of funds and received a management fee of 1.5% of the net value of the assets under management and a performance fee of 10–20% of the funds’ performance. The activities of the Guernsey company were delegated to the Swiss parent and third parties. Both the third parties and the Swiss parent received an management fee of 0.75%, but only the third parties also received a performance fee. The tax administration claimed that 70% of the performance fees and a remuneration for other activities should have been paid to the Swiss parent. Judgement of the Supreme Court The Court found that the agreed conditions with third-party service providers were at arm’s length, and should also have been applied in relation to the Swiss parent company. Hence, the court dismissed the appeal of Click here for English translation Click here for other translation ... 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 €162,506,660. Fertilizer BV is the parent company of a fiscal unity for corporation tax (hereinafter: FU). It is a limited partner in a limited partnership under Dutch law, which operates a factory in [Country 1]. The interested party borrowed the money for the capital contribution to the limited partnership from a wholly-owned subsidiary. The share in profits from the limited partnership was expressed as profit from a permanent establishment. In dispute was the amount of interest attributable to the permanent establishment. The court followed the inspector in allocating – in connection with the [circumstances] in [Country 1] – 75% equity and 25% loan capital to the PE. Furthermore, the FU had deposits and loans in USD. These positions were partly hedged by forward exchange contracts. Fertilizer BV valued these deposits and loans at the historical acquisition ... Read more

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the ... Read more

The Italian tax authorities had issued an assessment against a local distribution company of a multinational group, where the transfer pricing analysis conducted by the taxpayer had been disregarded. The tax authorities, carried out a new benchmark analysis based on the transactional net margin method (“TNMM”) and adjusted the company’s profitability to the median. Judgement of the Court The Court decided in favour of BI S.r.l. and cancelled the assessment. The Court stated that the profitability range calculated by the tax authorities goes, for the year 2013, from a minimum value of 1.40% to a maximum of 18.28%. The local distribution company had obtained a ROS/EBIT margin of 8.38%, and since the last percentage falls between the minimum and the maximum, the court set aside the assessment. In regards to the TP analysis performed by the tax authorities the Court stated: “The company had applied the CUP method, as it was considered the most direct and reliable method to apply ... Read more

Recordati Industria Chimica e Farmaceutica S.p.A had been issued an assessment by the tax authorities for FY 2003 on various issues related to transfer pricing. Recordati Industria Chimica e Farmaceutica S.p.A. disagreed with the assessment and brought the case to court. The Regional Tax Commission of Lombardy (Ctr) issued a decision where it partially annulled the assessment. This decision was challenged both by the tax authorities and Recordati Industria Chimica e Farmaceutica S.p.A. Judgement of the Supreme Court Before the Supreme Court there were 29 issues to be resolved. The Supreme Court predominantly ruled in favour of the tax authorities. The court confirms that transfer pricing adjustments are applicable even in the absence of proof by the administration of a concrete tax advantage by the taxpayer. The shift of taxable income following transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence ... Read more

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 ... Read more

Nestlé de Costa Rica S.A. had been issued a tax assessment in which the taxable income for FY 2005 and 2006 was adjusted with an additional amount of ¢60,609,096.00 and ¢75,663,084.00. According to the tax authorities, the sales made by Nestlé to its related companies located in Chile, Switzerland and Puerto Rico had a profit margin different from those made to third parties. The margin on the unrelated transactions was 88% whereas the margins on comparable related party transactions was only 7%. The adjustments was determined based on internal CUPs. Judgement of the Court The Court dismissed the appeal of Nestlé. Excerpts “This Chamber agrees with the Tribunal, in the sense that the expert witness Luna Ramírez, during her testimony, does not manage to disprove the system applied by the Tax Administration, since she rejects the method used, however, she also states that it is difficult to resort to any other method. What is clear from this testimony is that ... Read more

In this case, the tax authorities had issued an assessment to Belle Corporation pursuant to Section 43 (now Section 50) of the National Internal Revenue Code. The tax authorities alleges that Belle’s granting of advances to its affiliates is tantamount to granting loan or credit which is subject to DST under Section 180 of the Tax Code. Furthermore, the CIR argues that the letters of instruction and cash vouchers, which are written documents to advance money from one company to another, are loan transactions by their very nature even though they do not strictly conform to the supposed documentation of a loan. The advances covered by inter-office memo made by BELLE to its affiliates should be treated as loans extended to the latter, and the inter-office memo is in the nature of a promissory note within the purview of Section 180 of the Tax Code. Judgement of the Tax Court The Court decided predominantly in favour of the tax authorities ... Read more

Avon Products exported products to related parties at lower price than charged when sold domestically. The tax authorities issued an assessment where the export prices had been adjusted. Judgement of the Tax Court The Court decided in favour of Avon Products. According to the court the initial burden to prove that the pricing of inter-company transactions complies with the arm’s-length principle lies with the taxpayer. However, once sufficient proof is provided, the burden shifts, and the revenue authority must then prove that the adjustment is sufficiently supported. Before the court Avon argued that the export and domestic markets were two different markets. The export market was very competitive while the domestic market was a captured market due to an exclusive Supply Agreement with AVON Cosmetics, Inc. Avon also argued that export sales maximized the productivity level which in turn lowers unit cost of production as the fixed overhead was spread over a larger number of product units. Excerpts: “This Court ... Read more