Tag: Internal set-offs

TPG2022 Chapter III paragraph 3.17

A taxpayer may seek on examination a reduction in a transfer pricing adjustment based on an unintentional over-reporting of taxable income. Tax administrations in their discretion may or may not grant this request. Tax administrations may also consider such requests in the context of mutual agreement procedures and corresponding adjustments (see Chapter IV) ... Read more

TPG2022 Chapter III paragraph 3.16

It may be necessary to evaluate the transactions separately to determine whether they each satisfy the arm’s length principle. If the transactions are to be analysed together, care should be taken in selecting comparable transactions and regard had to the discussion at paragraphs 3.9-3.12. The terms of set-offs relating to international transactions between associated enterprises may not be fully consistent with those relating to purely domestic transactions between independent enterprises because of the differences in tax treatment of the set-off under different national tax systems or differences in the treatment of the payment under a bilateral tax treaty. For example, withholding tax would complicate a set-off of royalties against sales receipts ... Read more

TPG2022 Chapter III paragraph 3.15

Recognition of intentional set-offs does not change the fundamental requirement that for tax purposes the transfer prices for controlled transactions must be consistent with the arm’s length principle. It would be a good practice for taxpayers to disclose the existence of set-offs intentionally built into two or more transactions between associated enterprises and demonstrate (or acknowledge that they have relevant supporting information and have undertaken sufficient analysis to be able to show) that, after taking account of the set-offs, the conditions governing the transactions are consistent with the arm’s length principle ... Read more

TPG2022 Chapter III paragraph 3.14

Intentional set-offs may vary in size and complexity. Such set-offs may range from a simple balance of two transactions (such as a favourable selling price for manufactured goods in return for a favourable purchase price for the raw material used in producing the goods) to an arrangement for a general settlement balancing all benefits accruing to both parties over a period. Independent enterprises would be very unlikely to consider the latter type of arrangement unless the benefits could be sufficiently accurately quantified and the contract is created in advance. Otherwise, independent enterprises normally would prefer to allow their receipts and disbursements to flow independently of each other, taking any profit or loss resulting from normal trading ... Read more

TPG2022 Chapter III paragraph 3.13

An intentional set-off is one that associated enterprises incorporate knowingly into the terms of the controlled transactions. It occurs when one associated enterprise has provided a benefit to another associated enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return. These enterprises may indicate that the benefit each has received should be set off against the benefit each has provided as full or part payment for those benefits so that only the net gain or loss (if any) on the transactions needs to be considered for purposes of assessing tax liabilities. For example, an enterprise may license another enterprise to use a patent in return for the provision of know-how in another connection and indicate that the transactions result in no profit or loss to either party. Such arrangements may sometimes be encountered between independent enterprises and should be assessed in accordance with the arm’s length principle in order to quantify ... Read more

TPG2022 Chapter III paragraph 3.12

Even in uncontrolled transactions, package deals may combine elements that are subject to different tax treatment under domestic law or an income tax convention. For example, royalty payments may be subject to withholding tax but lease payments may be subject to net taxation. In such circumstances, it may still be appropriate to determine the transfer pricing on a package basis, and the tax administration could then determine whether for other tax reasons it is necessary to allocate the price to the elements of the package. In making this determination, tax administrations should examine the package deal between associated enterprises in the same way that they would analyse similar deals between independent enterprises. Taxpayers should be prepared to show that the package deal reflects appropriate transfer pricing ... Read more

TPG2017 Chapter III paragraph 3.17

A taxpayer may seek on examination a reduction in a transfer pricing adjustment based on an unintentional over-reporting of taxable income. Tax administrations in their discretion may or may not grant this request. Tax administrations may also consider such requests in the context of mutual agreement procedures and corresponding adjustments (see Chapter IV) ... Read more

TPG2017 Chapter III paragraph 3.16

It may be necessary to evaluate the transactions separately to determine whether they each satisfy the arm’s length principle. If the transactions are to be analysed together, care should be taken in selecting comparable transactions and regard had to the discussion at paragraphs 3.9-3.12. The terms of set-offs relating to international transactions between associated enterprises may not be fully consistent with those relating to purely domestic transactions between independent enterprises because of the differences in tax treatment of the set-off under different national tax systems or differences in the treatment of the payment under a bilateral tax treaty. For example, withholding tax would complicate a set-off of royalties against sales receipts ... Read more

TPG2017 Chapter III paragraph 3.15

Recognition of intentional set-offs does not change the fundamental requirement that for tax purposes the transfer prices for controlled transactions must be consistent with the arm’s length principle. It would be a good practice for taxpayers to disclose the existence of set-offs intentionally built into two or more transactions between associated enterprises and demonstrate (or acknowledge that they have relevant supporting information and have undertaken sufficient analysis to be able to show) that, after taking account of the set-offs, the conditions governing the transactions are consistent with the arm’s length principle ... Read more

TPG2017 Chapter III paragraph 3.14

Intentional set-offs may vary in size and complexity. Such set-offs may range from a simple balance of two transactions (such as a favourable selling price for manufactured goods in return for a favourable purchase price for the raw material used in producing the goods) to an arrangement for a general settlement balancing all benefits accruing to both parties over a period. Independent enterprises would be very unlikely to consider the latter type of arrangement unless the benefits could be sufficiently accurately quantified and the contract is created in advance. Otherwise, independent enterprises normally would prefer to allow their receipts and disbursements to flow independently of each other, taking any profit or loss resulting from normal trading ... Read more

TPG2017 Chapter III paragraph 3.13

An intentional set-off is one that associated enterprises incorporate knowingly into the terms of the controlled transactions. It occurs when one associated enterprise has provided a benefit to another associated enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return. These enterprises may indicate that the benefit each has received should be set off against the benefit each has provided as full or part payment for those benefits so that only the net gain or loss (if any) on the transactions needs to be considered for purposes of assessing tax liabilities. For example, an enterprise may license another enterprise to use a patent in return for the provision of know-how in another connection and indicate that the transactions result in no profit or loss to either party. Such arrangements may sometimes be encountered between independent enterprises and should be assessed in accordance with the arm’s length principle in order to quantify ... Read more

TPG2017 Chapter III paragraph 3.12

Even in uncontrolled transactions, package deals may combine elements that are subject to different tax treatment under domestic law or an income tax convention. For example, royalty payments may be subject to withholding tax but lease payments may be subject to net taxation. In such circumstances, it may still be appropriate to determine the transfer pricing on a package basis, and the tax administration could then determine whether for other tax reasons it is necessary to allocate the price to the elements of the package. In making this determination, tax administrations should examine the package deal between associated enterprises in the same way that they would analyse similar deals between independent enterprises. Taxpayers should be prepared to show that the package deal reflects appropriate transfer pricing ... Read more
Sweden vs Nordea Nordic Baltic AB, October 2015, Administrative Court of Appeal, Case No 4811-14, 4813–4817-14

Sweden vs Nordea Nordic Baltic AB, October 2015, Administrative Court of Appeal, Case No 4811-14, 4813–4817-14

Nordea Nordic Baltic AB was the manager of funds and a central distributor in Sweden of certain funds registered in Luxembourg. The company entered into a new distribution agreement that replaced two previous agreements. According to this new agreement, the remuneration to the company was lower than under the previous agreement. The company considered that the compensation under the old agreements had been too high which therefore compensated for (set-off) the lower compensation received according to the new agreement. The Court of Appeal stated that the set-off principle must be applied with caution. A basic precondition should be that these are transactions that have arisen within the framework of the same contractual relationship. It did not matter if the company was overcompensated by another party to the agreement. Any overcompensation in previous years from the same contracting party could also not be taken into account as it was the result of a different pricing strategy within the framework of another ... Read more
Sweden vs Svenske Shell AB, October 1991, Supreme Administrative Court, Case no RÅ 1991 ref. 107

Sweden vs Svenske Shell AB, October 1991, Supreme Administrative Court, Case no RÅ 1991 ref. 107

Svenske Shell AB imported crude oil from its UK sister company SIPC over a five-year period. Imports included the purchase and shipping of crude oil to the port of Gothenburg i Sweden from different parts of the world. The price of the oil was based on a framework agreement entered into between the parties, while the freight was calculated based on templates with no direct connection to the actual individual transport. The tax authorities considered that the pricing in both parts was incorrect and therefore partially refused deduction of the costs of oil imports. The assessment (and the later judgement of the Supreme Administrative Court) was based on the wording of the former Swedish “arm’s length” provision dating back to 1965. Decision of Court The Court did not consider that a price deviation has been sufficiently established where the applied price of only a single transaction deviates from the market price. Applying such a narrow view on price comparisons in ... Read more