Tag: Know-how

All undivulged technical information, whether or not capable of being patented, that is necessary for the industrial reproduction of a product or process, i.e. knowing how a product is made or how a particular process works. Payments for knowhow may be taxed as royalties in many cases. The distinction from contracts for the provision of services is addressed in the OECD Commentary to Article 12.

France vs Bluestar Silicones France, Feb 2021, Supreme Administrative Court (CAA), Case No 16VE00352

France vs Bluestar Silicones France, Feb 2021, Supreme Administrative Court (CAA), Case No 16VE00352

Bluestar Silicones France (BSF), now Elkem Silicones France SAS (ESF), produces silicones and various products that it sells to other companies belonging to the Bluestar Silicones International group. The company was audited for the financial years 2007 – 2008 and an assessment was issued. According to the tax authorities, the selling prices of the silicone products had been below the arm’s length price and the company had refrained from invoicing of management exepences and cost of secondment of employees . In the course of the proceedings agreement had been reached on the pricing of products. Hence, in dispute before the court was the issue of lacking invoicing of management exepences and cost of secondment of employees for the benefit of the Chinese and Brazilian subsidiaries of the Group. According to the company there had been no hidden transfer of profits; its method of constructing the group’s prices has not changed and compliance with the arm’s length principle has been demonstrated ... Continue to full case
Denmark vs. Adecco A/S, June 2020, Supreme Court, Case No SKM2020.303.HR

Denmark vs. Adecco A/S, June 2020, Supreme Court, Case No SKM2020.303.HR

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these ... Continue to full case
Denmark vs Adecco A/S, Oct 2019, High Court, Case No SKM2019.537.OLR

Denmark vs Adecco A/S, Oct 2019, High Court, Case No SKM2019.537.OLR

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. “Section 2 of the Tax Assessment Act. Paragraph 1 states that, when calculating the taxable income, group affiliates must apply prices and terms for commercial or economic transactions in accordance with what could have been agreed if the transactions had been concluded between independent parties. SKAT does not consider it in accordance with section ... Continue to full case
US vs Medtronic, August 2018, U.S. Court of Appeals, Case No: 17-1866

US vs Medtronic, August 2018, U.S. Court of Appeals, Case No: 17-1866

The IRS was of the opinion, that Medtronic erred in allocating the profit earned from its devises and leads between its businesses located in the United States and its device manufacturer in Puerto Rico. To determine the arm’s length price for Medtronic’s intercompany licensing agreements the comparable profits method was therefor applied by the IRS, rather than the comparable uncontrolled transaction (CUT) method used by Medtronic. Medtronic brought the case to the Tax Court. The Tax Court applied its own valuation analysis and concluded that the Pacesetter agreement was the best CUT to calculate the arm’s length result for intangible property. This decision from the Tax Court was then appealed by the IRS to the Court of Appeals. The Court of Appeal found that the Tax Court’s factual findings were insufficient. The Tax Court failed to: address whether the circumstances of the Pacesetter settlement was comparable to the licensing agreements in this case, the degree of comparability of the contractual ... Continue to full case
Japan vs C Uyemura & Co, Ltd, November 2017, Tokyo District Court, Case No. 267-141 (Order No. 13090)

Japan vs C Uyemura & Co, Ltd, November 2017, Tokyo District Court, Case No. 267-141 (Order No. 13090)

C Uyemura & Co, Ltd. is engaged in the business of manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending over technical experts. The company had used a CUP method to price these transactions based on “internal comparables”. The tax authorities found that the amount of the consideration paid to C Uyemura & Co, Ltd for the licenses and services had not been at arm’s length and issued an assessment where the residual profit split method was applied to determine the taxable profit for the fiscal years 2000 – 2004. C Uyemura & Co, Ltd disapproved of the assessment. The company held that it was inappropriate to use a residual profit split method and that there were errors in the calculations performed by the tax authorities. Judgement of the Court The Court ... Continue to full case
TPG2017 Chapter VI Annex example 24

TPG2017 Chapter VI Annex example 24

86. Zhu is a company engaged in software development consulting. In the past Zhu has developed software supporting ATM transactions for client Bank A. In the process of doing so, Zhu created and retained an interest in proprietary copyrighted software code that is potentially suitable for use by other similarly situated banking clients, albeit with some revision and customisation. 87. Assume that Company S, an associated enterprise of Zhu, enters into a separate agreement to develop software supporting ATM operations for another bank, Bank B. Zhu agrees to support its associated enterprise by providing employees who worked on the Bank A engagement to work on Company S’s Bank B engagement. Those employees have access to software designs and know-how developed in the Bank A engagement, including proprietary software code. That code and the services of the Zhu employees are utilised by Company S in executing its Bank B engagement. Ultimately, Bank B is provided by Company S with a software ... Continue to full case

TPG2017 Chapter VI paragraph 6.20

Know-how and trade secrets are proprietary information or knowledge that assist or improve a commercial activity, but that are not registered for protection in the manner of a patent or trademark. Know-how and trade secrets generally consist of undisclosed information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise. Know-how and trade secrets may relate to manufacturing, marketing, research and development, or any other commercial activity. The value of know-how and trade secrets is often dependent on the ability of the enterprise to preserve the confidentiality of the know-how or trade secret. In certain industries the disclosure of information necessary to obtain patent protection could assist competitors in developing alternative solutions. Accordingly, an enterprise may, for sound business reasons, choose not to register patentable know-how, which may nonetheless contribute substantially to the success of the enterprise. The confidential nature of know-how and trade secrets may be protected to ... Continue to full case

TPG2017 Chapter I paragraph 1.155

It should be noted, however, that in some situations, the transfer or secondment of one or more employees may, depending on the facts and circumstances, result in the transfer of valuable know-how or other intangibles from one associated enterprise to another. For example, an employee of Company A seconded to Company B may have knowledge of a secret formula owned by Company A and may make that secret formula available to Company B for use in its commercial operations. Similarly, employees of Company A seconded to Company B to assist with a factory start-up may make Company A manufacturing know-how available to Company B for use in its commercial operations. Where such a provision of know-how or other intangibles results from the transfer or secondment of employees, it should be separately analysed under the provisions of Chapter VI and an appropriate price should be paid for the right to use the intangibles ... Continue to full case

TPG2017 Chapter I paragraph 1.107

Differences in the specific characteristics of property or services often account, at least in part, for differences in their value in the open market. Therefore, comparisons of these features may be useful in delineating the transaction and in determining the comparability of controlled and uncontrolled transactions. Characteristics that may be important to consider include the following: in the case of transfers of tangible property, the physical features of the property, its quality and reliability, and the availability and volume of supply; in the case of the provision of services, the nature and extent of the services; and in the case of intangible property, the form of transaction (e.g. licensing or sale), the type of property (e.g. patent, trademark, or know-how), the duration and degree of protection, and the anticipated benefits from the use of the property. For further discussion of some of the specific features of intangibles that may prove important in a comparability analysis involving transfers of intangibles or ... Continue to full case

TPG2017 Chapter I paragraph 1.49

Where no written terms exist, the actual transaction would need to be deduced from the evidence of actual conduct provided by identifying the economically relevant characteristics of the transaction. In some circumstances the actual outcome of commercial or financial relations may not have been identified as a transaction by the MNE, but nevertheless may result in a transfer of material value, the terms of which would need to be deduced from the conduct of the parties. For example, technical assistance may have been granted, synergies may have been created through deliberate concerted action (as discussed in Section D.8), or know-how may have been provided through seconded employees or otherwise. These relations may not have been recognised by the MNE, may not be reflected in the pricing of other connected transactions, may not have been formalised in written contracts, and may not appear as entries in the accounting systems. Where the transaction has not been formalised, all aspects would need to ... Continue to full case
US vs. Medtronic Inc. June 2016, US Tax Court

US vs. Medtronic Inc. June 2016, US Tax Court

The IRS argued that Medtronic Inc failed to accurately account for the value of trade secrets and other intangibles owned by Medtronic Inc and used by Medtronic’s Puerto Rico manufacturing subsidiary in 2005 and 2006 when determening the royalty payments from the subsidiary. In 2016 the United States Tax Court found in favor of Medtronic, sustaining the use of the CUT method to analyze royalty payments. The Court also found that adjustments to the CUT were required. These included additional adjustments not initially applied by Medtronic Inc for know-how, profit potential and scope of product. The decision from the United States Tax Court has been appealed by the IRS in 2017. US-Memo-2016-112-Medtronic-v.-Commissioner ... Continue to full case
Italy vs GE TRANSPORTATION SYSTEMS SPA, December 2014, Supreme Court 27296

Italy vs GE TRANSPORTATION SYSTEMS SPA, December 2014, Supreme Court 27296

In this case the Italien tax administration concluded that transactions between an Italien company an a German sister company had been priced lower than the “normal value” of similar transactions. Judgement of the Supreme Court The Supreme Court ruled partly in favor of the GE Transportation Systems S.p.A. and partly in favour of the tax authorities. The case was remanded to the lower court for further considerations. In relation to intercompany transactions the court found that GE Transportation Systems S.p.A. had only limited risk and that the German company owned the intellectual property. In relation to transactions with independent companies, GE Transportation Systems S.p.A. assumed the risks of the transaction and had the rights to manufacture and sell the products. These differences justified different price and led to the transactions not being comparable. The Court concluded that the limited risk – contract manufacturing – transactions with the German parent could not be compared with the full-fledged manufacturing activities. In regards ... Continue to full case
Finland vs. Corp. March 2013, Supreme Administrative Court HFD 2013:36

Finland vs. Corp. March 2013, Supreme Administrative Court HFD 2013:36

A AB purchased manufacturing services of its subsidiary B AS, which had its headquarters in Estonia. The internal pricing of services had since July 2004 been under the net margin method. The price data beside B AS’s realized expenses also included half of the so-called location-savings. On taxation of A AB approved as deductible expenditure only B AS’s actual expenses plus a calculated profit margin. The Supreme Administrative Court stated that A AB in Finland did not have such manufacturing as B AS was conducted in Estonia during the tax year. B AS’s production of the products differed substantially from A ABs former manufacturing in Finland, where A AB had manufactured the products by hand. Most of the new working methods and stages developed in Estonia had never been used in Finland. Hence the situation was not comparable to the location savings by moving the activities as described in the OECD report, and the pricing of would not be judged ... Continue to full case
UK vs. DSG Retail (Dixon case), Tax Tribunal, Case No. UKFT 31

UK vs. DSG Retail (Dixon case), Tax Tribunal, Case No. UKFT 31

This case concerns the sale of extended warranties to third-party customers of Dixons, a large retail chain in the UK selling white goods and home electrical products. The DSG group captive (re)insurer in the Isle of Man (DISL) insured these extended warranties for DSG’s UK customers. Until 1997 this was structured via a third-party insurer (Cornhill) that reinsured 95% on to DISL. From 1997 onwards the warranties were offered as service contracts that were 100% insured by DISL. The dispute concerned the level of sales commissions and profit commissions received by DSG. The Tax Tribunal rejected the taxpayer’s contentions that the transfer pricing legislation did not apply to the particular series of transactions (under ICTA 88 Section 770 and Schedule 28AA) – essentially the phrases ‘facility’ (Section 770) and ‘provision’ (Schedule 28AA) were interpreted broadly so that there was something to price between DSG and DISL, despite the insertion of a third party and the absence of a recognised transaction ... Continue to full case
US vs Eli Lilly & Co, October 1998, United States Court of Appeals

US vs Eli Lilly & Co, October 1998, United States Court of Appeals

In this case a pharmaceutical company in the US, Eli Lilly & Co, transferred valuable pharmaceutical patents and manufacturing know-how to its subsidiary in Puerto Rico. The IRS argued that the transaction should be disregarded (substance over form) and claimed that all of the income from the transferred intangibles should be allocated to the U.S. parent. The Judgment from the Tax Court: “Respondent’s argument, that petitioner, having originally developed the patents and know-how, is forever required to report the income from those intangibles, is without merit. Respondent ignores the fact that petitioner, as developer and owner of the intangible property, was free to and did transfer the property to the Puerto Ricanaffiliate in 1966.” The Court of Appeals altered the judgement from the Tax Court. According to the Court of Appeals, the parent company had received an arm’s length consideration for the transfer of intangibles in the form of stock in the subsidiary. Hence, the Court disallowed the allocation of ... Continue to full case