Tag: Limited Risk Distributors (LRD)

Finland vs A Oy, June 2021, Supreme Administrative Court, Case No. KHO:2021:73

Finland vs A Oy, June 2021, Supreme Administrative Court, Case No. KHO:2021:73

A Oy was part of the A group, whose parent company was A Corporation, a US corporation. A Oy had acted as the group’s limited risk distribution company in Finland. The transfer prices of the group companies had been determined on a mark-to-market basis using the net transaction margin method and the group companies’ operating profit on a mark-to-market basis had been determined on the basis of US GAAP, the accounting standard commonly applied within the group. The target profit level for the group’s limited risk distribution companies, including A Ltd, was set at 0,5 % in the group’s transfer pricing documentation, based on a comparables analysis. In 2011, the competent authorities of the countries of residence of the A Group’s European manufacturing companies had entered into an Advance Transfer Pricing Agreement (APA) under which transfer pricing is monitored in accordance with the Group’s common accounting standard, US GAAP, and the market-based operating profit level for the limited risk distributors ... Continue to full case
Chile vs Avery Dennison Chile S.A., March 2021, Tax Court, Case N° RUT°96.721.090-0

Chile vs Avery Dennison Chile S.A., March 2021, Tax Court, Case N° RUT°96.721.090-0

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low. Judgement of the Tax Tribunal The Tribunal decided in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform ... Continue to full case
Norway vs "Distributor A AS", March 2021, Tax Board, Case No 01-NS 131/2017

Norway vs “Distributor A AS”, March 2021, Tax Board, Case No 01-NS 131/2017

A fully fledged Norwegian distributor in the H group was restructured and converted into a Limited risk distributor. The tax authorities issued an assessment where the income of the Norwegian distributor was adjusted to the median in a benchmark study prepared by the tax authorities, based on the “Transactional Net Margin Method” (TNMM method). Decision of the Tax Board In a majority decision, the Tax Board determined that the case should be send back to the tax administration for further processing. Excerpt “…The majority agrees with the tax office that deficits over time may give reason to investigate whether the intra-group prices are set on market terms. However, the case is not sufficiently informed for the tribunal to take a final position on this. In order to determine whether the income has been reduced as a result of incorrect pricing of intra-group transactions and debits, it is necessary to analyze the agreed prices and contract terms. A comparability analysis will ... Continue to full case

OECD COVID-19 TPG paragraph 41

When considering the risks assumed by a party to a controlled transaction, tax administrations should carefully consider the commercial rationale for any purported change in the risks assumed by a party before and after the outbreak of COVID-19 (and taking into consideration the accurate delineation of such purported change). In particular, concerns may arise where before the outbreak of COVID-19 a taxpayer argues that a “limited-risk” distributor did not assume any marketplace risk and hence was only entitled to a low return, but after the outbreak argues that the same distributor assumes some marketplace risk (for example, due to changes in risk management functions) and hence should be allocated In this scenario, consideration should be given to re-examining whether prior to the outbreak of COVID-19 the “limited-risk” distributor genuinely did not assume any marketplace risk, whether after the outbreak the “limited risk” distributor did not actually assume any marketplace risk, and/or whether the assumption of this risk following the outbreak ... Continue to full case

OECD COVID-19 TPG paragraph 40

In determining whether or not a “limited-risk” entity may incur losses, the risks assumed by an entity will be particularly important. This reflects the fact that at arm’s length, the allocation of risks between the parties to an arrangement affects how profits or losses resulting from the transaction are allocated.23 For example, where there is a significant decline in demand due to COVID-19, a “limited-risk” distributor (classified as such, for example, based on limited inventory ownership – such as through the use of “flash title” and drop-shipping – and therefore limited risk of inventory obsolescence) that assumes some marketplace risk (based on the accurate delineation of the transaction) may at arm’s length earn a loss associated with the playing out of this risk. The extent of the loss that may be earned at arm’s length will be determined by the conditions and the economically relevant characteristics of the accurately delineated transaction compared to those of comparable uncontrolled transactions, including application ... Continue to full case

OECD COVID-19 TPG paragraph 39

In all circumstances it will be necessary to consider the specific facts and circumstances when determining whether a so-called “limited-risk” entity could incur losses at arm’s length. This is reflected in the OECD TPG which states that “simple or low risk functions in particular are not expected to generate losses for a long period of time”,22 and therefore holds open the possibility that simple or low risk functions may incur losses in the short-run. In particular, when examining the specific facts and circumstances, the analysis should be informed by the accurate delineation of the transaction and the performance of a robust comparability analysis. For example, where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transaction then such a comparable should be excluded from the list of comparables (see paragraph 3.65 of the OECD TPG). 22  Paragraph 3.64 of Chapter III of the OECD ... Continue to full case

OECD COVID-19 TPG paragraph 38

When performing transfer pricing analyses, the activities performed by an entity may lead it to be characterised as “limited-risk” where it has a relatively lower level of functions and risks. 20 Though the term “limited-risk” is commonly used, since the term is not defined in the OECD TPG, the functions performed, assets used and risks assumed by “limited-risk” entities vary, and therefore it is not possible to establish a general rule that entities so-described should or should not incur losses. It should also be noted that neither the mere labelling of activities as “limited-risk” nor the fact that an entity receives a fixed remuneration means by itself that an entity operates on a limited risk basis in a controlled transaction.21 Further, no supposition should be made regarding the most appropriate transfer pricing method to apply in any set of circumstances without first undertaking a full and accurate delineation of the transaction, which then will help inform the choice of method ... Continue to full case
France vs Valueclick Ltd. Dec 2020, Supreme Administrative Court (CAA), Case No 420174

France vs Valueclick Ltd. Dec 2020, Supreme Administrative Court (CAA), Case No 420174

The issue in the case before the Supreme Administrative Court was whether an Irish company had a PE in France in a situation where employees of a French company in the same group carried out marketing, representation, management, back office and administrative assistance services on behalf of the group. The following facts were used to substantiate the presence of a French PE: French employees negotiated the terms of contracts and were involved in drafting certain contractual clauses with the customers. Contracts were automatically signed by the Irish company – whether this action corresponded to a simple validation of the contracts negotiated and drawn up by the managers and employees in France. Local advertising programs were developed and monitored by employees in France. French employees acted to third parties as employees of the Irish company. Customers did not distinguish between the Irish and the French company. In a 2018 decision the Administrative Court had found that none of these factors established that employees in France ... Continue to full case
Denmark vs. Software A/S, September 2020, Tax Court, Case no SKM2020.387.LSR

Denmark vs. Software A/S, September 2020, Tax Court, Case no SKM2020.387.LSR

Software A/S was a fully fledged Danish distributor of software an related services up until 2010 where the company was converted into a commissionaire dealing on behalf of a newly established sales and marketing hub in Switzerland. Following an audit, the Danish tax authorities issued a assessment where additional taxable income from the transfer of intangibles to Switzerland in 2010 had been determined by application of the DCF valuation model. As no transfer pricing documentation had been prepared on the transfer, the assessment was issued on a discretionary basis. Software A/S filed a complaint to the Danish Tax Court. The Tax Court found that the tax authorities did not have the authority to make a discretionary assessment. It was emphasized that the company in its transfer pricing documentation had described the relevant circumstances for the restructuring. Furthermore, the company had analyzed functions and risks and prepared comparability analyzes for transactions before and after the restructuring. However, the Tax Court found ... Continue to full case
Poland vs Cans Corp Sp z.o.o., August 2020, Administrative Court, I SA/Sz 115/20

Poland vs Cans Corp Sp z.o.o., August 2020, Administrative Court, I SA/Sz 115/20

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal lids for jars etc. The Polish tax authorities had issued an tax assessment for FY 2009 – 2012 based on a TNMM benchmark study where financial results of comparable independent manufactures operating in the packaging industry showed that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities The Court of first instance held in favor of the tax authorities. The case was then brought before the Administrative Court of Appeal. In the Court’s view, the authorities did not subject the case to thorough verification in accordance with the legal standards on which the decision was based – including, in particular, the analysis of comparable transactions (CUP’s). In the Court’s opinion, the authorities have illegally ... Continue to full case
Poland vs K. sp. z o.o., January 2020, Supreme Administrative Court, Case No II FSK 191/19 - Wyrok

Poland vs K. sp. z o.o., January 2020, Supreme Administrative Court, Case No II FSK 191/19 – Wyrok

K. sp. z o.o. is a Polish company belonging to an international group. The main activity of K is local sale of goods purchased from a intra group supplier. K is best characterized as a limited risk distributor and as such should achieve an certain predetermined level of profitability as a result of its activities. In order to achieve the determined level of profitability, the group had established that, if the operating margin actually achieved by the distributor during a given period is less or more than the assumed level of profit, it will be adjusted. The year-end adjustment will not be directly related to the prices of goods purchased from the intra-group supplier and will be made after the end of each financial year. The Administrative Court decided that the year-end adjustment is not sufficiently linked to obtaining, maintaining or securing the company’s income. Hence the adjustment cannot be recognized as a deductible cost within the meaning of Article 15 ... Continue to full case
Czech Republic vs. Eli Lilly ČR, s.r.o., December 2019, District Court of Praque, No. 6 Afs 90/2016 - 62

Czech Republic vs. Eli Lilly ČR, s.r.o., December 2019, District Court of Praque, No. 6 Afs 90/2016 – 62

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from ... Continue to full case
Microsoft - Taxes and Transfer Pricing

Microsoft – Taxes and Transfer Pricing

Microsoft’s tax affairs have been in the spotlight of tax authorities all over the World during the last decade. Why? The setup used by Microsoft involves shifting profits from sales in the US, Europe and Asia to regional operating centers placed in low tax jurisdictions (Bermuda, Luxembourg, Ireland, Singapore and Puerto Rico). The following text has been provided by Microsoft in a US filing concerning effective tax and global allocation of income: “Our effective tax rate for the three months ended September 30, 2017 and 2016 was 18% and 17%, respectively. Our effective tax rate was lower than the U.S. federal statutory rate primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico.“ “In fiscal year 2017, our U.S. income before income taxes was $6.8 billion and our foreign income before income taxes was $23.1 billion. In fiscal year 2016, ... Continue to full case
France vs. Piaggio, October 2019, Conseil dÉtat, Case No. 418817

France vs. Piaggio, October 2019, Conseil dÉtat, Case No. 418817

Following a restructuring of the Italien Piaggio group, SAS Piaggio France by a contract dated January 2 2007, was changed from an exclusive distributor of vehicles of the “Piaggio” brand in France to a commercial agent for its Italian parent company. The tax authorities held that this change had resulted in a transfer without payment for the customers and applied the provisions of article 57 of the general tax code (the arm’s length principle). A tax assessment was issued whereby the taxable income of SAS Piaggio France was added a profit of 7.969.529 euros on the grounds that the change in the contractual relations between the parties had resultet in a transfer of customers for which an independent party would have been paid. The Judgement of the Court The court helt in favor of the tax authorities and added an additional profit of 7.969.529 to the taxable income of the SaS Piaggio France for the transfer of customers to the ... Continue to full case
Aruba vs PriceSmart Inc., September 2019, Council for Tax Affairs of Aruba, Case No 2010/45712

Aruba vs PriceSmart Inc., September 2019, Council for Tax Affairs of Aruba, Case No 2010/45712

PriceSmart Inc (PSMT) operates a retail chain including approximately 25 department stores in the Caribbean and Central America. PSMT’s local branch had recognised losses in their profit tax returns for the years 2001 to 2006. In 2009, the tax authorities audited the tax returns for the years 2002 to 2006. At issue was the definition and interpretation of the various functions of the interested party and the risks incurred. In particular, the dispute concerned transfer pricing typologies, and whether the local branch could be characterised as a ‘Limited Risk Distributor’ or as a ‘Buy-Sell Distributor’ with a ‘proprietary’ risk in respect of, inter alia, accounts receivable, stock and currency. The tax authorities characterised the local branch as a ‘Limited Distributor’ as it was not the local branch but PSMT Inc. that determined the marketing strategy, mix of products. The branch hasd virtually no decision-making influence in this, because its tasks and activities are determined by functions and employees of PSMT ... Continue to full case
France vs Google, September 2019, Court approval of CJIP Agreement - Google agrees to pay EUR 1 billion in fines and taxes to end Supreme Court Case

France vs Google, September 2019, Court approval of CJIP Agreement – Google agrees to pay EUR 1 billion in fines and taxes to end Supreme Court Case

The district court of Paris has approved a  “convention judiciaire d’intérêt public” negotiated between the French state and Google for an amount of € 500 million plus another agreement with the French tax authorities which amounts to 465 million euros. The agreement puts an end to the French lawsuits against Google for aggressive tax evasion, and litigation with the tax administration relating to adjustments for the periods going from 2005 to 2018. The CJIP “convention judiciaire d’intérêt public“, was established by Article 22 of Law No. 2016-1691 of 9 December 2016 in France on transparency and fight against corruption. By Law No. 2018-898 of October 23, 2018 the law was extended to cover cases for tax evasion. According to the CJIP legal actions can be ended in return for the payment of a fine. The dispute concerned the existence of a permanent establishment of Google Ireland in France. In Googles European headquarters in Ireland the corporate tax rate is (12.5%). However, ... Continue to full case
Sweden vs Absolut Company AB, June 2019, Supreme Administrative Court, Case no 1913-18

Sweden vs Absolut Company AB, June 2019, Supreme Administrative Court, Case no 1913-18

The Absolut Company AB had been issued an assessment of additional taxable income of SEK 247 mio. The assessment was based on the position that (1) The Absolut Company AB had been selling below the arm’s length price to an US group company – The Absolut Spirit Company Inc. (ASCI), and (2) that acquired distribution services from ASCI that had been priced above the arm’s length price. In 2018 the Swedish Administrative Court of Appeal ruled in favor of the tax administration. The Swedish Supreme Administrative Court has now ruled in favor of The Absolute Company AB. According to the Supreme Administrative Court the Swedish Tax Agency did not fulfill the burden of proof. The Supreme Administrative Court further states that the full range of results in the benchmark study could be applied and that a multiple year analysis of the tested party data can be used to support an arm’s length result. Click here for translation Sweden vs Absolut AB 2019 ... Continue to full case
Spain vs Acer Computer Ibérica S.A., March 2019, AUDIENCIA NACIONAL, Case No 125:2017, NFJ073359

Spain vs Acer Computer Ibérica S.A., March 2019, AUDIENCIA NACIONAL, Case No 125:2017, NFJ073359

Acer Computer Ibérica S.A. (ACI) is part of the multinational ACER group, which manufactures and distributes personal computers and other electronic devices. Acer Europe AG (AEAG), a group entity in Switzerland, centralises the procurement of the subsidiaries established in Europe, the Middle East and Africa, and acts as the regional management centre for that geographical area. ACI is responsible for the wholesale marketing of electronic equipment and material, as well as in the provision of technical service related to these products in Spain and Portugal. ACI is characterized as a limited risk distributor by the group. At issue was deductibility of payments resulting from factoring agreements undertaken ACI with unrelated banks, adopted to manage liquidity risks arising from timing mismatches between its accounts payable and accounts receivable. Based on an interpretation of the limited risk agreement signed between ACI and its principal AEAG, the tax authorities disregarded the allocation of the risk – and hence allocation of the relevant costs ... Continue to full case
Zambia vs Nestlé Trading Ltd, March 2019, Tax Appeals Tribunal, Case No 2018/TAT/03/DT

Zambia vs Nestlé Trading Ltd, March 2019, Tax Appeals Tribunal, Case No 2018/TAT/03/DT

Nestlé Zambia had reported continuous losses for more than five years. Following an Transfer Pricing audit covering years 2010 – 2014, the tax administration  issued an assessment whereby profits were adjusted to ZMW 56,579,048 resulting in additional taxes of ZMW13,860,103 plus penalties and other levies. The assessment was based on Nestlé Zambia being characterised as a limited risk distributor instead of a full fledged dristributor. Nestlé  Zambia held that the tax administrations characterisation of the entity as a limited risk distributor was incorrect and that the assessment had not been performed in accordance with the arm’s length principle.  The Tribunal ruled in favor of Nestlé, except for it’s position on the characterisation of the entity as a limited risk distributor (ground four cf. the excerp below). “The summary of our findings is  that  there  was  basis  for  initiating  a  transfer pricing audit in this case because as has been stated in  Paragraph  1.129  of  the OECD Guidelines that, “When an associated enterprise ... Continue to full case
Denmark vs Microsoft Denmark, January 2019, Danish Supreme Court, Case No SKM2019.136.HR

Denmark vs Microsoft Denmark, January 2019, Danish Supreme Court, Case No SKM2019.136.HR

The Danish tax authorities were of the opinion that Microsoft Denmark had not been properly remunerated for performing marketing activities due to the fact that OEM sales to Danish customers via MNE OEM’s had not been included in the calculation of local commissions. According to the Market Development Agreement (MDA agreement) concluded between Microsoft Denmark and MIOL with effect from 1 July 2003, Microsoft Denmark received the largest amount of either a commission based on sales invoiced in Denmark or a markup on it’s costs. Microsoft Denmark’s commission did not take into account the sale of Microsoft products that occurred through the sale of computers by multinational computer manufacturers with pre-installed Microsoft software to end users in Denmark – (OEM sales). In court, Microsoft required a dismissal. In a narrow 3:2 decision the Danish Supreme Court found in favor of Microsoft. “…Microsoft Denmark’s marketing may have had some derivative effect, especially in the period around the launch in 2007 of ... Continue to full case
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