Following an audit the tax authorities concluded that ARGO-HYTOS s.r.o. sold goods (valves, blocks and hydraulic aggregates) to related parties at a price that differed from the prices that would have been agreed between unrelated parties under the same or similar conditions. Furthermore, according to the tax authorities ARGO-HYTOS s.r.o. did not satisfactorily document the difference from those normal prices. An appeal was filed by ARGO-HYTOS s.r.o. with the Regional Court which was dismissed the action by the above-quoted judgment No 30 Af 21/2019-46 (‘the contested judgment’). In the judgement, the Regional Court concluded that ARGO-HYTOS s.r.o. had not satisfactorily demonstrated the difference between the prices agreed between it and the companies of the ARGO-HYTOS group and the prices which would have been agreed between unrelated parties under the same or similar conditions. The Regional Court held that, if the tax authorities wished to justify the reasons for the increase in the applicant’s tax liability, it was incumbent on them ... Read more

Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and 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 transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses ... Read more

Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed “comparable” merely appear to be very different from the results observed in other proposed “comparables” ... Read more

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 ... Read more

In general, there is no overriding rule on the inclusion or exclusion of loss making comparables in the OECD TPG.15 Accordingly, loss-making comparables that satisfy the comparability criteria in a particular case should not be rejected on the sole basis that they suffer losses in periods affected by the COVID-19 pandemic.16 Consequently, when performing a comparability analysis for FY 2020, it may be appropriate to include loss-making comparables when the accurate delineation of the transaction indicates that those comparables are reliable (e.g. the comparables assume similar levels of risk and that have been similarly impacted by the pandemic). 15 Paragraph 3.64 of Chapter III of the OECD TPG. 16 Paragraph 3.65 of Chapter III of the OECD TPG ... Read more

However, the unique and almost unprecedented economic conditions arising from and government responses to COVID-19 have led to practical challenges for the application of the arm’s length principle. For example, the pandemic may raise novel issues or exacerbate in complexity or magnitude the occurrence of certain transfer pricing issues (e.g. effect of government assistance or the availability of reliable comparable data). For taxpayers applying transfer pricing rules for the financial years impacted by the COVID-19 pandemic and for tax administrations that will be evaluating this application, there is a need to address these practical questions. Based on the responses to the questionnaires submitted to members of the Inclusive Framework and businesses, and conscious of the need to provide practical and timely guidance, this note addresses four priority issues: (i) comparability analysis; (ii) allocation of losses and the allocation of COVID-19 specific costs; (iii) government assistance programmes; and (iv) Advance Pricing Arrangements (“APAs”). For ease of presentation, these issues have been ... Read more

“AC S.A” is engaged in sale of ventilation, heating and cooling equipment in Panama. AC S.A pays royalties for use of IP owned by the parent company of the AC Group. Following a audit carried out by the Tax Administration in Panama it was concluded that the profits of AC S.A 2.04% was below the arm’s length range determined by application of a TNM-method. After removing non-comparables from the benchmark study provided by the company, the interquartile range had a lower quartile of 6.15% and a median of 8.41%. Hence an assessment of additional taxable income was issued for FY 2014, bringing the profits of AC S.A up to the median (8.41%) of the adjusted benchmark. AC Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities, but made adjustment to the benchmark resulting in a lower quartile of 3.16% and a median of 6.2%. The adjustment ... Read more

Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and 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 transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses ... Read more

At issue were tax deductions for expenses related to assets and expenses for services paid by SC A SRL to a related party, C SpA Italy. Following an audit the tax authorities had issued an assessment, where certain costs were considered non deductible and where the cost of services had been determined by applying the transactional net margin method (TNMM). The assessment was brought to the courts by SC A SRL. Judgement of Supreme Court The Supreme Court found the appeal of SC A SRL unfounded and decided in favor of the tax authorities. Excerpt “As regards the criticisms made by the appellant concerning the use of the net transaction margin method used by the tax authorities and held by the judgment delivered by the court of first instance to be correct, the Supreme Court considers them to be unfounded. As is apparent from the evidence adduced in the case, during the period examined by the tax inspection bodies, it ... Read more

The principal activity of Aventis Pharma is manufacturing of pharmaceutical products and the secondary activity is the wholesale of pharmaceutical products; In FY 2000 the company carried out various transactions with related companies and based on a transfer pricing study the company concluded that profits were consistent with those obtained by comparable independent parties. Following an audit the tax authorities issued an assessment of additional income. In dispute were: Granting of extraordinary discounts, Reclassification of operating expenses together with related and non-operating expenses, Use of loss making comparables. The Court decided in favour of Aventis “From the above, it appears that the challenges made by the tax authority to the choice of the firm Bentley Pharmaceutical Inc, are unsubstantiated because they are based on the accusation of other manufacturing activities that were not carried out by the aforementioned company but by related companies, at a time when the rule regarding the selection of comparable companies is Article 4(1) of the ... Read more