Tag: Losses

Losses may broadly be defined as the excess of expenses over revenues for a period, or the excess of the cost of assets over the proceeds when the assets are sold or otherwise disposed of, or abandoned or destroyed.

Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022

Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022

Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the transfer prices applied between the parent company and the distributors in the group had been incorrect. An assessment was issued where the transfer pricing method applied by the group (cost +) was rejected and replaced with a CUP/RPM approach based on the pricing applied when selling to independent distributors. An appeal was filed by Prinoth S.p.A. which was rejected by the Court of first instance. The Court considered “the assessment based on the price comparison method to be well-founded, from which it emerged that in the three-year period from 2006 to 2008 the company had sold to its subsidiaries with a constant mark-up of 11.11 per cent, while in direct sales to end customers it had applied ... Read more
Czech Republic vs DFH Haus CZ s.r.o., November 2022, Supreme Administrative Court, Case No 4 Afs 98/2022-45

Czech Republic vs DFH Haus CZ s.r.o., November 2022, Supreme Administrative Court, Case No 4 Afs 98/2022-45

In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed these amendments. A complaint filed by DFH with the regional court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court rejected DFH’s appeal and upheld the decision of the tax authorities. Excerpts “[34] On the basis of the foregoing, the Supreme Court of Justice, like the Regional Court, considers that the complainant’s tax loss for 2006, as a relevant fact in terms of the reopening of proceedings, was incurred, assessed and could be deducted from the tax base pursuant to Section 34(1) of the ITA only on 8 July 2013, when it ... Read more
Czech Republic vs DFH Haus CZ s.r.o., November 2022, Supreme Administrative Court, Case No 4 Afs 287/2020-54

Czech Republic vs DFH Haus CZ s.r.o., November 2022, Supreme Administrative Court, Case No 4 Afs 287/2020-54

In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed the amendments. A complaint filed by DFH with the district court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Court rejected DFH’s arguments that the tax loss must be allowed under the Czech-German income tax treaty. DFH could not reduce its tax liabilities in the Czech Republic in 2010 and 2011 with the 2006 tax loss resulting from the German transfer pricing adjustment. The Court noted that the usual purpose of double taxation treaties is to regulate the place where income is taxed, but the actual rules for taxation or the deduction of expenses ... Read more
Greece vs "Clothing Distributor Ltd.", June 2022, Tax Court, Case No 2400/2022

Greece vs “Clothing Distributor Ltd.”, June 2022, Tax Court, Case No 2400/2022

Following an audit, the Greek tax authorities determined that the remuneration of a Greek Clothing Distributor had not been determined in accordance with the arm’s length principle. On that basis an upwards adjustment of the taxable income was issued. An appeal was filed by “Clothing Distributor Ltd.” Judgement of the Court The court dismissed the appeal and upheld the assessment issued by the tax authorities. “the findings of the audit, as recorded in the partial income tax audit report of 29/12/2021 of the C.E.M.E.P., on which the contested act is based, are considered valid, acceptable and fully justified” Click here for English translation Click here for other translation gr-ded-2022-2400_en_ath-2400_2022 ... Read more
Czech Republic vs Aisan Industry Czech, s.r.o., April 2022, Supreme Administrative Court, Case No 7 Afs 398/2019 - 49

Czech Republic vs Aisan Industry Czech, s.r.o., April 2022, Supreme Administrative Court, Case No 7 Afs 398/2019 – 49

Aisan Industry Czech, s.r.o. is a subsidiary within the Japanese Aisan Industry Group which manufactures various engine components – fuel-pump modules, throttle bodies, carburetors for independent car manufactures such as Renault and Toyota. According to the original transfer pricing documentation the Czech company was classified as a limited risk contract manufacturer within the group, but yet it had suffered operating losses for several years. Following a tax audit an assessment was issued resulting in additional corporate income tax for FY 2011 in the amount of CZK 11 897 090, and on top of that a penalty in the amount of CZK 2 379 418. The assessment resulted from application of arm’s length provisions where the profitability of Aisan Industry Czech, s.r.o. had been determined on the basis of the profitability of comparable companies – TNMM method. An appeal was filed by Aisan Industry Czech, s.r.o. with the Regional Court which – by judgment of 30 October 2019 – dismissed the ... Read more
France vs ST Dupont , April 2022, CAA of Paris, No 19PA01644

France vs ST Dupont , April 2022, CAA of Paris, No 19PA01644

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
Denmark vs Maersk Oil and Gas A/S, March 2022, Regional Court, Case No BS-41574/2018 and BS-41577/2018

Denmark vs Maersk Oil and Gas A/S, March 2022, Regional Court, Case No BS-41574/2018 and BS-41577/2018

A Danish parent in the Maersk group’s oil and gas segment, Maersk Oil and Gas A/S (Mogas), had operating losses for FY 1986 to 2010, although the combined segment was highly profitable. The reoccurring losses was explained by the tax authorities as being a result of the group’s transfer pricing setup. “Mogas and its subsidiaries and branches are covered by the definition of persons in Article 2(1) of the Tax Act, which concerns group companies and permanent establishments abroad, it being irrelevant whether the subsidiaries and branches form part of local joint ventures. Mogas bears the costs of exploration and studies into the possibility of obtaining mining licences. The expenditure is incurred in the course of the company’s business of exploring for oil and gas deposits. The company is entitled to deduct the costs in accordance with Section 8B(2) of the Danish Income Tax Act. Mogas is responsible for negotiating licences and the terms thereof and for bearing the costs ... Read more
Spain vs Delsey España S.A, February 2022, Tribunal Superior de Justicia, Case No 483/2022 (Roj: STSJ CAT 1467/2022 - ECLI:ES:TSJCAT:2022:1467)

Spain vs Delsey España S.A, February 2022, Tribunal Superior de Justicia, Case No 483/2022 (Roj: STSJ CAT 1467/2022 – ECLI:ES:TSJCAT:2022:1467)

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 Spain vs Delsey STSJ_CAT_1467_2022 ORG1 ... Read more
Italy vs SKECHERS USA ITALIA SRL, January 2022, Supreme Court, Case No 02908/2022

Italy vs SKECHERS USA ITALIA SRL, January 2022, Supreme Court, Case No 02908/2022

Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland. The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of the goods in question. Skechers held that the losses did not derive from the costs ... Read more
TPG2022 Chapter VI Annex I example 10

TPG2022 Chapter VI Annex I example 10

30. The facts in this example are the same as in Example 9, except that the market development functions undertaken by Company S in this Example 10 are far more extensive than those undertaken by Company S in Example 9. 31. Where the marketer/distributor actually bears the costs and assumes the risks of its marketing activities, the issue is the extent to which the marketer/distributor can share in the potential benefits from those activities. A thorough comparability analysis identifies several uncontrolled companies engaged in marketing and distribution functions under similar long-term marketing and distribution arrangements. Assume, however, that the level of marketing expense Company S incurred in Years 1 through 5 far exceeds that incurred by the identified comparable independent marketers and distributors. Assume further that the high level of expense incurred by Company S reflects its performance of additional or more intensive functions than those performed by the potential comparables and that Primair and Company S expect those additional ... Read more
TPG2022 Chapter VI Annex I example 5

TPG2022 Chapter VI Annex I example 5

13. The facts are the same as in Example 4 except that instead of appreciating, the value of the patents decreases during the time they are owned by Company S as a result of unanticipated external circumstances. Under these circumstances, Company S is entitled to retain the proceeds of the sale, meaning that it will suffer the loss ... Read more

TPG2022 Chapter III paragraph 3.76

In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price. For example, the use of data from past years will show whether a taxpayer’s reported loss on a transaction is part of a history of losses on similar transactions, the result of particular economic conditions in a prior year that increased costs in the subsequent year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis may be particularly useful where a transactional profit method is applied. See paragraph 1.151 on the usefulness of multiple year data in examining loss situations. Multiple year data can also improve the understanding of long term arrangements ... Read more
France vs (SAS) SKF Holding France, October 2021, Conseil d'Etat, Case No. 443133

France vs (SAS) SKF Holding France, October 2021, Conseil d’Etat, Case No. 443133

RKS, whose business consists of the manufacture of very large custom bearings for the civil and military industries, is controlled by the Swedish group SKF through (SAS) SKF Holding France. RKS was subject to a tax audit for FY 2009 and 2010, at the end of which the tax authorities adjusted the prices at which it had invoiced its products to the SKF group’s distribution companies abroad. According to the tax authorities, RKS was a simple manufacturing company that did not have control over strategic and operational risks, at therefore should not have losses resulting from such risks. As a result of the adjustment, SKF Holding France (the immediate parent of RKS) was subject to additional corporate income taxes amounting to EUR 5,385,325, including penalties. In a 2018 judgment the Montreuil Administrative Court discharged the additional taxes. However, this decision was set aside by the Versailles Administrative Court of Appeal in a judgment of 22 June 2020 in which the ... Read more
France vs (SAS) RKS, October 2021, Conseil d'Etat, Case No. 443130

France vs (SAS) RKS, October 2021, Conseil d’Etat, Case No. 443130

RKS, whose business consists of the manufacture of very large custom bearings for the civil and military industries, is controlled by the Swedish group SKF through (SAS) SKF Holding France. RKS was subject to a tax audit for FY 2009 and 2010, at the end of which the tax authorities adjusted the prices at which it had invoiced its products to the SKF group’s distribution companies abroad. According to the tax authorities, RKS was a simple manufacturing company that did not have control over strategic and operational risks, at therefore should not have losses resulting from such risks. In a 2018 judgment the Montreuil Administrative Court discharged the additional taxes. However, this decision was set aside by the Versailles Administrative Court of Appeal in a judgment of 22 June 2020 in which the appeal of the tax authorities was granted. This judgement was then appealed by SKF to the Supreme Court. Judgement of the Supreme Administrative Court The court decided ... Read more

OECD COVID-19 TPG paragraph 59

In response to COVID-19, some taxpayers may seek to assert force majeure in situations where it is not contained within the relevant intercompany agreement (assuming here that the law governing the contract is not a civil law jurisdiction where force majeure would automatically apply), may seek to change an existing intercompany agreement to insert a force majeure clause, or may seek to assert that a renegotiation at arm’s length would have similar economic outcomes. In these circumstances, tax administrations should carefully review such assertions in light of the accurately delineated transaction (including consideration of the conduct of the parties, both past and present) and the economically relevant circumstances of the transaction. Tax administrations should therefore review the agreements and/or the conduct of associated enterprises, in light of the guidance in section D of Chapter I of the OECD TPG, together with observations of relevant behaviour of independent parties and this guidance, in order to ascertain whether any such assertion, revision ... Read more

OECD COVID-19 TPG paragraph 58

For example, assume that Company G in Jurisdiction G provides manufacturing services to Company H under a long-term manufacturing services agreement that includes a force majeure clause. The government in jurisdiction G mandates the closure of the manufacturing facility for a certain specified short-term period, which may be extended depending on the duration of the pandemic. Given the lack of clarity on the extent of the disruption, it would be important to analyse the contract to see if the disruption qualifies as a force majeure event and consider whether, at arm’s length, Company G or Company H would seek to invoke the clause. Assuming that a clause may be legally invoked under the relevant legal framework, given the long-term nature of the relationship and the short-term nature of the disruption, it may be the case that neither company would invoke the clause, even if it did qualify as a force majeure event. If the disruption was for a longer period, ... Read more

OECD COVID-19 TPG paragraph 57

Where one party to a controlled transaction seeks to invoke force majeure, the agreement and underlying legal framework within which force majeure may be invoked should form the starting point of a transfer pricing analysis. It cannot be automatically assumed that where a relevant intercompany contract contains a force majeure clause that the COVID-19 pandemic is sufficient for a party to that contract to invoke force majeure, nor can it be automatically assumed in the absence of such a clause in the intercompany contract that a renegotiation with a potentially similar outcome at arm’s length would be inappropriate (see paragraph 59 below). Whether COVID-19 constitutes a force majeure in a particular case will depend on the plain language of the force majeure provision (and possibly also on how that provision interacts with other terms, such as certain terms of the controlled transaction itself). In addition, it will be relevant to analyse the conduct of the parties in reviewing an existing ... Read more

OECD COVID-19 TPG paragraph 56

Because of the COVID-19 pandemic, a party may attempt to assert that the extreme circumstances justify the non-performance of a contract and this may be achieved through invoking a force majeure clause, which defines circumstances beyond the control of parties to a transaction that can frustrate or render impossible contractual performance. For instance, force majeure events arising in the context of COVID-19 could be the prohibition of activities by a governmental body, for example through the enforced closure of production or retail facilities ... Read more

OECD COVID-19 TPG paragraph 55

Force majeure clauses may be invoked in order to suspend, defer, or release an enterprise from its contractual duties without liability in certain situations.33 This may result in losses for enterprises because of the loss of a customer, supplier or an ordinarily profitable contract, and could also lead to the closure of business operations and associated restructuring costs. 33 Note that these guidelines do not seek to legally define concepts such as “force majeure” or provide comment on when it may legally be invoked, but instead focus on the transfer pricing implications of the existence of the force majeure concept and its invocation. The “force majeure” concept originated in civil law systems. While the doctrine does not apply automatically in all civil law countries, certain European civil law countries at least implicitly recognise the force majeure principle in their civil codes (i.e. it may not be necessary to include it in a contract because the statutory force majeure provisions apply ... Read more

OECD COVID-19 TPG paragraph 54

Third, adjustments for accounting consistency may be required to improve comparability. Adjustments for accounting consistency are designed to eliminate the effect of differing accounting practices between the controlled and uncontrolled transactions and should be considered if and only if they are expected to increase the reliability of the results of a comparability analysis.32 In some cases, if exceptional costs arising from COVID-19 may be accounted for as either operating or non-operating items by different taxpayers in different transactions, then comparability adjustments may be In other cases there can be differences in whether the COVID-19 related costs are taken into account above or below the gross profit line. For instance, the recognition of the purchase of PPE as an operating cost by the tested party and as a cost of goods sold by a comparable may have a significant impact when computing a profit level indicator based on gross profit and may require a comparability adjustment. 32 Paragraph 3.48 and 3.50 ... Read more

OECD COVID-19 TPG paragraph 53

Second, when determining a cost basis, it will be important to consider whether the basis should include or exclude exceptional costs that are deemed to relate to the controlled transactions (determination noted above), and, if included in the costs basis, whether such costs should or should not be treated as pass-through costs to which no profit element should be attributed (see paragraph 2.99 of the OECD TPG). Including exceptional costs in the cost basis would transfer these costs to the counterparty, whereas excluding them would have the effect of allocating them to the tested party. Therefore, in determining which approach is most appropriate, it will be important to consider at arm’s length which party to the controlled transaction would have borne these additional costs, which should in turn be informed by the accurate delineation of the transaction.31 31 Paragraph 2.51 and 2.98 of Chapter II of the OECD TPG ... Read more

OECD COVID-19 TPG paragraph 52

First, exceptional costs should generally be excluded from the net profit indicator except when those costs relate to the controlled transaction as accurately delineated.29 The exclusion of exceptional costs must be done consistently at the level of the tested party and the comparables to ensure a reliable outcome, noting that the availability of this information may be limited.30 Care should be taken in order to ensure that such costs are appropriately measured and are consistently accounted for to the extent possible. 29 Paragraph 2.86 of Chapter II of the OECD TPG.30 Paragraph 2.74 of Chapter II of the OECD TPG ... Read more

OECD COVID-19 TPG paragraph 51

When performing a comparability analysis, it may be necessary to specifically consider how exceptional costs arising from COVID-19 should be taken into account ... Read more

OECD COVID-19 TPG paragraph 50

At arm’s length, exceptional costs may or may not be passed on (wholly or partially) to customers or suppliers depending on who has the responsibility to bear such costs and (including in cases in which such responsibility is not expressly provided for) the consequences of the accurate delineation of the controlled transaction (including risk assumption) and the comparability analysis. For example, which party ultimately bears such costs might be influenced by the competitiveness of the industry within which the activity occurs and how demand responds to changes in price. For example, a manufacturer in a highly competitive market, with undifferentiated products, may be unable to pass on exceptional costs to its customers, without experiencing a decline in demand for its services (unless its competitors are passing on similar costs). However, a similar manufacturer that produces differentiated products in a comparatively uncompetitive industry may be able to pass on these costs to its customers, at least partially, without experiencing a decline ... Read more

OECD COVID-19 TPG paragraph 49

Further, it should be noted that certain operating costs may not be viewed as exceptional or non- recurring in circumstances where the costs relate to long-term or permanent changes in the manner in which businesses operate. For example, certain costs relating to teleworking arrangements may become permanent if working from home became more common as a result of the pandemic. Consequently, if the expense is viewed as neither being exceptional nor non-recurring and reflects more common means of doing business, then it should be treated as such when delineating the transaction to which the costs pertain and in undertaking the comparability analysis. Furthermore, it should also be noted that for certain businesses the COVID-19 pandemic has led to reduction in or elimination of certain costs that were typically incurred prior to the COVID-19 pandemic. These will differ depending on the underlying facts and circumstances, but might include expenses on rent, the day-to-day running expenses of a physical office, and travel ... Read more

OECD COVID-19 TPG paragraph 48

Allocation of operating or exceptional costs would follow risk assumption and how third parties would treat such costs. Thus in order to determine which associated enterprise should bear exceptional costs, it would be first necessary to accurately delineate the controlled transaction, which would indicate who has the responsibility for performing activities related to the relevant costs and who assumes risks related to these activities. For example, if a cost directly relates to a particular risk, then the party assuming that risk would typically bear the costs associated with that risk. Furthermore, the party initially incurring an exceptional cost may not be the party assuming risks associated to that cost at arm’s length, and consequently such costs may need to be passed on to parties that do assume such risks. Thus a thorough analysis should be performed before concluding whether all or part of the operating or exceptional costs should be allocated between related parties ... Read more

OECD COVID-19 TPG paragraph 47

As a result of the COVID-19 pandemic, many enterprises have incurred exceptional, non-recurring operating costs relevant to differing operating conditions for the pandemic period. These include expenditure on Personal Protective Equipment (PPE), reconfiguration of workspaces to enable physical distancing, IT infrastructure expenses relating to test, track and trace obligations and to implement teleworking arrangements. In determining how these costs should be allocated between related parties, it will be important to consider how these costs would be allocated between independent parties operating in comparable circumstances ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

OECD COVID-19 TPG paragraph 37

Finally, the COVID-19 pandemic has created conditions in which associated parties may consider whether they have the option to apply force majeure clauses, revoke or otherwise revise their intercompany agreements. This may impact the allocation of losses and COVID-19 specific costs between associated parties, and therefore also requires specific consideration in the current economic environment ... Read more

OECD COVID-19 TPG paragraph 36

Second, it will be necessary to consider how exceptional, non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties.19 These costs should be allocated based on an assessment of how independent enterprises under comparable circumstances operate. Separately, as extraordinary costs may be recognised as either operating or non-operating items, comparability adjustments may be necessary to improve the reliability of a comparability analysis. It is important to keep in mind that the treatment in a transfer pricing analysis of “exceptional,” “non-recurring,” or “extraordinary” costs incurred as a result of the pandemic will not be dictated by the label applied to such costs, but by an accurate delineation of the transaction, an analysis of the risks assumed by the parties to the intercompany transaction, an understanding of how independent enterprises may reflect such costs in arm’s length prices, and ultimately how such costs may impact prices charged in transactions between the associated enterprises (see OECD TPG paragraph ... Read more

OECD COVID-19 TPG paragraph 35

First, it is important to emphasise that the allocation of risks between the parties to an arrangement affects how profits or losses resulting from the transaction are allocated at arm’s length through the pricing of the transaction.18 Hence, the existing guidance on the analysis of risks in commercial or financial relations will be particularly relevant for determining how losses are allocated between associated parties. 18 Paragraph 1.58 of Chapter I of the OECD TPG ... Read more

OECD COVID-19 TPG paragraph 34

During the COVID-19 pandemic, many MNE groups have incurred losses due to a decrease in demand, inability to obtain or supply products or services or as a result of exceptional, non-recurring operating costs.17 The allocation of losses between associated entities can give rise to dispute and hence is an issue that requires consideration given the probable increase in the frequency and magnitude of losses in the current economic environment. When considering the issue of losses and the allocation of COVID-19 specific costs, three issues warrant specific discussion. 17 For example, this might include expenditure on personal protective equipment, on IT infrastructure required to implement a “test and trace” system, measures to reconfigure office space to implement physical distancing requirements, or on other health-related safety equipment ... Read more
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 ... Read more
Poland vs "Fish Factory" sp. z o.o., July 2020, Administrative Court, I SA/Gd 184/20 - Wyrok

Poland vs “Fish Factory” sp. z o.o., July 2020, Administrative Court, I SA/Gd 184/20 – Wyrok

The activity of Spółka A sp. z o.o. included salmon breeding, processing, smoking and sale and distribution of the finished products. The company operated within Group A with head quarter in the Netherlands. By decision of 27 May 2019, the tax authorities determined that the operating expenses determined by transactions with related parties were inflated by PLN 29,613,156.00. The authorities did not accept calculations presented by the Company, as there were no reliable accounting records regarding the amount of costs incurred. Furthermore, the authorities held that the cost plus method, which should guarantee profit on the transaction in the Company, had been applied incorrect. The dispute before the administrative Court boils down to assessing whether the court of first instance, in compliance with the provisions in force, reversed the decision of the authorities in its entirety and referred the case back for reconsideration due to the deficiencies found in the evidentiary proceedings, making it necessary to conduct the proceedings in ... Read more
Czech Republic vs Aisan Industry Czech, s.r.o., October 2019, Regional Court, Case No 15 Af 105/2015

Czech Republic vs Aisan Industry Czech, s.r.o., October 2019, Regional Court, Case No 15 Af 105/2015

Aisan Industry Czech, s.r.o. is a subsidiary within the Japanese Aisan Industry Group which manufactures various engine components – fuel-pump modules, throttle bodies, carburetors for independent car manufactures such as Renault and Toyota. According to the original transfer pricing documentation the Czech company was classified as a limited risk contract manufacturer within the group, but yet it had suffered operating losses for several years. Following a tax audit an assessment was issued resulting in additional corporate income tax for FY 2011 in the amount of CZK 11 897 090, and on top of that a penalty in the amount of CZK 2 379 418. The assessment resulted from application of arm’s length provisions where the profitability of Aisan Industry Czech, s.r.o. had been determined on the basis of the profitability of comparable companies – TNMM method. An appeal was filed by Aisan Industry Czech, s.r.o. with the Regional Court. Judgement of the Regional Court The court dismissed the appeal and ... Read more
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 ... Read more
Poland vs A Sp. z o.o., June 2019, Administrative Court, Case No GD 530/19

Poland vs A Sp. z o.o., June 2019, Administrative Court, Case No GD 530/19

A Polish Subsidiary A SP. z o.o. had incurred a loss in 2012 in the amount of PLN 1,357,333.66 and following an audit the tax authorities issued an assessment whereby the loss was reduced by an amount of PLN 234,019.90. The disputable issue was whether, in the circumstances of the case under consideration, the tax authorities correctly determined the amount of the applicant’s loss for 2012 in an amount other than that resulting from the correction of the declaration due to the finding that the Company undervalued income from transactions concluded with related entities for a total amount of PLN 234,019.90. The Administrative Court dismissed the complaint of A SP z o.o. According the the provided transfer pricing documentation the company had applied a TNMM and determined remuneration based on cost added a fixed percentage of 4% for the parent company, 8% for other companies. Meanwhile, the mark-ups actually applied by the applicant company in transactions concluded with related entities: ... Read more
France vs ST Dupont, March 2019, Administrative Court of Paris, No 1620873, 1705086/1-3

France vs ST Dupont, March 2019, Administrative Court of Paris, No 1620873, 1705086/1-3

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
Poland vs "Blueberry Factory" Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013. According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities. The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income Tax Act of February 15th 1992, as the gross margin earned by the Blueberry Factory ... Read more
Costa Rica vs Reca Química S.A., December 2017, Supreme Court, Case No 01586 - 2017

Costa Rica vs Reca Química S.A., December 2017, Supreme Court, Case No 01586 – 2017

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company of the group and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question. In 2015 the Administrative Court of Appeal ruled in favor of Reca ... Read more
TPG2017 Chapter VI Annex example 5

TPG2017 Chapter VI Annex example 5

13. The facts are the same as in Example 4 except that instead of appreciating, the value of the patents decreases during the time they are owned by Company S as a result of unanticipated external circumstances. Under these circumstances, Company S is entitled to retain the proceeds of the sale, meaning that it will suffer the loss ... Read more
France vs GE Healthcare Clinical Systems, December 2015, CAA de VERSAILLES, Case No 13VE00965

France vs GE Healthcare Clinical Systems, December 2015, CAA de VERSAILLES, Case No 13VE00965

During the period from 1 January 2003 to 31 December 2005 all the products marketed by GE Healthcare Clinical Systems (France), a company wholly owned by the American company GE Medical Systems Information Technologies and the exclusive distributor in France of medical equipment produced by the General Electric group, were supplied to it by its German subsidiary, GE Medical Systems Information Technologies (MSIT) GmbH, of which it held 100% of the capital. Transfer prices were determined based on the cost plus method. Following an audit of the accounts of GE Healthcare Clinical Systems, the tax authorities dismissing the cost plus method and instead set up a sample of eight companies considered comparable to GE Healthcare Clinical Systems. The difference between the operating loss declared by this company and its arm’s length operating results, calculated on the basis of the median of the net operating margin of the eight companies deemed to be comparable, constituted an indirect transfer of profits granted ... Read more
Costa Rica vs Reca Química, September 2015, Administrative Court, Case No 00147 - 2015 Case File 11-006793-1027-CA

Costa Rica vs Reca Química, September 2015, Administrative Court, Case No 00147 – 2015 Case File 11-006793-1027-CA

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question. Judgement of the Administrative Court The court ruled in favour of Reca Quimica due to ... Read more
Austria vs. Wx-Distributor, July 2012, Unabhängiger Finanzsenat, Case No RV/2516-W/09

Austria vs. Wx-Distributor, July 2012, Unabhängiger Finanzsenat, Case No RV/2516-W/09

Wx-Distributor (a subsidiary of the Wx-group i.d.F. Bw.) is responsible for the distribution of Household appliances in Austria. It is wholly owned by Z. Deliveries to Wx-Distributor are made by production companies of the Group located in Germany, Italy, France, Slovakia, Poland and Sweden with which it has concluded distribution agreements to determine transfer prices. On average Wx-Distributor had been loss-making in FY 2001-2005. Following an tax audit, the intra-group transfer prices were re-determined for the years 2001 to 2004 by the tax authorities. It was determined that the transfer prices in two years were not within the arm’s length range. The review of the tax authorities had revealed a median EBIT margin of 1.53% and on that basis the operating margin for 2001 were set at 1.5%. For the following years the margin was set at 0.9% due to changed functions (outsourcing of accounts receivable, closure of half the IT department). The resulting adjustments were treated as hidden distribution ... Read more
Netherlands vs "Car B.V.", 28 June 2002, Supreme Court, Case No 36446, ECLI:NL:HR:2002:AE4718

Netherlands vs “Car B.V.”, 28 June 2002, Supreme Court, Case No 36446, ECLI:NL:HR:2002:AE4718

In this case a Dutch subsidiary of a Japanese car group incurred losses related to import and sales of a specific car model. However in total the car importer remained profitable. The tax authorities claimed that the purchase price of the specific car model had been too high, and on that basis an assessment of additional income was issued. Judgement of the Supreme Court The court set aside the assessment and decided in favour of the car importer. According to the court the tax authorities did not make it sufficiently plausible that the price for the car model had not at arm’s length – taking into consideration the overall functions and profitability of the car importer. Excerpt “The following must be stated first. The at arm’s length principle, as included in Article 10(b) of the Treaty with Japan (Treaty Series 1970, 67, as amended by Treaty Series 1992, 68) empowers the Netherlands to take into account advantages that would have ... Read more