Tag: Losses  

The term 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.

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
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 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
Loading...