In FY 2013 Inventec carried out manufacturing activities in the electronics industry on behalf of its parent company. It took formal title to the raw materials, but considered that its role was limited to assembly, without assuming risk or adding value to the materials. Inventec therefore used ROVAC (return on value added costs – not including cost of materials) as a profit level indicator (PLI) in its transfer pricing analysis. The tax authorities disagreed with the choice of PLI and considered ROTC (return on total costs – including materials) to be more appropriate. An appeal was filed by Inventec, which ended up before the Supreme Administrative Court. Judgment The Supreme Administrative Court dismissed the appeal of Inventec s.r.o. and ruled in favour of the tax authorities. (See also the FY 2014 Judgment) Click here for English Translation Click here for other translation ... Read more

In FY 2014 Inventec carried out manufacturing activities in the electronics industry on behalf of its parent company. It took formal title to the raw materials, but considered that its role was limited to assembly, without assuming risk or adding value to the materials. Inventec therefore used ROVAC (return on value added costs – not including cost of materials) as a profit level indicator (PLI) in its transfer pricing analysis. The tax authorities disagreed with the choice of PLI and considered ROTC (return on total costs – including materials) to be more appropriate. An appeal was filed by Inventec, which ended up before the Regional Court, which in its decision no. 29 Af 91/2019-147 found that the tax authorities had not taken into account Inventec’s FAR profile and that the alternative choice of profit level indicator – ROTC instead of ROVAC – had therefore not been sufficiently justified. On this basis, the court quashed the assessment and remitted the case ... Read more

SC (Pty) Ltd (SCL) received remuneration for activities performed for SIL, a related party resident in Mauritius. According to the company, SIL was responsible for trademarks, know-how, and related intangibles, as outlined in the franchise agreements with the non-RSA subsidiaries. Following a transfer pricing audit, the South African Revenue Service (SARS) concluded that it was evident from the conduct of both SIL and SCL, their respective employees and boards, and the general correspondence provided to SARS, that SCL had in fact determined the strategies with respect to the group’s expansion into the African market. SCL set the standard with regard to the development of marketing intangibles in non-RSA jurisdictions. SIL was only responsible for entering into the franchise agreements after they had been drafted and vetted by SCL employees. SARS therefore concluded that the remuneration received by SCL fell below the arm’s length range determined using the CUP method, and adjusted SCL’s taxable income accordingly. SCL objected to the assessment ... Read more

Puerto Arturo S.A.S. had determined that its income from the sale of emeralds to a related party was at arm’s length using the Comparable Uncontrolled Price (CUP) method. It compared the average selling price per carat with the average minimum and total values of the emeralds as determined by independent appraisers. The tax authorities disagreed with both the method and its application. Instead, they applied the Transactional Net Margin Method (TNMM) using a cost-based profit level indicator (PLI), which led to an assessment where the income from the transactions was adjusted to the median result of a benchmarking study. On appeal, the Court of First Instance dismissed the taxpayer’s complaint. It found that the appraisers’ valuations did not constitute comparable uncontrolled prices within the meaning of the CUP method. Puerto Arturo subsequently appealed to the Council of State. Judgment The Council of State upheld the approach of the tax authorities and confirmed the assessment of additional income. It held that ... Read more

To support its transfer pricing, SK MTS, s.r.o. submitted documentation that included a benchmark study, asserting that its pricing fell within the full range. Upon review, the tax authorities found that 9 out of the 10 companies included in the benchmark were not truly independent. Consequently, the authorities conducted their own benchmarking study and determined that the pricing of SK MTS, s.r.o.’s controlled transactions fell outside the interquartile range. They therefore adjusted the pricing to the median and issued an assessment. SK MTS, s.r.o. appealed the assessment to the Administrative Court. Judgment of the Court The Administrative Court dismissed the appeal and upheld the assessment issued by the tax authorities. Excerpts “22. Given that the companies compared by the plaintiffs did not meet the condition of independence and the plaintiff did not submit transfer documentation for 2019 to the tax administrator or prepare a comparability analysis, the tax administrator prepared such an analysis himself, and this procedure cannot be criticised ... Read more

The tax authorities had challenged the transfer prices applied for FY 2014 in several of Sofia Med AD’s related-party transactions, including the purchase of intermediary services, the purchase of copper cathodes (with deferred payment interest), and the sale of finished products and an assessment of additional taxable income was issued. An appeal was made to the Administrative Court, which largely upheld the tax authorities’ decision, and Sofia Med AD then appealed to the Supreme Administrative Court. The main complaints in Sofia Med AD’s appeal were the lack of reasoning in the decision when rejecting the comparability analysis carried out by the company in the transfer pricing documentation submitted, the lack of evidence in the case regarding the additional analysis carried out by the tax authorities of the transactions for the purchase of intermediary services and the sale of production, as well as the failure to consider the evidence submitted in the administrative proceedings and the conclusion of the forensic economic ... Read more

The assessment centered on whether RR Donnelley’s pricing with a related party reflected arm’s length terms under Section 23(7) of the Czech Income Tax Act. In particular, the tax authorities claimed that RR Donnelley was essentially lending funds to a related party by purchasing materials (disk drives, HDDs) on the latter’s behalf. They argued that this was a virtually risk-free transaction akin to a deposit of funds, so they chose the USD LIBOR rate as a reference for what an arm’s length return would look like. RR Donnelley appealed, and the Regional Court agreed in part that the transaction might have been low-risk. However, it ruled that the tax authorities had not thoroughly or transparently established a proper arm’s length price, nor had they shown why no comparable transactions could be found. Simply relying on the USD LIBOR rate did not suffice, since that rate applies to short-term interbank lending—an entirely different context from internal inventory purchases by non-banking companies ... Read more

The dispute concerns whether Íslenska kalkþörungafélagið ehf., a local Icelandic producer of calcareous algae, properly determined its transfer prices when selling its production to its Irish parent company in the years 2016 – 2020. According to the Icelandic tax authorities, the company’s cost-plus method did not comply with the OECD transfer pricing guidelines. In particular, the authorities concluded that the company had incorrectly determined its cost base by excluding both payroll expenses and depreciation of fixed assets, thereby understating actual costs and reducing taxable income in Iceland. The authorities also found that the transfer pricing documentation submitted by Íslenska kalkþörungafélagið ehf. was insufficient. Íslenska kalkþörungafélagið ehf. argued that it correctly applied the cost-plus method by focusing only on “variable” costs and claimed that adding such fixed costs would make its exports uncompetitive and that much of the group’s value was created by the parent company’s investments and expertise in Ireland. After receiving the assessments, Íslenska kalkþörungafélagið ehf. appealed to the ... Read more

Iprona SpA is an Italian company that sells fruit extract powder. It had sold products to an Austrian subsidiary at a price that was nearly tripled when the goods were quickly resold through related companies before reaching a final buyer in Liechtenstein. The tax authorities argued that the final price received by the Liechtenstein company should have been treated as the “normal value” of the initial sale from Iprona SpA, indicating an artificial profit shift. A tax assessment was issued on this basis. The case ended up in the Supreme Court. Judgment The Supreme Court decided that Iprona SpA had not applied the arm’s length principle correctly. The Court emphasized that, to establish normal value for transfer pricing purposes, one can rely on various complementary methods under both domestic law and OECD guidelines, such as the resale price method. The tax authority had shown that no further processing of the goods had occurred and that the rapid resale at a ... Read more

Viking A/S sold life-saving equipment products to its foreign subsidiaries (internal service stations) at lower prices than to unrelated parties (external service stations). Its transfer pricing documentation did not clearly state or justify the pricing method used. The way in which Viking compared internal sales with external prices also included non-comparable transactions, such as mixing sales to end customers with sales to external service stations, without sufficient explanation of the comparability defects. Following an audit, the tax authorities issued a transfer pricing assessment after finding that Viking’s documentation did not adequately demonstrate compliance with the arm’s length principle. The tax authorities selected the transactional net margin method (TNMM) and conducted a benchmark study of the profitability of comparable external service stations to determine the arm’s length profitability of the foreign subsidiaries (internal service stations). They applied the interquartile range to account for imperfect comparability and used the median to determine the profits that should have been earned by the subsidiaries ... Read more

AON Consulting provided services such as human resources consulting, payroll processing, business process outsourcing and software development services. It had controlled transactions with both US and non-US related parties. The pricing of the US transactions had been agreed in a Mutual Agreement Procedure (MAP) between the US and India. The issue for the High Court was whether the non-US transactions should be priced using the same framework as that used to price the US transactions, as ordered by the Income Tax Appellate Tribunal (ITAT) in its decision. In the appeal to the High Court, AON argued that the MAP is based on a consensus between the competent authorities of the contracting states and that the basis for TP adjustments under the MAP cannot be applied to international transactions which are not subject to negotiation under the MAP. Judgment The High Court ruled in favour of AON and set aside the decision of the ITAT. Excerpt “36. An agreement arrived at ... Read more

Sofia Med AD is a manufacturer of a wide range of rolled and pressed copper and copper alloy products. It was subject to a tax audit in which the tax authorities challenged several aspects of its tax reporting, including transfer pricing adjustments on intercompany transactions. The dispute concerned the deductibility of intermediary fees, the application of the arm’s length principle, and the classification of certain payments as taxable under withholding tax rules. Intercompany Transactions and Transfer Pricing Adjustments The tax authorities audited Sofia Med’s pricing methods for transactions involving related entities. The company had used different pricing approaches over the years — first linking intermediary service fees to tonnes of production sold, then shifting to a percentage of net sales revenue. The authorities found that this methodology failed to ensure a reliable comparability analysis, as required under both Bulgarian regulations and OECD transfer pricing guidelines. Applying the CUP method, the tax authorities adjusted the company’s financial results, arguing that the ... Read more

The case arises from tax assessments issued by the Italian Revenue Agency to Eco Leather S.p.A. and Kulch S.p.A., involving alleged transfer pricing irregularities under Article 110(7) of Presidential Decree No. 917/1986, as well as the non-deductibility of certain costs. After separate proceedings before the Provincial Tax Commission, the companies appealed an unfavorable judgment, and the Regional Tax Commission then annulled or partially annulled several of the contested assessment notices. The Revenue Agency appealed that decision to the Court of Cassation, arguing that the Regional Commission had wrongly applied the OECD Guidelines and incorrectly rejected the transactional net margin method (TNMM). Judgment The Court of Cassation ultimately upheld the Commission’s rulings. It found that the Commission had reasonably preferred the comparable uncontrolled price (CUP) method in evaluating transactions between related parties, deemed there was insufficient proof that the American subsidiary owed interest for delayed payments, and upheld the conclusion that commissions paid to a Hong Kong company were genuine deductible ... Read more

Viva Decor TOV, is part of the Sintra Group, which manufactures and sells wallpaper. Viva Decor challenged two tax assessments issued by the tax authorities in February 2020, which assessed additional corporate income tax and reduced VAT refunds, due to mispricing of controlled transactions in FY 2013–2015. The dispute focused on the correct period to use for calculating profit level indicators under the TNMM. The tax authority claimed Viva Decor improperly calculated its profitability for the relevant periods—using full-year figures (2013, 2015)while the tax authorities insisted only data from the months when the transactions were officially recognized as “controlled” (September–December 2013 and January–May 2015) should be used. The tax authorities also alleged flaws in Viva Decor’s transfer pricing documentation and accounting errors, including the treatment of exchange rate differences and the valuation of inventories. Viva Decor argued that full-year financial data should be used because the wallpaper market is seasonal, and that the databases used for comparables only offer annual ... Read more

IHLE ESPAÑA (later NEX TYRES) purchased tyres from its German parent company (IHLE BB) using what it claimed was the CUP method. It claimed that IHLE BB sold the tyres at the same price as it paid to third party suppliers, simply passing on additional transport costs and a small administration fee. The tax authorities rejected the CUP method used by IHLE and instead applied a TNMM, selecting a group of EU car parts wholesalers as comparables, using statistical tools to determine an interquartile range and then adjusting IHLE ESPAÑA’s profit to the median. IHLE ESPAÑA appealed. Judgment The Court ruled largely in favour of the tax authorities, but partially upheld IHLT’s appeal. The Court ruled that the “CUP method” used by IHLT was inconsistent because, once all indirect costs were added to the price, IHLE appeared to buy the tyres at a higher total price than it sold them, resulting in negative or minimal gross margins that no independent ... Read more

Inventec carried out manufacturing activities in the electronics industry on behalf of its parent company. It took formal title to the raw materials, but considered that its role was limited to assembly, without assuming risk or adding value to the materials. Inventec therefore used ROVAC (return on value added costs – not including cost of materials) as a profit level indicator (PLI) in its transfer pricing analysis. The tax authorities disagreed with the choice of PLI and considered ROTC (return on total costs – including materials) to be more appropriate. An appeal was filed by Inventec, which ended up before the Regional Court, which in its decision no. 29 Af 91/2019-147 found that the tax authorities had not taken into account Inventec’s FAR profile and that the alternative choice of profit level indicator – ROTC instead of ROVAC – had therefore not been sufficiently justified. On this basis, the court quashed the assessment and remitted the case to the tax ... Read more

Plaintif, “E Corp” is a Japanese corporation whose business activities are focused on four business fields: resources and energy, public infrastructure, industrial machinery, and aeronautics and space. Through company B, E Corp owned the shares in Company A located in Thailand. Company A purchased vehicle turbocharger parts or components from “E Corp” or local suppliers, manufactured vehicle turbochargers under a licence agreement with E Corp and also recieved services from E Corp. It sold the turbochargers mainly to Japanese automobile manufacturers, and also both finished products and parts to E Corp’s other affiliated companies. Following an audit a dispute arose between E Corp and the tax authorities as to what transfer pricing method to apply. An assessment was issued where the tax authorities applied a “method equivalent to the Transactional Net Margin Method” “E Corp” filed a complaint which the district court alleging that the method used by the tax authoritis was not equivalent to a TNMM, and therefore the ... Read more

“Lifts Ltd.” had used the transactional net margin method to set the pricing of its sales to related parties. The tax authority rejected that method for certain sales and applied a cost plus method instead, drawing comparisons to the company’s sales to third parties. This approach resulted in upward adjustments to taxable income. An appeal was filed by “Lifts Ltd.” with the Administrative Court. Judgment The Court largely upheld the authority’s use of a traditional (cost plus) method for most sales, finding that internal comparables of sales to independent parties existed and could be made sufficiently reliable through adjustments. However, it ruled that sales to a Turkish affiliate were not properly comparable to sales in Swedish or Czech markets. Given the market differences and the company’s strategy to penetrate Turkey, the authority had not shown that the transfer prices for those sales were outside an acceptable arm’s length range. Consequently, the related upward adjustment for the Turkish sales was annulled ... Read more

The case concerned whether the tax authorities had been justified in rejecting five out of the sixteen comparable companies that had been selected by ABB Ltda. in a benchmark study to justify the pricing of its intercompany transactions, which was the basis for a tax assessment that had been issued by the tax authorities. The court of first instance accepted four of the comparables originally disallowed by the tax authorities, finding that the grounds for their exclusion were not adequately proven. It only upheld the exclusion of Dulhunty Power Ltd., because the company’s intangibles were well over ten percent of its sales, and there was no technical explanation for omitting that portion of its assets from the study. After recalculating the interquartile range with the accepted comparables, the court adjusted upward the sales of produced inventories but recognized the costs linked to purchases for production, as these fell within the arm’s-length range. Regarding technical assistance and royalty expenses, which were ... Read more

A Kenyan company, Avic International Beijing (EA) Limited, purchased completely knocked-down motor vehicle parts from Avic International Beijing Company Limited (China) and then assembled them into finished products and sold these products to independent buyers. To determine the pricing of the controlled transaction between Avic International Beijing (EA) Limited (Kenya) and Avic International Beijing Company Limited (China), the resale price method had been applied. The tax authorities disagreed with use of the resale price method and instead applied a TNMM which resulted in additional taxable income, and moreover a deemed dividend distribution to which withholding taxes was applied. An appeal was filed by Avic International Beijing (EA) Limited with the Tax Appeal Tribunal. Judgment The tribunal upheld the assessment regarding use of the TNMM, but the calculation of withholding taxes on the deemed dividend distribution was changed due to lack of legal basis for collecting and recovering the WHT in part of the period under review. Excerpts on choice of ... Read more

“Bedding Textile Sp. z o.o.” (A) is a producer of bedding textiles which is sold to a related party C. Following an audit, the tax authorities concluded, inter alia, that the pricing of the controlled transactions between A and C was not at arm’s length. This conclusion was based on a benchmark study which showed that the profit earned by A (1.61% ROTC) was lower than the net profit earned by unrelated comparables. The interquartile range for the transaction in question was determined to be between 4.20% and 9.22%, with a median of 5.23% (after rejecting extreme results), and since the profit reported by A was outside the interquartile range, the tax authorities adjusted to the median of 5.23%, i.e. the value that most closely approximates the market value. An appeal was filed by A with the Administrative Court. Judgment The Administrative Court upheld the decision of the tax authorities in regards of the transfer pricing adjustment. Excerpts in English ... Read more

The case concerns the legality of a diverted profits tax (DPT) assessment issued by the tax authorities against three UK-based companies in the Thomson Reuters group. The total amount assessed was in excess of £167 million, with Refinitiv Limited receiving the largest assessment. The issue is whether the tax assessments for FY 2015-2018 under UK diverted profit tax-provisions were inconsistent with an Advance Pricing Agreement (APA) previously agreed between the companies and the tax authorities in January 2013. The APA, which covered the period from October 1, 2008 to December 31, 2014, established a transfer pricing method (TNMM/Cost Plus Method) for the pricing of certain intercompany services between UK companies and a Swiss company of the Thomson Reuters group. The UK companies (TRUK) provided intellectual property (“IP”) services to a Swiss group company (TRGR) which held the group’s main IP assets. According to the tax authorities, these services increased the value of the IP held by the Swiss company and ... Read more

RIn this case, JCB India Ltd. challenged the assessment order for the assessment year 2017–18, where the tax authorities made a transfer pricing adjustment of approximately ₹166 crores to the royalty payments made by the company to its associated enterprises (AEs). JCB argued that the arm’s length price for royalties should be 4%, in line with a Mutual Agreement Procedure (MAP) settled between Indian and UK tax authorities for previous years. The company further contended that similar royalty arrangements were consistent with those already accepted in earlier years, and that a recently signed Advance Pricing Agreement (APA) for assessment years 2018–19 to 2022–23, which set the royalty rate at 5%, should guide the treatment of the royalty payments in the current year as well. Decision The Tribunal noted that while the royalty arrangements with UK AEs were covered under the MAP and APA in other years, the current assessment year (2017–18) was not included. As a result, the Tribunal held ... Read more

Sabic India is a subsidiary of the Sabic group and provided marketing services to other companies in the group. For purposes of pricing the controlled transactions, the TNMM had been chosen with a cost based PLI as well as a Berry ratio. Following an audit for FY 2015 and 2016, the tax authorities (the TPO) rejected the method and issued an assessment based on an “other method”. A complaint was filed Sabic India and the assessment was later overturned by the Income Tax Appellate Tribunal. An appeal was then filed by the tax authorities with the High Court. Judgment The High Court upheld the judgment of the Tribunal and found in favour of Sabic India. Excerpts “Undeniably, Rule 10AB of the Rules does permit determination of the ALP by simulating the price that would have been charged in similar uncontrolled transactions under similar circumstances having regard to all relevant facts. However, the recourse to this method would be available only ... Read more

Ilapark Italia SpA is an Italian manufacturing company that produces packaging machines. Other companies within the group were responsible for distribution and sales of the machines. Following an audit, the Italian tax authorities issued an assessment for FY 2008, where they had set aside the CUP method applied by the company and instead used the Transactional Net Margin Method (TNMM). An appeal was filed where Ilapark Italia SpA argued that the CUP method was preferable over the TNMM according to the 2010 TPG. The lower courts upheld the tax authorities’ assessment and an appeal was then filed by Ilapark Italia SpA with the Supreme Court. Judgment The Supreme Court dismissed the appeal in regards of the transfer pricing issue. According to the Court the OECD Guidelines provide guidance rather than enforceable rules. The Guidelines offer operational strategies for implementing transfer pricing but are not part of Italy’s legal hierarchy. In the case at hand, the Court found that the TNMM ... Read more

Futaba Czech s.r.o. is a Czech company that has been operating since 2005 as a manufacturer and supplier of components for the automotive industry and is part of the Japanese Futaba group. Futaba had been loss making in FY 2016-2017. Following a transfer pricing audit, the tax authorities found that Futaba had provided “comprehensive production service”, which should have compensated by the group. An assessment was issued based on the TNMM with NCP as Profit Level Indicator. Futaba Czech contested the assessment on several grounds. It argued that no instructions or pricing directives from the parent had been proven; that it in fact bore most business functions, risks and financing decisions; that the tax authorities had wrongly reallocated the functional‐and‐risk profile in a value‐chain analysis (for example assigning research and development 50 percent weight versus only 15 percent to production); that the choice of the transaction‐net‐margin method and aggregation over individual‐transaction methods was unjustified; that the reference period (2014–16) and ... Read more

The tax authorities considered Minebea to be a contract manufacturer with limited functions within the Valeo group and had issued a TP adjustment where the company’s taxable profit had been determined using the TNMM, IQR and median. Deductions for certain intra-group services (management and technical services) were also denied. Minebea appealed to the Administrative Court, which rejected the appeal, and then Minebea appealed to the Supreme Administrative Court. Judgment of the Court The Supreme Administrative Court dismissed the appeal and upheld the judgment of the Administrative Court and the assessment made by the tax authorities. Click here for English translation Click here for translation ... Read more

9 September 2024, the Peruvian tax authority – SUNAT – issued guidance on the qualification of services, transfer pricing methods for services and the application of the “benefit test”. Click here for English translation ... Read more

Cummins Car & General had priced goods purchased from a related party for sale to external customers using the CUP method based on prices that had previously agreed between the two parties before they became related parties. An assessment was issued by the tax authorities where the pricing of the goods had instead been determined using the resale price method. According to the tax authorities, the CUP method could not be used as there was a significant time lag between the previously agreed prices and the current controlled transactions. In the assessment, the tax authorities had also adjusted the commission rates in relation to a transaction between unrelated parties. An appeal was lodged with the Tax Appeals Tribunal. Judgment The Tribunal upheld the tax assessment relating to the use of the RPM method instead of the CUP method, but overturned the assessment relating to the commission rate on the unrelated party transaction. Excerpts “The Tribunal in the circumstances concludes that ... Read more

The tax authority (DIAN) had issued an assessment of additional taxable income for FY2013 due to non-arm’s length pricing of transactions with related parties. According to the assessment, the tax authority disagreed with method applied by C.I. Banacol and instead applied a TNMM where the transactions were priced in the aggregate. C.I. Banacol appealed to the Administrative Court, which ruled in favour of the tax authories. An appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court upheld the decision of the Administrative Court and ruled in favour of the tax authorities. Excerpts in English “The Chamber agrees with the DIAN and the Court in the sense that the four segmented transactions for the purposes of the transfer pricing regime are interrelated and are directed to the fulfilment of a single object: the international marketing of bananas and plantains and other fruits, products that are previously acquired from national economic partners or consigned by third parties.” ... Read more

Sony India Private Limited is a wholly owned subsidiary of Sony Corporation, Japan. During the years under consideration, 2010-11, Sony India was engaged primarily in import and distribution of Sony products in the Indian market. Following an audit, an assessment was issued by the tax authorities where the taxable income of Sony India was adjusted upwards. The tax authorities considered and benchmarked the distribution activities and found that the margin declared by the Sony India was below the average margin of 27,8% determined by applying the TNMM. They further proceeded to benchmark advertising, markeing and promotion (APM) expenses separately by adopting bright line test. An appeal was filed by Sony India Private Limited with the Income Tax Appellate Tribunal. Judgment of the Income Tax Appellate Tribunal The Tribunal ruled mostly in favor of Sony India. Excerpt “24. Next coming to the issue of benchmarking the ALP relating to software division of the assessee, we heard both sides and considered each ... Read more

Executive Offshore Shipping SDN BHD is active in the chartering of offshore support vessels. It is related to another company, one Eagle High (L) Limited (“EHLL”) located in Labuan – a low tax jurisdiction. EHLL is a ship-owning company. Both companies are part of the same group known as the Executive Offshore Group. EHLL had provided (i) charter hire of vessels and (ii) crew management services to Executive Offshore Shipping for the assessment years 2014 to 2016. In consideration of the services provided by EHLL, Executive Offshore Shipping paid EHLL a cost-plus mark-up of 35% as charter hire and crew management fee. Following an audit, the tax authorities concluded that the comparables and transfer pricing method selected by Executive Offshore Shipping were inappropriate and that the 35% mark-up on the vessel charter hire and crew management fees was not at arm’s length. The Inland Revenue issued an assessment of additional corporate income tax under the arm’s length provisions of Section ... Read more

Illichmann Castalloy carries out activities related to the production of aluminium castings and is part of the Alicon Group based in Vienna. It had used the profit-split method for the pricing of controlled transactions and in the financial year 2012/2013 the company reported a loss of EUR 562,183.94. Based on a functional and risk analysis, the tax authorities found that the company did not perform any functions related to strategic decision-making or marketing activities. It had been assigned risks over which it had no control. According to the tax authorities, the company’s profile was that of a manufacturer with limited risk, and n this basis, the tax authorities considered that the profit split method was not the most appropriate method. The tax authorities instead used the TNMM to determine the taxable profit from the controlled transactions. Upon receipt of the resulting tax assessment, Illichmann Castalloy appealed to the Administrative Court. Judgment The Court ruled largely in favour of Illichmann Castalloy ... Read more

In 2013, Airbnb entered into a technology and licensing agreement with its Irish subsidiary, which included a cost-sharing arrangement for the use and development of its proprietary intellectual property. As part of this arrangement, the Irish affiliate made a lump-sum platform contribution transaction (PCT) payment of $35 million in exchange for rights to Airbnb’s IP. To determine the PCT amount, Airbnb applied the income method, using discount rates ranging from 25% to 35% and estimating the useful lives of the licensed intangibles. The U.S. Internal Revenue Service (IRS) challenged this valuation, asserting that an arm’s length payment should have been approximately $4.2 billion. Based on this position, the IRS issued an assessment for additional taxable income and associated penalties. The IRS employed a comparable uncontrolled transaction (CUT) method, referencing Airbnb’s Series D financing round, which took place on April 16, 2014—roughly three months after the PCT was executed. Airbnb disputed the IRS assessment and filed a petition with the United ... Read more

The tax authorities chose the cost plus method for determining the arm’s length price for low value-added intra-group services provided between related parties (Cost+). It took the parent company’s wage costs as the basis, to which it added a mark-up of 7 %, the maximum mark-up under Guideline D-10. On that basis, they concluded that the applicant had obtained services from the parent company that were different from the price at which an unrelated person would have provided the services. An appeal was filed with the regional court where BEAS SUN s.r.o. argued that the tax authorities should have chosen the comparable uncontrolled price (CUP) method, rather than the Cost plus method, to determine the reference price. The Regional Court stated that the CUP method is not superior to the other methods resulting from Guideline D-10 and the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organisation for Economic Cooperation and Development (‘the OECD Guidelines’). The ... Read more

The case concerned the determination of the arm’s length value of shares transferred between related parties. The tax authorities had assessed the value using the discounted cash flow (DCF) method and issued an adjustment based on that valuation. DCF S.A. challenged the assessment before the Tax Court, arguing that the DCF method was not among the transfer pricing methods recognized under Peruvian law for the 2017 fiscal year. Judgment The Tax Court ruled in favor of DCF S.A., finding that the tax authorities had neither applied an approved method nor correctly interpreted the transfer pricing regulations applicable in 2017. Since the DCF method was not implemented in Peruvian law at the time, it could not be used to determine the arm’s length value. The Court held that the Comparable Uncontrolled Price (CUP) method should have been applied instead. Excerpt in English “It is important to note that in Request No. and in the appealed resolution (pages 943, 945/reverse and 1354/reverse), ... Read more

Avago Technologies Trading Ltd is active in the semiconductor industry and licenses intellectual property under a licence agreement with GEN IP, a related party in Singapore. This agreement allows Avago to sublicense the manufacture of Avago products to both related and unrelated parties. The issue was whether the royalty payments made by Avago to GEN IP were at arm’s length. The tax authorities determined that the payments were not at arm’s length and issued an assessment of additional taxable income. In order to determine the arm’s length royalty payments, the tax authorities disregarded the TNMM method used by Avago and instead used the CUP method. Avago filed an appeal with the Assessment Review Committee. Decision. The Assessment Review Committee upheld the tax assessment and dismissed Avago’s complaint. Click here for other translation ... Read more

“Poly Corp”, a manufacturer of polypropylene products, had an export marketing contract with an group company for overseas sales. The products were sold to unrelated third parties or foreign group companies through this arrangement. Following an audit, the tax authority claimed that “Poly Corp” sold its products to foreign group companies below the arm’s length price. An assessment of additional taxable income was issued and the amount was treated as dividends to the foreign group companies. “Poly Corp” appealed. Judgment The Administrative Court determined that even though the transfer prices were agreed upon by shareholders without special relationships, they did not automatically qualify as arm’s length prices. For transactions with certain group companies, the tax authority failed to account for sales volume in their comparability analysis, rendering the assessments invalid. However, for transactions with another related companies, the criteria applied were deemed reasonable, and using a single comparable transaction to determine the arm’s length price was sufficient. The court concluded ... Read more

Eni Norge AS was a wholly owned subsidiary of Eni International B.V., a Dutch company. Both companies were part of the Eni Group, which was headquartered by the Italian company Eni SpA. Eni Norway had deducted costs related to the purchase of “technical services” from Eni SpA. Following an audit, the tax authorities reduced these deductions in accordance with Section 13-1 of the Tax Act (arm’s length provision). As a result, Eni Norge’s income was increased by NOK 32,673,457 in FY2015 and NOK 16,752,728 in FY2016. The tax assessment issued by the tax authorities was later confirmed by a decision of the Petroleum Tax Appeal Board. The Tax Appeal Board found that there were price differences between the internal hourly rates for technical services and the external hourly rates. The price differences could be due to errors in the cost base and/or lack of arm’s length in the allocation of costs. Eni Norge applied to the District Court for a ... Read more

In 2008, “Peru Deposits SA” provided funds totaling USD 8.3 million to a group company in Luxembourg, characterizing the transactions as deposits and charging interest at rates between 2.3% and 4.6% per annum. The transfer pricing documentation supported these rates by referencing deposit rates typically offered by banks. Following an audit, the tax authorities characterized the transactions as loans rather than deposits, asserting that the applicable interest should reflect lending rates, which are generally higher. The interest income was recalculated – based on Peruvian interest rates – and an assessment for additional taxable income issued. “Peru Deposits SA” challenged the assessment before the Tax Court. Decision of the Tax Court The Tax Court upheld the tax authorities’ characterization of the transactions as loans and found that the interest rates applied by the company did not meet the arm’s length standard. However, the Court did not fully endorse the rates used by the authorities and instead set the appropriate arm’s length ... Read more

Puma Energy Bahamas SA is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing documentation and financial reports and other publicly available information, an assessment was issued for FY 2013 and 2014 of additional taxable income of $39 million resulting in additional taxes and surcharges of approximately $ 14 millions. Puma Energy Bahamas SA disagreed with the assessment and brought the case before the Administrative Tax Tribunal. In 2020 the Administrative Tribunal decided in favor of the tax authorities with a minor adjustment in the calculations for 2014. “…we consider that the Tax Administration adhered, in this case, to the powers conferred by law, and that there is no defenselessness, since it was verified that, in the course of the audit, several requests for information were made (as evidenced in the ... Read more

“Steel Industry” had priced each of its controlled transactions on a separate basis. The tax authorities disagreed with this approach and instead priced all controlled transactions on an aggregated basis using the TNMM with ROA as the profit level indicator. On this basis, an assessment of additional taxable income was issued. An appeal was lodged by the steel industry, which eventually went to the Supreme Administrative Court. Judgment The Supreme Administrative Court ruled in favour of “Steel Industry”. According to the Court, the tax authorities had failed to provide sufficient evidence that the approach adopted by “Steel Industry” did not lead to an arm’s length result. Click here for English translation Click here for other translation ... Read more

“B Electro Ltd” is a wholly owned subsidiary of the “B Electro group” “which is one of the leading worldwide suppliers of technology and services with 468 subsidiaries and agencies in 60 countries around the world. In order to document the pricing of purchases and sales of goods from/to related companies, “Electro Ltd” had applied the net transaction margin method (TNMM), using itself as tested party and selected external comparative data using the TP Catalyst database and used ROS as PLI. An audit of intra-group transactions for the tax year 2018 was carried out, inter alia, and accounting differences were identified due to non-compliance with the arm’s length principle in the invoicing of intra-group transactions, and in particular the invoicing of the category of transactions involving purchases and sales of goods from/to related companies. The tax authorities found that 6 out of the 10 comparables were not sufficiently comparable and conducted a benchmark that showed that the return on sales ... Read more

The tax authorities had audited Unilever’s controlled transactions for FY 2009 and concluded that the prices charged for sales to related parties were unrealistically low. As a result, the tax authorities adjusted Unilever’s taxable income. Unilever challenged the tax adjustment, arguing that the tax authorities did not conduct a proper transfer pricing study in accordance with recognized methodologies. The Tax Administration applied the Comparable Uncontrolled Price (CUP) method, comparing Unilever’s prices to independent third parties. However, Unilever contended that the Transactional Net Margin Method (TNMM) was more appropriate, as it considered the functional, economic, and risk differences between its transactions with affiliates and third parties. The lower court ruled against Unilever, stating that the documentation was not properly authenticated, as it lacked a signature and a preparation date. Additionally, the expert witness from Deloitte who testified did not assume authorship of the report, which led the court to discount its probative value. Without this evidence, the court found that Unilever ... Read more

“Hygiene Corp” is a manufacturer of hygiene products, diapers, sanitary napkins, toilet paper, which it sold to forty‐five overseas related parties at cost plus 8%, the same markup applied to four unrelated foreign purchasers. It also dispatched skilled employees abroad under an internal exchange programme and transferred patented know‐how free of charge to another related affiliate. Following an audit for FY 20152019 the tax authorities issued an assessment of additional taxable profits due to non-arm’s length pricing of sales to related parties and unpaid service fees and royalties from related parties. An appeal was filed where “Hygiene Corp” argued that its sales prices (manufacturing cost plus an 8% margin) mirrored prices charged to independent third parties and so already reflected an arm’s-length result. It emphasised having genuine internal comparables, growing share of non-related-party exports (over 20% by 2019), and meaningful economic rationale for low-margin pricing to utilize idle capacity amid a sharp decline in Korea’s birth rate after 2016. Citing OECD ... Read more

ING Bank SPA received interest on a loan granted to a Dutch group company, Ing Lease Interfinance B.V.. The tax authorities considered that the interest rate on the loan was significantly lower than an arm’s length interest rate and issued a notice of assessment, changing the interest rate from 3.90% to 6.81%, resulting in additional taxable income. ING Bank disagreed with the assessment and appealed to the Provincial Tax Commission and later to the Regional Tax Commission, which ruled in favour of the tax authorities. ING Bank then appealed to the Supreme Court. Judgment of the Court The Supreme Court referred the case back to the Regional Tax Commission for a more detailed explanation of why the tax authorities’ arguments for an upward adjustment of the interest rate were considered decisive for the decision issued. “6.7. In the present case, both parties pointed to evidence supporting the correctness of the loan interest rate as stated by them. Neither party has ... Read more

Marelli Slovakia’s main business is the manufacture of automotive engine and transmission components and that its main products are throttle bodies, throttle position sensors and high-pressure fuel pumps. The parent company is Magneti Marelli S.p.A., Italy, which owns 100 % of the shares of the company, and the parent company of the entire group is Fiat S.p.A. In an audit of corporate income taxes for FY 2012 the tax authorities compared the resale price method, the cost plus method and the net margin method, and stated the reasons why it had chosen the net margin method as the most appropriate method for assessing the arm’s length pricing of the controlled transactions relating to the intra-group sale of Marelli Slovakia’s products. In comparing the terms and conditions agreed in the commercial relationships, it took into account the activities carried out by Marelli Slovakia in production, purchasing and sales, as well as the extent of the business risks, the contractual terms and ... Read more

The tax authority had issued an assessment of additional taxable income for FY2011 due to non-arm’s length pricing of transactions with foreign associated enterprises – purchase of inventory for distribution (CBU) and inventory for production (CDK). With regard to goods for distribution, the tax authority disagreed with the use of comparables from 2008 to 2010 and the screening criteria applied. With regard to inventory for production, the tax authority also disagreed with the transfer pricing method and some of the comparability adjustments made by Fabricación de Automotores S.A. Fabricación de Automotores S.A. appealed to the Administrative Court, which later ruled in its favour. The tax authority then appealed to the Supreme Administrative Court. Judgment The Supreme Administrative Court upheld the decision of the Administrative Court and ruled in favour of Fabricación de Automotores S.A. The Court found that the use of data from previous years was acceptable and that the transfer pricing method, benchmark study and comparability adjustments applied by ... Read more

UFI Filters SpA had paid two related companies in China for the supply of filters in 2009 and deducted the costs from its taxable income. Following an audit, the tax authorities found, on the basis of a benchmark study of six comparable companies, that the mark-ups applied by the Chinese companies (39.77% and 17.2%) under the cost-plus method were not at arm’s length and issued a tax assessment of additional taxable income resulting from the reduction in the price and, consequently, the deductions. UFI Filters SpA appealed, arguing that the six companies were not comparable. The Provincial Tax Commission ruled against UFI Filters SpA, but the Regional Tax Commission later ruled in favour of UFI Filters SpA An appeal was then filed by the tax authorities with the Supreme Court. Judgment of the Court The Supreme Court upheld the decision of the Regional Tax Commission, and dismissed the appeal of the tax authorities. Excerpts in English “2.4. In indicating the criteria ... Read more

Empresa Minera Los Quenuales S.A. had used the transactional net margin method to determine the arm’s length price for its controlled transactions consisting of sales of zinc concentrates to a related party, Glencore International AG, domiciled in Switzerland. The tax authorities disagreed with the choice of method and instead applied a CUP method, on the basis of which an assessment of additional taxable income was issued. Not satisfied with the assessment, Empresa Minera Los Quenuales S.A. appealed to the Tax Court. The Tax Court ruled mostly in favour of Empresa Minera Los Quenuales S.A. According to the Tax Court, the tax authorities had not taken into account various comparability factors in determining the arm’s length price of the zinc concentrate under the chosen method – such as weight, percentage of humidity, loss, ore grade, recovery factor, etc. The tax authorities then appealed. Judgment The Supreme Court overturned the Tax Court’s decision and decided in favour of the tax authorities. According ... Read more