“Fertilizer Licence SA” (“A”) transferred its trademarks to “B” in 2013, previously financed the transfer through a cash contribution, and then, following the transfer, paid royalties to “A” in exchange for the ability to use the assets. According to the tax authorities, a situation where an entity transfers its assets to another entity, finances the transfer and then pays for access to use those assets does not reflect the conditions that unrelated parties would establish. An unrelated party, in order to obtain such licence fees from another unrelated party, would first have to incur the costs of manufacturing or acquiring the trademarks and to finance these costs itself without the involvement of the licensee. An independent entity which has finances the creation or purchase of an intangible asset, should not incur further costs for the use of that asset. Furthermore, in determining the licence fee to “B” for the use of trademarks, “A” relied on formal legal ownership, granting “B” ... Read more

GlaxoSmithKline Costa Rica S.A. manufactures pharma products which is sold to both independent customers in the region and to group companies abroad. For FY 2004 and 2005 pricing of the controlled transactions had been determined based on the TNMM method using return on total costs (ROTC) as PLI. GSK said the range of return on total costs “for the comparable independent companies ranges from 4.7 per cent to 14.5 per cent, with a median of 9.6 per cent. GSK CR obtained an average ROTC of 50.6 percent during fiscal years 2004 and 2005, which was not below the range identified for comparable independent companies. Accordingly, the transfer prices used by GSK CR in its controlled transactions did not distort GSK CR’s profitability and satisfied the arm’s length principle set out in the OECD Guidelines. In 2009 the tax authorities issued an assessment for FY 2004 and 2005 based on the internal CUP method. “…between the transactions under study, namely sales ... Read more

“Cosmetics Corp” is active in wholesale of medicinal products, cosmetics, perfumery and cleaning products. Following an audit the tax authorities issued an assessment regarding the interest rate on loans granted to the related parties domiciled in Cayman Islands and Luxembourg. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment. Excerpt “In this sense, it is essential to create a law that contains the guidelines that the OECD has established to guarantee the principle of full competition in transactions carried out between national taxpayers with related companies, for the purpose of applying the technical methods and procedures that they provide; The express reference made by Article 62-A of the TC cannot be considered as a dimension of the principle of relative legal reserve, insofar as there is no full development of the methods or procedures contained therein, nor a reference to an infra-legal rule containing them, but rather a reference that does ... Read more

Following an audit the tax authorities issued an assessment regarding various intra group costs of sales deducted for tax purposes by “E-S. Sales Corp”. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment, but in regards of application of the OECD Transfer Pricing Guidelines, the assessment was set aside. For the years in question the OECD guidelines had not yet been implemented by El Salvador. Excerpt “In this regard, it should be noted that the seventh paragraph of the aforementioned article provides that “””If, for any reason, the market price cannot be determined, the Tax Administration shall establish it by adopting the price or the amount of the consideration that the taxpayer under audit has received from purchasers of goods or providers of unrelated services other than those to whom it transferred goods or provided services at a price lower or higher than the market price”””. Therefore, if it had been ... Read more

In this case a group of taxpayers filed a lawsuit for the nullity of the new Mexican transfer pricing documentation obligations introduced in 2017 by rules 3.9.11, 3.9.14, 3.9.15, 3.9.16 and 3.9.17 of the First Resolution of Amendments to the Tax Miscellaneous published in the Official Gazette of the Federation, issued by the Head of the Tax Administration Service. Article 76-A of the Mexican Income Tax Law states that the taxpayers referred to in Article 32-H, Sections I, II, III and IV of the Federal Tax Code who enter into transactions with related parties must provide the tax authorities with annual related party information returns: 1) master file; 2) local file and 3) a country-by-country report. This three tiered documentation package provides the tax authorities with information related to transactions between related parties on transfer pricing, in order to identify conduct that could imply a risk of tax avoidance or evasion, improve the exchange of information with authorities of the ... Read more

During fiscal years 2006–2008, A-Group had been manufacturing and selling products in the construction industry – insulation and other building components. License fees received by the parent company A OY from the manufacturing companies had been determined by application of the CUP method. The remuneration of the sales companies in the group had been determined by application of the resale price method. The Finnish tax administration, tax tribunal and administrative court all found that the comparable license agreements chosen with regard to determining the intercompany license fees had such differences regarding products, contract terms and market areas that they were incomparable. With regard to the sale of the finished products, they found that the resale price method had not been applied on a sufficiently reliable basis. By reference to the 2010 version of the OECD’s Transfer Pricing Guidelines, they considered the best method for determining the arm’s length remuneration of the group companies was the residual profit split method. The ... Read more

Eastern Produce Ltd is part of Camellia Plc Group, and is is engaged in the growing, production and processing of tea in Malawi. The Malawi tax administration conducted a tax audit and found that transfer prices for intergroup service transactions had not been at arm’s length. However, in the notifications to Eastern Produce Ltd. no reference was made to the local arm’s length regulations – only the OECD Transfer Pricing Guidelines. Eastern Produce Limited complained to the High Court and argued that: “The decision and proceeding by MRA to use OECD (Organisation for Economic Cooperation and Development) guidelines whilst performing transfer pricing analysis and as a basis for effecting amendments to tax assessments was illegal. CONSIDERATIONS OF THE COURT, EXCERPS “With regard to transfer pricing in 2014, the law was contained in Section 127A. Section 127A provides as follows: “where a person who is not resident in Malawi carries on business with a person resident in Malawi and the course of such business is ... Read more

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

Corrugados del Guarco S.A. had declared losses on controlled transactions for FY 2003, 2004 and 2005 as export prices for these transactions had been set below cost and without profit margin, and also different from the price charged for that product to other independent or unrelated companies, in favour of its related company Envases Nicaragüenses S.A. According to the Corrugados del Guarco S.A. the reason why the prices of these controlled transactions had been set low was that unfair competition had made it necessary to use a commercial strategy of selling at preferential prices to the group company in Nicaragua. The tax authorities issued an assessment whereby the prices of the controlled transactions were adjusted in accordance with the arm’s length principle. Furthermore a fine was issued to the company for gross negligence. Judgement of the Supreme Court The Court dismissed the appeal of Corrugados del Guarco S.A. Excerpts from the Judgement “…Finally, and in relation to transfer pricing, on which the ... Read more

JFC Ecuador is active in coordination and logistic operations for the transfer of Ecuadorian fruit to related parties in the Russian JFC Group. Following an audit the tax authorities issued an assessment where the prices of these transactions had been determined based on quoted prices issued by the authorities in the SOPISCO NEWS database. However, according to JFC Ecuador, SOPISCO NEWS does not correspond to a publicly available international trade exchange or price database. On the contrary, it is a bulletin that lists quotations that involve price estimates, established through unidentified sources. The price quotations listed by SOPISCO NEWS correspond to prices that the bulletin presumes were agreed upon by companies that have carried out the management and marketing and sales for the placement of the product, while JFC Ecuador did not carry out such activities. Judgment of the Court The Court concludes that the use of the SOPISCO NEWS database by the Tax Administration, as it is an internationally ... Read more

According to article 32, Section XVIII of the Mexican Income Tax Law, costs determined on a pro-rata basis and paid to non-residents are not deductible. In this case it is argued that the provision violates the non-discrimination provision included in Mexico’s income tax treaties. Supreme Court Judgement The Supreme Court concludes that the Mexican Income Tax Law must take into account the OECD transfer pricing guidelines, and that these guidelines under certain circumstances acknowledges pro rata cost allocations. On that basis pro rata costs are deductible in Mexico, where certain requirements are met. According to the Mexican Supreme Court, these requirements are: a) The corresponding transaction has been concluded in accordance with the transfer pricing rules (paragraphs 151 to 154 of this judgment). b) All documentation supporting the transaction is available so that its authenticity can be verified, as well as the amounts to which it amounted and that it is a strictly indispensable expense (structural deduction) that was made ... Read more

Polymer S.A. had been issued an assessment of taxable income based on the arm’s length principle. In the assessment the tax authorities had based the adjustment on the guidance provided in the OECD TPG. Polymer S.A. was of the opinion that this was unconstitutional since the OECD TPG had not been implemented by law and Costa Rica was not an OECD member country. Judgement of the Supreme Court The Court dismissed the appeal of Polymer S.A. Excerpts from the Judgement “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility that other – better – techniques may be admitted. What is important is that the contested Interpretative Guideline does not aim ... Read more

In an appeal to the Supreme Court in Costa Rica, Nestlé claimed that the basis for an arm’s length adjustment was unconstitutional, since the arms length principle as described in the OECD transfer pricing guidelines had not been incorporated into the laws of Costa Rica. Judgement of the Supreme Court The Court dismissed the appeal of Nestlé. “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility of admitting “other -better- techniques”. What is important is that the contested Interpretative Guideline does not aim to eliminate other multiple scenarios arising from different forms of company organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt ... Read more

The subject-matter of the dispute was the exclusion of the rent for lease of machinery and equipment. It referred to the lease and sublease agreements for non-residential premises, machinery and equipment with the companies B.p., s.r.o. and M.-T., s.r.o., by which the parties agreed that the objects of the lease agreements would be used free of charge for a certain period of time – during the trial period. Bp s.r.o. disputed the use of transfer prices in accordance with the arm’s length principle and the question of the tenant’s payment behaviour. It argued economic aspects – the possibility of making a real profit over a longer period of time. According to the taxpayer the tax authority should have examined the possibility of obtaining a total profit for the taxpayer over a five-year period and not simply applied ‘the most ideal course of market economics (i.e. the business partners are always solvent and the market situation is optimal)’. It also supplemented ... Read more