Tag: Outcome testing

Poland vs C. spółka z o.o. , November 2022, Supreme Administrative Court, Case No  II FSK 974/22

Poland vs C. spółka z o.o. , November 2022, Supreme Administrative Court, Case No II FSK 974/22

C. spółka z o.o. is part of a larger group and mainly (95%) sells products (boxes, metal enclosures, etc.) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. C. spółka filed an appeal with ... Read more

TPG2022 Chapter III paragraph 3.70

In other instances, taxpayers might test the actual outcome of their controlled transactions to demonstrate that the conditions of these transactions were consistent with the arm’s length principle, i.e. on an ex post basis (hereinafter “the arm’s length outcome-testing” approach). Such test typically takes place as part of the process for establishing the tax return at year-end ... Read more

OECD COVID-19 TPG paragraph 30

One potential solution to the uncertainty caused by the COVID-19 pandemic would be to allow for the inclusion of price adjustment mechanisms in controlled transactions. This may provide for flexibility while maintaining an arm’s length outcome. In particular, this approach to the extent permissible by domestic law would allow the adjustment of prices relevant for FY2020 through adjusted invoicing or intercompany payments effectuated in a later period (likely FY2021), when more accurate information to establish the arm’s length transfer price becomes available. In jurisdictions that use the outcome-testing approach, price adjustment mechanisms to reflect updated information relevant to determining an arm’s length price are often used. A jurisdiction that temporarily allows the outcome-testing approach could also temporarily allow the use of price adjustment mechanisms for that purpose and the taxpayer would be expected to describe the application of the price adjustment mechanism in its transfer pricing documentation. Such price adjustment mechanisms (provided that they are consistent with the arm’s length ... Read more

OECD COVID-19 TPG paragraph 23

Where possible, and on a temporary basis during the pandemic, tax authorities that otherwise use the price-setting approach could consider allowing taxpayers, for those controlled transactions affected by the pandemic, to take into account information that becomes available after the close of the taxable year in filing their returns (where legally permissible and properly described in the transfer pricing documentation). Tax administrations could provide flexibility to allow amendments to FY 2020 tax returns such that transfer prices are set on an arm’s length basis and using available information. Also given the potential for double taxation that may arise as a result of unilateral adjustments, consideration may be given by tax administrations to: Provide for flexibility in the allowance of “compensating adjustments” to be made before the tax return is filed, where it is legally permissible, in order to allow for any available contemporaneous information to be better evaluated by taxpayers and tax administrations such that arm’s length prices can be ... Read more

OECD COVID-19 TPG paragraph 22

The OECD TPG describe two approaches to identify and collect data required to undertake a transfer pricing analysis. The first is a “price-setting,” i.e. an ex-ante approach, which uses historical data updated to reflect any change in economic conditions through the date of the contract. The second is an “outcome-testing” approach, which may incorporate information that becomes available after the close of the taxable year to determine arm’s length conditions and report results on the taxable year to determine arm’s length conditions and report results on the tax return. According to the OECD TPG, both approaches, or a combination of these approaches, are found among OECD member countries.11 11 Paragraph 3.71 of Chapter III of the OECD TPG ... Read more
Sweden vs VSM Group AB,  July 2017, Administrative Court of Appeal, Case No 2038–2041-15

Sweden vs VSM Group AB, July 2017, Administrative Court of Appeal, Case No 2038–2041-15

An agreement between a Swedish company, VSM Group AB, and an American distributor, VSM Sewing Inc, stated that the distributor would receive compensation corresponding to an operating margin of three percent. Benchmark studies showed that the agreed compensation was arm’s length. Each year, the company made a year end adjustment to ensure that the pricing was arm’s length. In cases where the outcome was outside the interquartile range, additional invoicing took place so that the operating margin was adjusted to the agreed level. But no additional invoicing took place where the operating margin deviated from what was agreed but was within the interquartile range. The company argued that the pricing was correct as long as the operating margin was within the interquartile range. The company also argued that the agreement between the parties had a different content than the written agreement because the parties consistently applied an understanding of the arrangement that deviated from the written content. The Court of ... Read more

TPG2017 Chapter III paragraph 3.70

In other instances, taxpayers might test the actual outcome of their controlled transactions to demonstrate that the conditions of these transactions were consistent with the arm’s length principle, i.e. on an ex post basis (hereinafter “the arm’s length outcome-testing” approach). Such test typically takes place as part of the process for establishing the tax return at year-end ... Read more
Germany vs GmbH, February 1993, Bundesfinanzhof, Case No IR 3/92

Germany vs GmbH, February 1993, Bundesfinanzhof, Case No IR 3/92

The decision is about a German distribution company of international groups, which is in a continual overall loss position. This case established an important principle that: ‘… an orderly and diligent manager will, for the corporation managed by him, introduce to the market and distribute a new product only if he can expect, based on a prudent and pre-prepared economic forecast, a reasonable overall profit within a foreseeable period of time with due consideration to the predictable market development’. This decision covered the market introduction of a new product by an already established company and stated that typically a market introduction phase, losses should not be accepted for longer than three years. A later Bundesfinanzhof decision from 15 May 2002 stated that a start-up loss phase can be substantially longer than 3 years based on facts and circumstances. Click here for English translation Click here for other translation Germany vs GmbH Feb 1993 ... Read more