Following an audit, the Greek tax authorities determined that the profit of “Pharma Distributor Ltd” for sales and service activities had not been determined in accordance with the arm’s length principle. The tax authorities issued an assessment of additional taxable income, rejecting the resale price method used by “Pharma Distributor Ltd” and instead applying the TNMM. An appeal was filed by “Pharma Distributor Ltd”. Judgement of the Tax Court The Court dismissed the appeal in part and allowed it in part. The tax authorities’ assessment was largely upheld in relation to sales activities, where it was found that the prices charged by “Pharma Distributor Ltd” were outside the interquartile range. In relation to the service activities, the Court found that the remuneration for these activities was within the arm’s length range and therefore annulled the assessment. Excerpts “In the light of the above, as regards the applicant company’s intra-group transactions Nos 1 to 4, there is a question of non-compliance ... Read more

In April 2010 Roche pharmaceutical group acquired the entire share capital of the Israeli company, Medingo Ltd, for USD 160 million. About six months after the acquisition, Medingo was entered into 3 inter-group service agreements: a R&D services agreement, pursuant to which Medingo was to provide R&D services in exchange for cost + 5%. All developments under the agreement would be owned by Roche. a services agreement according to which Medingo was to provided marketing, administration, consultation and support services in exchange for cost + 5%. a manufacturing agreement, under which Medingo was to provide manufacturing and packaging services in exchange for cost + 5. A license agreement was also entered, according to which Roche could now manufacture, use, sell, exploit, continue development and sublicense to related parties the Medingo IP in exchange for 2% of the relevant net revenues. Finally, in 2013, Medingo’s operation in Israel was terminated and its IP sold to Roche for approximately USD 45 million ... Read more

Amgen, in its quarterly report for the period ended March 31, 2022, disclosed that, not only has the group been issued a notice of assessments from the IRS for FY 2010-2012 resulting in additional taxes of approximately $3.6 billion plus interest – as previously reported – it has also received a Revenue Agent Reports (RAR) for 2013-2015 resulting in additional taxes of approximately $5.1 billion, plus interest and penalties of approximately $2.0 billion. Furthermore, it is disclosed that Amgen is currently under examination by the IRS for the years 2016, 2017 and 2018 and by a number of state and foreign tax jurisdictions The main dispute relates to the allocation of profits between Amgen group entities in the United States and the U.S. territory of Puerto Rico. Excerpt from Amgen’s quarterly report for the period ended March 31, 2022 4. Income taxes The effective tax rates for the three months ended March 31, 2022 and 2021, were 11.9% and 11.4%, ... 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

ResMed – a world-leading digital health company – in an October 2021 publication of results for the first quarter of FY 2022, informs that a $381.7 million tax settlement agreement has been entered with the Australian Tax Office. The dispute concerns the years 2009 through 2018, in which the ATO alleged that ResMed should have paid additional Australian taxes on income derived from the company’s Singapore operations. Excerpts from the announcement “Operating cash flow for the quarter was negative $65.7 million and was impacted by a payment to the Australian Tax Office of $284.8 million, which was the settlement amount of $381.7 million net of prior remittances.” “During the quarter, concluded the settlement agreement with the Australian Taxation Office (“ATO”), which fully resolves the transfer pricing dispute for all prior years since 2009. ResMed previously recognized a tax reserve in êscal year 2021 in anticipation of the settlement. The net impact of the settlement was $238.7 million ($381.7 million gross ... Read more

Varian Medical Systems Iberica S.L. is the Spanish subsidiary of the multinational company Varian Medical Systems and carries out two types of activities – distribution and after-sales services. The products sold was purchased from related entities: Varian Medical Systems Inc., Varian Medical Systems UK Ltd., Varian Medical Systems International AG and Varian Medical Systems HAAN GmbH. The remuneration of Varian Medical Systems Iberica S.L. had been determined by application of the net margin method for all transactions and resulted in a operating margin of 2.86% in 2005 and 2.75% in 2006. In 2010 an audit were performed by the tax authorities for FY 2005 and 2006, which resulted in an adjustment. The tax authorities accepted the net margin method, but made various corrections in its application. The adjustments made by the tax authorities resulted in a operating margin of 6.45% in the two years under review, The tax administration argued that the margins determined by Varian Medical Systems Iberica S.L ... Read more

“G Pharma Ltd” is a distributor of generic and specialised pharmaceutical products purchased exclusively from affiliated suppliers. It has no significant intangible assets nor does it assume any significant risks. However for 17 consecutive years it has had losses. Following an audit, the tax authorities issued an assessment, where the income of G Pharma Ltd was determined by application of the Transactional Net Margin Method (TNMM). According to the tax authorities a limited risk distributor such as G Pharma Ltd would be expected to be compensated with a small, guaranteed, positive profitability. G Pharma Ltd disagreed with the assessment and filed an appeal. Judgement of the Court The court dismissed the appeal of G Pharma Ltd and upheld the assessment issued by the tax authorities. Excerpts “First, the reasons for the rejection of the final comparable sample of two companies were set out in detail and then the reasons for using the net profit margin as an appropriate indicator of ... Read more

Following an audit the tax authorities issued a tax assessment and a substantial fine to S.p.A. ST. MEDICAL related to costs deducted in FY 2009, which the tax authorities claimed were partially fictitious. “the Economic Police carried out, on 22.10.2012, a tax audit of the appellant, which, during the contested management period (1.1.-31.12.2009), had as its business the wholesale trade in medical and surgical equipment, tools and similar items, keeping, for the purpose of monitoring its business, books and records of category C of the Commercial Code. During the audit carried out, in addition to the books kept by the appellant, various items of information found at its registered office (sales invoices, service receipts, delivery notes, delivery notes, exclusive distribution contracts between the appellant and foreign companies, with attached price lists of the products to be distributed, etc.) were seized for further processing, including items issued by the limited liability company ‘Praxis Company of Medical Equipment Ltd’ (‘Praxis’), established in ... Read more

Following an audit the tax authorities issued a tax assessment and a substantial fine to S.p.A. ST. MEDICAL related to costs deducted in FY 2010, which the tax authorities claimed were partially fictitious. “the Economic Police carried out, on 22.10.2012, a tax audit of the appellant, which, during the contested management period (1.1.-31.12.2010), had as its business the wholesale trade in medical and surgical equipment, tools and similar items, keeping, for the purpose of monitoring its business, books and records of category C of the Commercial Code. During the audit carried out, in addition to the books kept by the appellant, various items of information found at its registered office (sales invoices, service receipts, delivery notes, delivery notes, exclusive distribution contracts between the appellant and foreign companies, with attached price lists of the products to be distributed, etc.) were seized for further processing, including items issued by the limited liability company ‘Praxis Company of Medical Equipment Ltd’ (‘Praxis’), established in ... Read more

A Swiss company manufactured and distributed pharmaceutical and chemical products. The Swiss company was held by a Dutch parent that held another company in France. R&D activities were delegated by the Dutch parent to its French subsidiary and compensated with cost plus 15%. On that basis the Swiss company had to pay a royalty to its Dutch parent of 2.5% of its turnover for using the IP developed. Following an audit the Swiss tax authorities concluded that the Dutch parent did not contribute to the development of IP. In 2006 and 2007, no employees were employed, and in 2010 and 2011 there were only three employees. Hence the royalty agreement was disregarded and an assessment issued where the royalty payments were denied. Instead the R&D agreement between the Dutch parent and the French subsidiary was regarded as having been concluded between the Swiss and French companies Judgement of the Supreme Court The Court agreed with the decision of the tax ... Read more

The Korean company (hereinafter ‘MedImpo Corp’) imported medicines from foreign related parties and sold them locally. The tax authorities issued an assessment based on transfer prices between two unrelated comparable companies and then applied the resale price method to calculate the “normal price” on the imported medicines. MedImpo Corp argued that the selection of a comparable company by the taxation authority was unlawful. They held that the selected transactions between local companies were not comparable because MedImpo Corp purchased and sold goods from overseas related parties. The Korean Tax Tribunal ruled in favor of the tax authorities. “Even if the price is applied in transactions with foreign related parties, if the transaction is conducted at a price that is considered to be applied or applied in a normal transaction with a person who is not a related party, the price may be the normal price (meaning: In the case of calculating the normal price, the normal price range should be ... Read more

Smithkline is a manufacturer of pharmaceutical products. During the period relevant to this appeal, 1981 to 1986, Smithkline manufactured a drug named Tagamet, the active ingredient of which is cimetidine. During those years, Smithkline bought cimetidine from related corporations outside Canada. All of the assessments under appeal are based on the Crown’s allegation that the price paid by Smithkline for cimetidine during that period was $66,982,990 more than would have been reasonable in the circumstances if Smithkline and its suppliers had been dealing at arm’s length. Following an audit the tax authorities issued assessments increasing Smithkline’s taxable income for 1981 to 1986 by a total of $66,982,990, and also reflect consequential adjustments to the investment tax credits for 1986 and 1987 and non-capital losses for 1987 to 1990. The increased income resulted from application of the CUP method. Smithkline filed notices of objection against all of these assessments. The Tax court dismissed the objections and decided in favor of the ... Read more