Tag: Procurement

§ 1.482-3(d)(3)(ii)(D) Purchasing agent.

If a controlled taxpayer is comparable to a purchasing agent that does not take title to property or otherwise assume risks with respect to ownership of such goods, the commission earned by such purchasing agent, expressed as a percentage of the purchase price of the goods, may be used as the appropriate gross profit markup ... Read more
The Netherlands releases New 2022 Decree on application of the Arm's Length Principle

The Netherlands releases New 2022 Decree on application of the Arm’s Length Principle

On 1 July 2022, the tax authorities in the Netherlands published Decree No. 2022-0000139020 of 14 June 2022 containing local guidance on application of the arm’s length principle. The Decree is based on article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines and also contains references to local case laws. In the Decree, particular focus is on areas that have been updated in the most recent releases of the OECD Transfer Pricing Guidelines – Legal ownership, DEMPE functions, Services, HTVI and Valuation Methods, Government policies (COVID-19), Remuneration of Procurement activities, Financial transactions etc. Click here for Unofficial English translation Click here for other translation NL TP decree stcrt-2022-16685 ... Read more

TPG2022 Chapter IX paragraph 9.25

For example, a business restructuring may involve the setting up by an MNE group of a central procurement operation that replaces the procurement activities of several associated enterprises. Similar to the guidance at paragraph 1.180 the MNE group has taken affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts and potential savings in administrative costs. In accordance with the guidance in Chapter I, the benefits due to deliberate concerted group action should be allocated to the associated enterprises whose contributions create the synergies. However, in a business restructuring, the central procurement company may also contractually assume risk associated with buying, holding, and on-selling goods. As stated in the previous section, an analysis of risk under the framework provided in Section D. 1.2.1 of Chapter I will determine the economic significance of the risk and which party or parties assume that risk. Although the central procurement operation is entitled to profit potential arising from ... Read more

TPG2022 Chapter IX paragraph 9.2

Business restructurings may often involve the centralisation of intangibles, risks, or functions with the profit potential attached to them. They may typically consist of: Conversion of full-fledged distributors (that is, enterprises with a relatively higher level of functions and risks) into limited-risk distributors, marketers, sales agents, or commissionnaires (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Conversion of full-fledged manufacturers (that is, enterprises with a relatively higher level of functions and risks) into contract manufacturers or toll manufacturers (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Transfers of intangibles or rights in intangibles to a central entity (e.g. a so-called “IP company”) within the group, The concentration of functions in a regional or central entity, with a corresponding reduction in scope or scale of functions carried out locally; examples may ... Read more

TPG2022 Chapter VII paragraph 7.15

In considering whether a charge for the provision of services would be made between independent enterprises, it would also be relevant to consider the form that an arm’s length consideration would take had the transaction occurred between independent enterprises dealing at arm’s length. For example, in respect of financial services such as loans, foreign exchange and hedging, all of the remuneration may be built into the spread and it would not be appropriate to expect a further service fee to be charged if such were the case. Similarly, in some buying or procurement services a commission element may be incorporated in the price of the product or services procured, and a separate service fee may not be appropriate ... Read more

TPG2022 Chapter II paragraph 2.39

In a case where there is a chain of distribution of goods through an intermediate company, it may be relevant for tax administrations to look not only at the resale price of goods that have been purchased from the intermediate company but also at the price that such company pays to its own supplier and the functions that the intermediate company undertakes. There could well be practical difficulties in obtaining this information and the true function of the intermediate company may be difficult to determine. If it cannot be demonstrated that the intermediate company either assumes an economically significant risk or performs an economic function in the chain that has increased the value of the goods, then any element in the price that is claimed to be attributable to the activities of the intermediate company would reasonably be attributed elsewhere in the MNE group, because independent enterprises would not normally have allowed such a company to share in the profits ... Read more

TPG2022 Chapter I paragraph 1.193

Under these circumstances, Country B would be entitled to make a transfer pricing adjustment reducing the expenses of the Country B manufacturing affiliate by USD 2 500. The transfer pricing adjustment is appropriate because the pricing arrangements misallocate the benefit of the group synergy associated with volume purchasing of the widgets. The adjustment is appropriate notwithstanding the fact that the Country B manufacturing affiliate acting alone could not purchase widgets for a price less than the USD 50 000 it paid. The deliberate concerted group action in arranging the purchase discount provides a basis for the allocation of part of the discount to the Country B manufacturing affiliate notwithstanding the fact that there is no explicit transaction between the Country B and Country C manufacturing affiliates ... Read more

TPG2022 Chapter I paragraph 1.192

The purchasing employee at the shared services centre then places orders for the required widgets and requests that the supplier invoice the Country B manufacturing affiliate for 5 000 widgets at a total price of USD 50 000 and invoice the Country C manufacturing affiliate for 5 000 widgets at a total price of USD 45 000. The supplier complies with this request as it will result in the supplier being paid the agreed price of USD 95 000 for the total of the 10 000 widgets supplied ... Read more

TPG2022 Chapter I paragraph 1.191

The independent supplier sells widgets for USD 10 apiece and follows a policy of providing a 5% price discount for bulk purchases of widgets in excess of 7 500 units. A purchasing employee in the Country D shared services centre approaches the independent supplier and confirms that if the Country B and Country C manufacturing affiliates simultaneously purchase 5 000 widgets each, a total group purchase of 10 000 widgets, the purchase discount will be available with respect to all of the group purchases. The independent supplier confirms that it will sell an aggregate of 10 000 widgets to the MNE group at a total price of USD 95 000, a discount of 5% from the price at which either of the two manufacturing affiliates could purchase independently from the supplier ... Read more

TPG2022 Chapter I paragraph 1.190

Assume a multinational group based in Country A, has manufacturing subsidiaries in Country B and Country C. Country B has a tax rate of 30% and Country C has a tax rate of 10%. The group also maintains a shared services centre in Country D. Assume that the manufacturing subsidiaries in Country B and Country C each have need of 5 000 widgets produced by an independent supplier as an input to their manufacturing processes. Assume further that the Country D shared services company is consistently compensated for its aggregate activities by other group members, including the Country B and Country C manufacturing affiliates, on a cost plus basis, which, for purposes of this example, is assumed to be arm’s length compensation for the level and nature of services it provides ... Read more

TPG2022 Chapter I paragraph 1.189

Assume facts similar to those in Example 3, except that instead of actually purchasing and reselling the widgets, Company A negotiates the discount on behalf of the group and group members subsequently purchase the widgets directly from the independent supplier. Under these circumstances, assume that the comparability analysis suggests that Company A would be entitled to a service fee of USD 5 per widget for the coordinating services that it performed on behalf of other group members. (The lower assumed service fee in Example 4 as compared to Example 3 may reflect a lower level of risk in the service provider following from the fact that it does not take title to the widgets or hold any inventory.) Group members purchasing widgets would retain the benefit of the group purchasing discount attributable to their individual purchases after payment of the service fee ... Read more

TPG2022 Chapter I paragraph 1.188

Assume that Company A is assigned the role of central purchasing manager on behalf of the entire group. It purchases from independent suppliers and resells to associated enterprises. Company A, based solely on the negotiating leverage provided by the purchasing power of the entire group is able to negotiate with a supplier to reduce the price of widgets from USD 200 to USD 110. Under these circumstances, the arm’s length price for the resale of widgets by Company A to other members of the group would not be at or near USD 200. Instead, the arm’s length price would remunerate Company A for its services of coordinating purchasing activity. If the comparability and functional analysis suggests in this case that in comparable uncontrolled transactions involving a comparable volume of purchases, comparable coordination services resulted in a service fee based on Company A’s costs incurred plus a mark-up equating to a total service fee of USD 6 per widget, then the ... Read more

TPG2022 Chapter I paragraph 1.182

If important group synergies exist and can be attributed to deliberate concerted group actions, the benefits of such synergies should generally be shared by members of the group in proportion to their contribution to the creation of the synergy. For example, where members of the group take deliberate concerted actions to consolidate purchasing activities to take advantage of economies of scale resulting from high volume purchasing, the benefits of those large scale purchasing synergies, if any exist after an appropriate reward to the party co-ordinating the purchasing activities, should typically be shared by the members of the group in proportion to their purchase volumes ... Read more

TPG2022 Chapter I paragraph 1.180

For example, if a group takes affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts, and that group company resells the items it purchases to other group members, a deliberate concerted group action occurs to take advantage of group purchasing power. Similarly, if a central purchasing manager at the parent company or regional management centre performs a service by negotiating a group wide discount with a supplier on the condition of achieving minimum group wide purchasing levels, and group members then purchase from that supplier and obtain the discount, deliberate concerted group action has occurred notwithstanding the absence of specific purchase and sale transactions among group members. Where a supplier unilaterally offers one member of a group a favourable price in the hope of attracting business from other group members, however, no deliberate concerted group action would have occurred ... Read more
Italy vs BenQ Italy SRL, March 2021, Corte di Cassazione, Sez. 5 Num. 1374 Anno 2022

Italy vs BenQ Italy SRL, March 2021, Corte di Cassazione, Sez. 5 Num. 1374 Anno 2022

BenQ Italy SRL is part of a multinational group headed by the Taiwanese company BenQ Corporation that sells and markets technology products, consumer electronics, computing and communications devices. BenQ Italy’s immediate parent company was a Dutch company, BenQ Europe PV. Following an audit the tax authorities issued a notice of assessment for FY 2003 in which the taxpayer was accused of having procured goods from companies operating in countries with privileged taxation through the fictitious interposition of a Dutch company (BenQ Europe BV), the parent company of the taxpayer, whose intervention in the distribution chain was deemed uneconomic. On the basis of these assumptions, the tax authorities found that the recharge of costs made by the interposed company, were non-deductible. The tax authorities also considered that, through the interposition of BenQ BV, the prices charged by the taxpayer were aimed at transferring most of the taxable income to the manufacturing companies of the BenQ Group located in countries with privileged ... Read more
Marketing and Procurement Hubs - Tax Avoidance

Marketing and Procurement Hubs – Tax Avoidance

The Australian Taxation Office has issued new guidance for multinational groups using offshore marketing- and procurment hubs for tax avoidance purposes. The guidance adresses tax schemes where MNEs uses offshore hubs to shift profits and thereby avoid Australian taxes. Offshore hub arrangements are catagorised by the ATO as white, green, blue, yellow, amber, or red – based on the risk assesment for tax purposes of the transfer pricing setup. The new guidance is a result of recent Australian investigations and hearings into tax avoidance schemes used by Multinational Groups. Tax avoidance in Australia Australian Senate Hearings into Tax Avoidance The overall framework for Australian risk assessment for tax purposes of MNE’s offshore marketing- and procurement hubs is shown below: ... Read more

South Africa vs. Sasol, Oct. 2017, $878 million tax case

A tax dispute over a potential 11.6 billion rand ($878 million) charge between South Africa -based international chemicals and energy company Sasol and the Revenue Service will play out in South Africa’s Supreme Court of Appeal within the next 12 months. June 30. 2017 a R1.2-billion tax liability was approved by the Tax Court in a case against Sasol by SARS relating to the company’s international crude oil procurement activities between 2005 and 2012. The Tax Court further reported that the final tax amount along with other tax principles raised by SARS in relation to Sasol Oil’s crude purchases in 2013 and 2014, would result in a further tax exposure of R11.6-billion, thus uplifting the total tax liability to R12.8-billion. Aug. 14. 2017 the supreme court granted Sasol’s application for leave to appeal the tax court ruling. Sasol’s dispute with the tax authority comes after Kumba Iron Ore, Anglo American’s iron ore producer, announced it had settled a tax dispute ... Read more

TPG2017 Chapter IX paragraph 9.25

For example, a business restructuring may involve the setting up by an MNE group of a central procurement operation that replaces the procurement activities of several associated enterprises. Similar to the guidance at paragraph 1.160 the MNE group has taken affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts and potential savings in administrative costs. In accordance with the guidance in Chapter I, the benefits due to deliberate concerted group action should be allocated to the associated enterprises whose contributions create the synergies. However, in a business restructuring, the central procurement company may also contractually assume risk associated with buying, holding, and on-selling goods. As stated in the previous section, an analysis of risk under the framework provided in Section D. 1.2.1 of Chapter I will determine the economic significance of the risk and which party or parties assume that risk. Although the central procurement operation is entitled to profit potential arising from ... Read more

TPG2017 Chapter IX paragraph 9.2

Business restructurings may often involve the centralisation of intangibles, risks, or functions with the profit potential attached to them. They may typically consist of: Conversion of full-fledged distributors (that is, enterprises with a relatively higher level of functions and risks) into limited-risk distributors, marketers, sales agents, or commissionnaires (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Conversion of full-fledged manufacturers (that is, enterprises with a relatively higher level of functions and risks) into contract manufacturers or toll manufacturers (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Transfers of intangibles or rights in intangibles to a central entity (e.g. a so-called “IP company”) within the group, The concentration of functions in a regional or central entity, with a corresponding reduction in scope or scale of functions carried out locally; examples may ... Read more

TPG2017 Chapter VII paragraph 7.15

In considering whether a charge for the provision of services would be made between independent enterprises, it would also be relevant to consider the form that an arm’s length consideration would take had the transaction occurred between independent enterprises dealing at arm’s length. For example, in respect of financial services such as loans, foreign exchange and hedging, all of the remuneration may be built into the spread and it would not be appropriate to expect a further service fee to be charged if such were the case. Similarly, in some buying or procurement services a commission element may be incorporated in the price of the product or services procured, and a separate service fee may not be appropriate ... Read more

TPG2017 Chapter II paragraph 2.39

In a case where there is a chain of distribution of goods through an intermediate company, it may be relevant for tax administrations to look not only at the resale price of goods that have been purchased from the intermediate company but also at the price that such company pays to its own supplier and the functions that the intermediate company undertakes. There could well be practical difficulties in obtaining this information and the true function of the intermediate company may be difficult to determine. If it cannot be demonstrated that the intermediate company either assumes an economically significant risk or performs an economic function in the chain that has increased the value of the goods, then any element in the price that is claimed to be attributable to the activities of the intermediate company would reasonably be attributed elsewhere in the MNE group, because independent enterprises would not normally have allowed such a company to share in the profits ... Read more

TPG2017 Chapter I paragraph 1.173

Under these circumstances, Country B would be entitled to make a transfer pricing adjustment reducing the expenses of the Country B manufacturing affiliate by USD 2 500. The transfer pricing adjustment is appropriate because the pricing arrangements misallocate the benefit of the group synergy associated with volume purchasing of the widgets. The adjustment is appropriate notwithstanding the fact that the Country B manufacturing affiliate acting alone could not purchase widgets for a price less than the USD 50 000 it paid. The deliberate concerted group action in arranging the purchase discount provides a basis for the allocation of part of the discount to the Country B manufacturing affiliate notwithstanding the fact that there is no explicit transaction between the Country B and Country C manufacturing affiliates ... Read more

TPG2017 Chapter I paragraph 1.172

The purchasing employee at the shared services centre then places orders for the required widgets and requests that the supplier invoice the Country B manufacturing affiliate for 5 000 widgets at a total price of USD 50 000 and invoice the Country C manufacturing affiliate for 5 000 widgets at a total price of USD 45 000. The supplier complies with this request as it will result in the supplier being paid the agreed price of USD 95 000 for the total of the 10 000 widgets supplied ... Read more

TPG2017 Chapter I paragraph 1.171

The independent supplier sells widgets for USD 10 apiece and follows a policy of providing a 5% price discount for bulk purchases of widgets in excess of 7 500 units. A purchasing employee in the Country D shared services centre approaches the independent supplier and confirms that if the Country B and Country C manufacturing affiliates simultaneously purchase 5 000 widgets each, a total group purchase of 10 000 widgets, the purchase discount will be available with respect to all of the group purchases. The independent supplier confirms that it will sell an aggregate of 10 000 widgets to the MNE group at a total price of USD 95 000, a discount of 5% from the price at which either of the two manufacturing affiliates could purchase independently from the supplier ... Read more

TPG2017 Chapter I paragraph 1.170

Assume a multinational group based in Country A, has manufacturing subsidiaries in Country B and Country C. Country B has a tax rate of 30% and Country C has a tax rate of 10%. The group also maintains a shared services centre in Country D. Assume that the manufacturing subsidiaries in Country B and Country C each have need of 5 000 widgets produced by an independent supplier as an input to their manufacturing processes. Assume further that the Country D shared services company is consistently compensated for its aggregate activities by other group members, including the Country B and Country C manufacturing affiliates, on a cost plus basis, which, for purposes of this example, is assumed to be arm’s length compensation for the level and nature of services it provides ... Read more

TPG2017 Chapter I paragraph 1.169

Assume facts similar to those in Example 3, except that instead of actually purchasing and reselling the widgets, Company A negotiates the discount on behalf of the group and group members subsequently purchase the widgets directly from the independent supplier. Under these circumstances, assume that the comparability analysis suggests that Company A would be entitled to a service fee of USD 5 per widget for the coordinating services that it performed on behalf of other group members. (The lower assumed service fee in Example 4 as compared to Example 3 may reflect a lower level of risk in the service provider following from the fact that it does not take title to the widgets or hold any inventory.) Group members purchasing widgets would retain the benefit of the group purchasing discount attributable to their individual purchases after payment of the service fee ... Read more

TPG2017 Chapter I paragraph 1.168

Assume that Company A is assigned the role of central purchasing manager on behalf of the entire group. It purchases from independent suppliers and resells to associated enterprises. Company A, based solely on the negotiating leverage provided by the purchasing power of the entire group is able to negotiate with a supplier to reduce the price of widgets from USD 200 to USD 110. Under these circumstances, the arm’s length price for the resale of widgets by Company A to other members of the group would not be at or near USD 200. Instead, the arm’s length price would remunerate Company A for its services of coordinating purchasing activity. If the comparability and functional analysis suggests in this case that in comparable uncontrolled transactions involving a comparable volume of purchases, comparable coordination services resulted in a service fee based on Company A’s costs incurred plus a mark-up equating to a total service fee of USD 6 per widget, then the ... Read more

TPG2017 Chapter I paragraph 1.162

If important group synergies exist and can be attributed to deliberate concerted group actions, the benefits of such synergies should generally be shared by members of the group in proportion to their contribution to the creation of the synergy. For example, where members of the group take deliberate concerted actions to consolidate purchasing activities to take advantage of economies of scale resulting from high volume purchasing, the benefits of those large scale purchasing synergies, if any exist after an appropriate reward to the party co-ordinating the purchasing activities, should typically be shared by the members of the group in proportion to their purchase volumes ... Read more

TPG2017 Chapter I paragraph 1.160

For example, if a group takes affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts, and that group company resells the items it purchases to other group members, a deliberate concerted group action occurs to take advantage of group purchasing power. Similarly, if a central purchasing manager at the parent company or regional management centre performs a service by negotiating a group wide discount with a supplier on the condition of achieving minimum group wide purchasing levels, and group members then purchase from that supplier and obtain the discount, deliberate concerted group action has occurred notwithstanding the absence of specific purchase and sale transactions among group members. Where a supplier unilaterally offers one member of a group a favourable price in the hope of attracting business from other group members, however, no deliberate concerted group action would have occurred ... Read more
India vs. Gap International Sourcing Pvt. Ltd., May 2016, ITA No.1077/Del./2016

India vs. Gap International Sourcing Pvt. Ltd., May 2016, ITA No.1077/Del./2016

Gap International Sourcing was engaged in sourcing products from India to other group companies. The activity comprised of assistance in identification of vendors, provision of assistance to vendors in procurement of apparel, inspection and quality control and coordination with vendors to ensure delivery of goods to group companies. The necessary technical and intellectual basis for provision of these services were provided by the group companies. The Indian company used TNMM to benchmark the service fee at full cost plus 15%. The tax administration disregarded the functional profile and characterisation of Gap International Sourcing by assuming that the functional profile was substantially higher than those of limited risk support service providers. The tax administration found that a cost plus form of remuneration did not take into account substantial intangible assets owned by the taxpayer. Intangibles were identified to be human asset intangibles, supply chain intangibles and location savings. Based on above, the tax administration set the arm’s length remuneration at a ... Read more

April 2013: Draft Handbook on Transfer Pricing Risk Assessment

The 2013 Draft Handbook on Transfer Pricing Risk Assessment is a detailed, practical resource that countries can follow in developing their own risk assessment approaches. The handbook supplements useful materials already available with respect to transfer pricing risk assessment. The OECD Forum on Tax Administration published a report entitled “Dealing Effectively with the Challenges of Transfer Pricing” in January 2012. One chapter of that report also addresses transfer pricing risk assessment. Draft-Handbook-TP-Risk-Assessment-ENG ... Read more
Netherland vs. X BV, March 2007, District Court of Arnhem, Case No ECLI:NL:RBARN:2007:BA0339

Netherland vs. X BV, March 2007, District Court of Arnhem, Case No ECLI:NL:RBARN:2007:BA0339

X BV in the Netherlands was a wholesaler in garden related (gift) articles. Customers are located in the Netherlands and abroad (especially in Western Europe, the United States and Canada). Procurement of the products is mainly done in China. Delivery of the products is made directly by the producer to [X] BV or to its other clients. As compensation for procurement activities performed by the [X Limited] in Hong Kong, X group BV pays a 10% surcharge on the purchase price paid by [X Limited] to its Chinese suppliers. This surcharge is passed on in the cost price of the products. The tax administration held that the compensation [X Limited] receives for its procurement activities is (much) too high. The District Court disagreed and decided in favor of X Group BV. Click here for other translation Netherland vs BV 2007 ... Read more
Netherlands vs "Holding B.V.", March 2007, District Court, Case No AWB 06/288, V-N 2007/35.6

Netherlands vs “Holding B.V.”, March 2007, District Court, Case No AWB 06/288, V-N 2007/35.6

“Holding B.V.” is a holding company. The actual activity of the [X] group in the Netherlands – a wholesale trade in garden-related (gift) items – takes place in [X] B.V. The latter is included in a fiscal consolidation for corporate tax purposes with “Holding B.V.”. Customers of [X] B.V. are located in both the Netherlands and abroad (particularly in Western Europe, the United States and Canada). The products are purchased in China in particular and supplied direct by the producer to [X] B.V. or to its other customers. The procurement company – X Limited has an office and a showroom in Hong Kong, and employs a staff of five. The core activities of X Limited consist of quality control, logistics, product development, purchasing and sales. As remuneration for its activities, [X] B.V. pays a mark-up of 10% on the purchase price paid by X Limited to its Chinese suppliers. The tax authorities issued an assessment where the remuneration of the ... Read more
Netherlands vs "Metal Packaging Procurement B.V.", April 2004, Hoge Raad, Case No 39542, ECLI:NL:HR:2004:AO9474

Netherlands vs “Metal Packaging Procurement B.V.”, April 2004, Hoge Raad, Case No 39542, ECLI:NL:HR:2004:AO9474

This case concerns allocation of profits resulting from centralizing procurement functions within a group. The tax authorities took the position that the profit claimed by a centralized purchasing office was not aligned with the functions performed and the risks assumed by the office. According to the tax authorities profits derived from the realized discounts should be distributed to the members of the group (including a Dutch member) in proportion to their contribution of purchasing volume. Judgement of the Court The Supreme Court ruled in favor of the tax authorities. Profits in excess of the costs of the centralized purchase office with a markup of 5%, should at arm’s length be distributed to the members of the group in proportion to their contribution of purchasing volume. Excerpts “5.14. Notwithstanding the fact that [A-2 NV]’s profit was not so much caused by its own efforts but by the group’s policy of concentrating the price negotiations in [A-2 NV], and the extremely limited ... Read more