PJSC Vinnytsia Oil and Fat Plant’s sold oil from oilseeds (sunflower, rapeseed, soybean) to a British Virgin Islands affiliate during 2015 to 2017, which the tax authorities audited for transfer pricing and then assessed additional corporate income tax of about 37.6 million UAH based on the CUP method. On appeal, the court found that the tax authority’s CUP analysis relied on data that were not shown to be publicly available for the audited years and whose methodology became available only later, so the sources could not support a reliable like-for-like comparison. It also held that for forward contracts in 2015 and 2016 the correct comparison date is the contract date, not the delivery date, making the authority’s price comparisons improper. Because the authority did not request additional transfer pricing information within 30 days of receiving the taxpayer’s TP documentation, that documentation was deemed complete and sufficiently justified. The court thus cancelled the tax assessment. An appeal was then filed by ... Read more

The transaction concerned management services provided by CCB Management Services GmbH & Co KG, an Austrian group company, to Coca-Cola HBC under a long-term management services agreement in 2004. Coca-Cola HBC deducted the invoiced management fees as tax expenses and reported a tax loss for the 2004 corporate income tax period. However, the tax authorities concluded that a substantial portion of the management service costs were not tax-deductible. They treated the Austrian service provider as a related party, ruling that the pricing and allocation of services did not comply with the arm’s length principle under the Income Tax Act and Article 9 of the Austria-Slovakia tax treaty. Based on this, they made transfer pricing adjustment, increased the tax base and reduced the reported tax loss. They also took the view that applying the tax treaty allowed a longer limitation period for assessing tax. Coca-Cola HBC challenged the decision, arguing that the right to assess tax had expired under the five-year ... Read more

Following an audit, the tax authority determined that prices for controlled transactions of grains had been below the arm’s length price and issued an assessment of additional taxable income. According to the tax authority, the correct application of the arm’s length principle in this case required the price of the controlled transaction to be compared with the prices (price range) of comparable uncontrolled transactions on the basis of the information available on the date closest to the date of the controlled transaction – and not on the date where the controlled contract had been concluded. For that purpose, the tax authorities had looked at prices from a different sources including non-public databases. An appeal was filed by “Novo-Sanzharsky Grain Storage LLC” with the Administrative Court. Judgment The Administrative Court decided in favour of “Novo-Sanzharsky Grain Storage LLC” and annulled the tax assessment issued by the tax authorities. Excerpt in English “The task of administrative court proceedings is to effectively protect ... Read more

Following an audit, the tax authorities determined that Maderas Anchile Limitada had sold wood chips to a related party at prices below the level charged by independent entities. On that basis a transfer pricing adjustment was made to its taxable income. Moreover, the tax authorities concluded that the difference in price should be treated as a hidden distribution of profits, an approach grounded in Article 21 of the Income Tax Act and leading to further tax liability for Daio Paper Corporation. The assessment issued by the tax authorities was later upheld by the Court of Appeal. An appeal was then filed by Maderas Anchile Limitada and Daio Paper Corporation with the Supreme Court In the appeal they challenged the legality of the assessment, claiming there was no explicit statutory authority to recalculate Maderas Anchile Limitada’s taxable income by applying Article 38. They argued that although Article 38 empowers the tax authority to challenge prices between related parties, the statute does ... Read more

Pgnig Upstream Norway AS (PUN) sold dry gas to its sister company (PST). According to the tax authorities the price for the gas had not been determined at arm’s length, cf. Section 13-1, first paragraph, of the Tax Act, and an assessment of additional income was issued. Judgment of the Court The Court decided in favour of the tax authorities. It found that the tax authorities had correctly concluded that there was a reduction in PUN’s income, and that the reduction was due to parties being under common control. The key point for the Court was that there was an imbalance in the functional profiles of PUN and the sister company, PST. Through certain deductions in the purchase price, PUN had indirectly been charged for parts of the sister company’s downside risk, without being allowed a share in potential upside profits. Excerpts “(…)In any event, the Court of Appeal finds reason to note that the [text removed] agreement in any ... Read more

“XZ Insurance SA” is the parent company in a group engaged in insurance activities in its various branches, both life and non-life, finance, investment property and services. An audit was conducted for FY 2013-2016 and in 2020 an assessment was issued in relation to both controlled transactions and other transactions. Among outher issued the tax authorities determined that “XZ Insurance SA” did not receive any royalty income from the use of the XZ trademark by to other entities of the group, both domestic and foreign. In the assessment the tax authorities determined the arm’s length royalty percentage for use of the trademarks to be on average ~0,5%. “In order to estimate the market royalty, the first aspect to be studied is the existence of an internal comparable or comparable trademark assignment contracts. And we have already stated that the absence of valid internal and external comparables has led us to resort to the use of other generally accepted valuation methods and ... Read more

Tax administrators may have information available to them from examinations of other taxpayers or from other sources of information that may not be disclosed to the taxpayer. However, it would be unfair to apply a transfer pricing method on the basis of such data unless the tax administration was able, within the limits of its domestic confidentiality requirements, to disclose such data to the taxpayer so that there would be an adequate opportunity for the taxpayer to defend its own position and to safeguard effective judicial control by the courts ... Read more

There are also proprietary databases that are developed and maintained by some advisory firms. In addition to the issues raised above for commercial databases that are more broadly commercialised, proprietary databases also raise a further concern with respect to their coverage of data if they are based on a more limited portion of the market than commercial databases. When a taxpayer has used a proprietary database to support its transfer prices, the tax administration may request access to the database to review the taxpayer’s results, for obvious transparency reasons ... Read more

There are various sources of information that can be used to identify potential external comparables. This sub-section discusses particular issues that arise with respect to commercial databases, foreign comparables and information undisclosed to taxpayers. Additionally, whenever reliable internal comparables exist, it may be unnecessary to search for external ones, see paragraphs 3.27-3.28 ... Read more

In order for the process to be transparent, it is considered a good practice for a taxpayer that uses comparables to support its transfer pricing, or a tax administration that uses comparables to support a transfer pricing adjustment, to provide appropriate supporting information for the other interested party (i.e. tax auditor, taxpayer or foreign competent authorities) to be able to assess the reliability of the comparables used. See paragraph 3.36 for a discussion of information available to tax administrations that is not disclosed to taxpayers. General guidance on documentation requirements is found at Chapter V of these Guidelines. See also the Annex II to Chapter IV “Guidelines for conducting Advance Pricing Arrangements under the Mutual Agreement Procedure (MAP APAs)” ... Read more

At issue in the case of „RĪGAS DZIRNAVNIEKS” was if the interest rates charged on loans between related parties were at arm’s length. Judgment of the Court of Appeals The Court remanded the case to the Regional Court for a new hearing. Excerpts “As already indicated above, paragraphs 84, 91 and 92.3.1 and 92.3.2 of Regulation No 556 deal with the need for adjustments and mathematical calculations when significant differences in the comparable data and their material effects are established. The need for adjustments is also underlined in point 1.35 of the Guidelines. Guidance on how differences between comparables are to be addressed is provided, inter alia, in paragraph 3.57 of the Guidelines. It may be the case that, although every effort is made to exclude items with a lower level of comparability, the result is a series of figures for which it is considered that, given the process used to select the comparables and the information available on the ... Read more

18 June 2019 the Polish Minister of Finance issued the first explanations on transfer pricing concerning – technical aspects of preparing comparability analyses and transfer pricing documentation. With regard to the technical aspects of preparing comparability analyses, the explanations cover such detailed issues as: data comparability vs. locality feasibility of using internal data feasibility of using bid data the appropriateness of using comparables that are not publicly available (so-called secret comparables) reasonableness of discarding from the comparables sample entities with extreme results (including those with loss) minimum sample size for benchmark data analysis selection of an interval point updating the benchmark data analysis. The second key issue addressed by the explanatory notes is the preparation of descriptions of the consistency of the terms of transactions and other events agreed with related parties with the terms that would be agreed among independent parties. Click here for unofficial English translation ... Read more

Tax administrators may have information available to them from examinations of other taxpayers or from other sources of information that may not be disclosed to the taxpayer. However, it would be unfair to apply a transfer pricing method on the basis of such data unless the tax administration was able, within the limits of its domestic confidentiality requirements, to disclose such data to the taxpayer so that there would be an adequate opportunity for the taxpayer to defend its own position and to safeguard effective judicial control by the courts ... Read more

There are also proprietary databases that are developed and maintained by some advisory firms. In addition to the issues raised above for commercial databases that are more broadly commercialised, proprietary databases also raise a further concern with respect to their coverage of data if they are based on a more limited portion of the market than commercial databases. When a taxpayer has used a proprietary database to support its transfer prices, the tax administration may request access to the database to review the taxpayer’s results, for obvious transparency reasons ... Read more

There are various sources of information that can be used to identify potential external comparables. This sub-section discusses particular issues that arise with respect to commercial databases, foreign comparables and information undisclosed to taxpayers. Additionally, whenever reliable internal comparables exist, it may be unnecessary to search for external ones, see paragraphs 3.27-3.28 ... Read more

In order for the process to be transparent, it is considered a good practice for a taxpayer that uses comparables to support its transfer pricing, or a tax administration that uses comparables to support a transfer pricing adjustment, to provide appropriate supporting information for the other interested party (i.e. tax auditor, taxpayer or foreign competent authorities) to be able to assess the reliability of the comparables used. See paragraph 3.36 for a discussion of information available to tax administrations that is not disclosed to taxpayers. General guidance on documentation requirements is found at Chapter V of these Guidelines. See also the Annex to Chapter IV “Guidelines for conducting Advance Pricing Arrangements under the Mutual Agreement Procedure (MAP APAs)” ... Read more

Lesprom Forestry Company had sold sand and construction services to a related party, Road Company LLC. The tax authority concluded that the Company had created a tax avoidance scheme aimed at artificially underestimating the income on transactions with Road Company LLC. The price for sand and construction work was revised and tax liabilities on income tax and VAT recalculated. Determining the arm’s length price of sand An official website of the Federal State Statistics Service posted information on the average prices of manufacturers of industrial goods… [however] this statistical information does not contain the physical characteristics of the product and the terms for its sale. Therefore this information could not be used. The minimum and maximum gross margin amounted to: 14.25 and 27.04 in 2012, 2.39 and 6.57 in 2013, and 3.04 and 25.58 in 2014. The gross profitability received by Road Company LLC in 2013-2014, was significantly above the arm’s length range of gross margins, 51.87% and 73.55%, respectively.” ... Read more

In this case ZERAIM IBÉRICA SA argues that the OECD Transfer Pricing Guidelines has not been applied propperly, as secret comparables have been used in determining the arm’s length price of controlled transactions between the Spanish company and its Dutch parent company. The court concludes that the “..Guidelines are considered to be merely recommendations to States, which are given an interpretative value.” The appeal filed by the company is dismissed by the court. Click here for other translation ... Read more

Total E&P Norge AS (Total) is engaged in petroleum exploration and production activities on the Norwegian Continental Shelf. Income from such activities is subject to a special petroleum tax, in addition to the normal corporate tax, resulting in a total nominal tax rate of 78%. In 2002-2007, Total sold gas to the controlled trading companies, and the trading companies resold the gas to third parties on the open market. The Supreme Court concluded that Total did not have a right to full access to the comparables. Although section 3-13 (4) of the Tax Assessment Act states that information subject to confidentiality may be given to third parties with the effect that such third parties are subject to the same duty of confidentiality, this rule could not, according to the Supreme Court, be applied in the present case. This was because the very point of the confidentiality obligation in this case was to avoid business secrets’ being shared with competitors such ... Read more

“X Beverages S.A.” had entered into an agreement with the ABCDE Group for the use of concentrate and trademarks for the production and sale of beverages in Spain, but according to the agreement, “X Beverages S.A.” only paid for the concentrate. Following an audit for the financial years 2005-2007, the tax authorities issued an assessment which considered part of the payment to be royalties on which withholding tax should have been paid. Court’s Judgment The Court agreed that part of the payment could be qualified as royalties, but the assessment made by the tax authorities had been based on secret comparables – leaving the taxpayer defenceless – and on this basis the Court annulled the assessment. Excerpts “The taxpayer itself seems to recognize that the so-called “Contract of …” contains both a distribution contract and a trademark assignment contract when it says on page 127 of its statement of allegations “Indeed, this authorization of use is necessary to be able ... Read more

In the Nestlé Finance case, a cash pool/treasury activity was transferred to a related Swiss entity. The function had been purely administrative and carried out exclusively for the benefit of parties related to the French company. The French company did not receive any compensation for the transfer of the cash pooling activity. The tax authorities issued an assessment where profit for the transfer of the activity had been determined under article 57 – the French arm’s length provision. Administrative Court concluded that the transfer of an internal administrative function to a foreign entity – even if the function only involved other affiliated companies ‘captive clientele’ – required the payment of arm’s-length compensation. Not satisfied with the decision, Nestlé filed an appeal with the Court of Appeals. Judgment of the Court of Appeals The decision of the Administrative Court was overturned by the Administrative Court of Appeal. The Court found that the tax authorities had failed to use a valid comparable, ... Read more

EcoloJeans SL had made purchases from its majority shareholder, Mr Donato. According to the tax authorities, the agreed prices for these purchases were higher than the arm’s length price, resulting in lower taxation. The tax authorities had determined the arm’s length price by applying the resale price method, based on the margin obtained by companies in the same sector in comparable transactions with independent parties. For this purpose, a sample of six wholesalers had been selected – two whose identification data were known and four that had not been identified by the authorities for reasons of confidentiality. EcoloJeans SL filed a complaint against the assessment to the TEAR, but the complaint was later rejected. An appeal was then lodged with the TEAC (Tribunal Económico Administrativo Central), which was partially upheld in the sense that the Tribunal found a lack of reasoning (due to use of secret comparables), leaving EcoloJeans SL defenceless. Judgment of the National Court. The Court upheld the ... Read more