A Korean subsidiary of a Dutch multinational electronics group imported medical equipment, small household appliances, and lighting products from related parties and sold them in Korea. The company also provided after-sales maintenance services for medical equipment. For FY 2012 to 2015, the company applied the transactional net margin method separately to each business division and reported its corporate tax accordingly, using operating profit margin as the profit level indicator. Following an audit the tax authorities reclassified the company’s activities into four segments. They concluded that in the medical equipment, small household appliances, and automotive lighting segments, the transfer prices paid to foreign related parties exceeded arm’s length levels, while no upward adjustment was needed for the general lighting segment. On that basis, they issued a tax assessment. The authorities treated maintenance service activities in the medical equipment segment as closely linked to product sales and selected comparable companies largely based on similarity to domestic maintenance service businesses. The taxpayer challenged ... Read more

Capitaria S.A.’s main lines of business are financial services. The case concerned a dispute over transfer pricing calculations made by Capitaria S.A. in relation to a joint venture agreement with a related foreign company, KT Financial Group BVI. Capitaria had segmented its financial statements to separate income derived from various business lines, including currency derivatives brokerage and advisory services, and had reported an operating margin of 69.24% for the joint venture activity in its 2014 tax return. The tax authorities contested the segmentation methodology, arguing that the line items for costs and expenses were not clearly attributable to the joint venture and that accepting Capitaria S.A.’s approach could pave the way for erosion of the tax base. An appeal was filed by Capitaria S.A. with the District Court, which upheld it’s claim after evaluating the transfer pricing study and the supporting documentary evidence. The court found that the segmented results sufficiently demonstrated the profitability margin from the joint venture contract ... Read more

A Korean subsidiary of a multinational electronics group imported medical equipment, small household appliances and lighting products from related parties abroad and sold them in Korea. It also provided after-sales maintenance services for medical equipment. The taxpayer segmented its activities by business line, applying the transactional net margin method separately to each segment and using operating profit margin as the profit level indicator. Maintenance services relating to medical equipment were treated either as a distinct activity or as a routine function with limited profitability. Following an audit, the tax authorities rejected the taxpayer’s segmentation and functional analysis. They reclassified the taxpayer’s activities into four segments, treating the maintenance services for medical equipment as economically integrated with the sale of medical equipment. Based on this, they concluded that the prices paid to foreign related parties for medical equipment, small household appliances and automotive lighting products exceeded arm’s length price, while no adjustment was required for the general lighting segment. The authorities ... Read more

BASF ARGENTINA S.A. is an Argentine company that manufactures and distributes chemical products, paints, plastics and agricultural inputs. For the 2008 tax year it filed a transfer pricing study applying the TNMM to most transactions with related parties abroad and the CUP method for interest on loans, using external comparables and BASF’s global income statement as the tested data. Following an audit focused on this study, the tax authorities determined income tax ex officio for 2008, increasing taxable income by ARS 5,625,444.17 on the basis that BASF’s profitability, especially in its chemical manufacturing activity, was below the range of independent comparables. The tax authorities did not dispute the choice of TNMM, the multi year period or the set of external comparables, but challenged BASF’s implementation of TNMM and certain comparability adjustments. They rejected BASF’s aggregation of all business segments and functions into a single operating margin, and instead used segmented information by function that BASF later provided, concluding that the ... Read more

Transalliance Iberica SA had priced its controlled transactions for the years 2008-2013 by comparing the gross margin achieved on an overall basis with the gross margins of comparable companies. Following an audit, the tax authorities issued a notice of assessment rejecting the method used by the company due to differences in the treatment of cost items and thus issues of comparability at a gross margin level. Instead, the tax authorities applied the TNMM. The profit was outside the interquartile range and an adjustment to the median was made. Transalliance lodged an appeal. Judgment of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since such defects had not been established, the adjustment was reduced to the lower quartile. Excerpt “Of the points that are dealt with, the appellant focuses the discussion on the ... Read more