Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland. The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of the goods in question. Skechers held that the losses did not derive from the costs ... Read more

35. The facts in this example are the same as in Example 9, except that Company S now enters into a three-year royalty-free agreement to market and distribute the watches in the country Y market, with no option to renew. At the end of the three-year period, Company S does not enter into a new contract with Primair. 36. Assume that it is demonstrated that independent enterprises do enter into short-term distribution agreements where they incur marketing and distribution expenses, but only where they stand to earn a reward commensurate with the functions performed, the assets used, and the risks assumed within the time period of the contract. Evidence derived from comparable independent enterprises shows that they do not invest large sums of money in developing marketing and distribution infrastructure where they obtain only a short-term marketing and distribution agreement, with the attendant risk of non-renewal without compensation. The potential short-term nature of the marketing and distribution agreement is such ... Read more

30. The facts in this example are the same as in Example 9, except that the market development functions undertaken by Company S in this Example 10 are far more extensive than those undertaken by Company S in Example 9. 31. Where the marketer/distributor actually bears the costs and assumes the risks of its marketing activities, the issue is the extent to which the marketer/distributor can share in the potential benefits from those activities. A thorough comparability analysis identifies several uncontrolled companies engaged in marketing and distribution functions under similar long-term marketing and distribution arrangements. Assume, however, that the level of marketing expense Company S incurred in Years 1 through 5 far exceeds that incurred by the identified comparable independent marketers and distributors. Assume further that the high level of expense incurred by Company S reflects its performance of additional or more intensive functions than those performed by the potential comparables and that Primair and Company S expect those additional ... Read more

35. The facts in this example are the same as in Example 9, except that Company S now enters into a three-year royalty-free agreement to market and distribute the watches in the country Y market, with no option to renew. At the end of the three-year period, Company S does not enter into a new contract with Primair. 36. Assume that it is demonstrated that independent enterprises do enter into short-term distribution agreements where they incur marketing and distribution expenses, but only where they stand to earn a reward commensurate with the functions performed, the assets used, and the risks assumed within the time period of the contract. Evidence derived from comparable independent enterprises shows that they do not invest large sums of money in developing marketing and distribution infrastructure where they obtain only a short-term marketing and distribution agreement, with the attendant risk of non-renewal without compensation. The potential short-term nature of the marketing and distribution agreement is such ... Read more

30. The facts in this example are the same as in Example 9, except that the market development functions undertaken by Company S in this Example 10 are far more extensive than those undertaken by Company S in Example 9. 31. Where the marketer/distributor actually bears the costs and assumes the risks of its marketing activities, the issue is the extent to which the marketer/distributor can share in the potential benefits from those activities. A thorough comparability analysis identifies several uncontrolled companies engaged in marketing and distribution functions under similar long-term marketing and distribution arrangements. Assume, however, that the level of marketing expense Company S incurred in Years 1 through 5 far exceeds that incurred by the identified comparable independent marketers and distributors. Assume further that the high level of expense incurred by Company S reflects its performance of additional or more intensive functions than those performed by the potential comparables and that Primair and Company S expect those additional ... Read more

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany.  The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range of arm’s length prices is produced, there are no legal basis for adjustment to the ... Read more

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 ... Read more