Tag: Substance over form

The tax doctrine of “substance over form” is a judicial creation applied in many countries. It is often used by the courts in cases where a taxpayer has constructed a scheme of transactional relationships in documents only or primarily to obtain tax benefits. If the tax motivation outweigh the business purpose and/or profit objective of the transaction, courts will decide that “form” (written contracts and arrangements) does not reflect the “substance” (the real deal) and on that basis denie the intented tax benefits.

See also delineation, labelling and business reasons/purpose.

Denmark vs NetApp Denmark ApS and TDC A/S, January 2023, Supreme Court, Cases 69/2021, 79/2021 and 70/2021

Denmark vs NetApp Denmark ApS and TDC A/S, January 2023, Supreme Court, Cases 69/2021, 79/2021 and 70/2021

The issue in the Danish beneficial ownership cases of NetApp Denmark ApS and TDC A/S was whether the companies were obliged to withhold dividend tax on distributions to foreign parent companies. The first case – NetApp Denmark ApS – concerned two dividend distributions of approximately DKK 566 million and DKK 92 million made in 2005 and 2006 to an intermediate parent company in Cyprus – and then on to NETAPP Bermuda. The second case – TDC A/S – concerned the distribution of dividends of approximately DKK 1.05 billion in 2011 to an intermediate parent company in Luxembourg – and then on to owner companies in the Cayman Islands. In both cases, the tax authorities took the view that the intermediate parent companies were so-called “flow-through companies” which were not the real recipients of the dividends, and that the real recipients (beneficial owners) were resident in countries not covered by the EU Parent-Subsidiary Directive (Bermuda and Cayman respectively). Therefore, withholding taxes ... Read more
Denmark vs Heavy Transport Holding Denmark ApS, March 2021, High Court, Cases B-721-13

Denmark vs Heavy Transport Holding Denmark ApS, March 2021, High Court, Cases B-721-13

Heavy Transport Holding Denmark ApS, a subsidiary in the Heerema group, paid dividends to a parent company in Luxembourg which in turn paid the dividends to two group companies in Panama. The tax authorities found that the company in Luxembourg was not the beneficial owner of the dividends and thus the dividends were not covered by the tax exemption rules of the EU Parent/Subsidiary Directive or the Double Taxation Convention between Denmark and Luxembourg. On that basis an assessment was issued regarding payment of withholding tax on the dividends. An appeal was filed by Heavy Transport Holding Denmark ApS with the High Court. Judgement of the Eastern High Court The court dismissed the appeal of Heavy Transport Holding Denmark ApS and decided in favor of the tax authorities. The parent company in Luxembourg was a so-called “flow-through” company which was not the beneficial owner of the dividend and thus not covered by the tax exemption rules of the Parent/Subsidiary Directive ... Read more

TPG2022 Chapter VI paragraph 6.91

The provisions of Section D.1.1 of Chapter I apply in identifying the specific nature of a transaction involving a transfer of intangibles or rights in intangibles, in identifying the nature of any intangibles transferred, and in identifying any limitations imposed by the terms of the transfer on the use of those intangibles. For example, a written specification that a licence is non-exclusive or of limited duration need not be respected by the tax administration if such specification is not consistent with the conduct of the parties. Example 18 in the Annex I to Chapter VI illustrates the provisions of this paragraph ... Read more

TPG2022 Chapter VI paragraph 6.34

The framework for analysing transactions involving intangibles between associated enterprises requires taking the following steps, consistent with the guidance for identifying the commercial or financial relations provided in Section D. 1 of Chapter I: i) Identify the intangibles used or transferred in the transaction with specificity and the specific, economically significant risks associated with the development, enhancement, maintenance, protection, and exploitation of the intangibles; ii) Identify the full contractual arrangements, with special emphasis on determining legal ownership of intangibles based on the terms and conditions of legal arrangements, including relevant registrations, licence agreements, other relevant contracts, and other indicia of legal ownership, and the contractual rights and obligations, including contractual assumption of risks in the relations between the associated enterprises; iii) Identify the parties performing functions (including specifically the important functions described in paragraph 6.56), using assets, and managing risks related to developing, enhancing, maintaining, protecting, and exploiting the intangibles by means of the functional analysis, and in particular which ... Read more

TPG2022 Chapter I paragraph 1.148

Company S1 conducts research activities to develop intangibles that it uses to create new products that it can produce and sell. It agrees to transfer to an associated company, Company S2, unlimited rights to all future intangibles which may arise from its future work over a period of twenty years for a lump sum payment. The arrangement is commercially irrational for both parties since neither Company S1 nor Company S2 has any reliable means to determine whether the payment reflects an appropriate valuation, both because it is uncertain what range of development activities Company S1 might conduct over the period and also because valuing the potential outcomes would be entirely speculative. Under the guidance in this section, the structure of the arrangement adopted by the taxpayer, including the form of payment, should be modified for the purposes of the transfer pricing analysis. The replacement structure should be guided by the economically relevant characteristics, including the functions performed, assets used, and ... Read more

TPG2022 Chapter I paragraph 1.147

Under the guidance in this section, the transaction should not be recognised. S1 is treated as not purchasing insurance and its profits are not reduced by the payment to S2; S2 is treated as not issuing insurance and therefore not being liable for any claim ... Read more

TPG2022 Chapter I paragraph 1.146

Company S1 carries on a manufacturing business that involves holding substantial inventory and a significant investment in plant and machinery. It owns commercial property situated in an area prone to increasingly frequent flooding in recent years. Third-party insurers experience significant uncertainty over the exposure to large claims, with the result that there is no active market for the insurance of properties in the area. Company S2, an associated enterprise, provides insurance to Company S1, and an annual premium representing 80% of the value of the inventory, property and contents is paid by Company S1. In this example S1 has entered into a commercially irrational transaction since there is no market for insurance given the likelihood of significant claims, and either relocation or not insuring may be more attractive realistic alternatives. Since the transaction is commercially irrational, there is not a price that is acceptable to both S1 and S2 from their individual perspectives ... Read more

TPG2022 Chapter I paragraph 1.144

The structure that for transfer pricing purposes, replaces that actually adopted by the taxpayers should comport as closely as possible with the facts of the actual transaction undertaken whilst achieving a commercially rational expected result that would have enabled the parties to come to a price acceptable to both of them at the time the arrangement was entered into ... Read more

TPG2022 Chapter I paragraph 1.143

The key question in the analysis is whether the actual transaction possesses the commercial rationality of arrangements that would be agreed between unrelated parties under comparable economic circumstances, not whether the same transaction can be observed between independent parties. The non-recognition of a transaction that possesses the commercial rationality of an arm’s length arrangement is not an appropriate application of the arm’s length principle. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. It should again be noted that the mere fact that the transaction may not be seen between independent parties does not mean that it does not have characteristics of an arm’s length arrangement ... Read more

TPG2022 Chapter I paragraph 1.142

This section sets out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. Where the same transaction can be seen between independent parties in comparable circumstances (i.e. where all economically relevant characteristics are the same as those under which the tested transaction occurs other than that the parties are associated enterprises) non-recognition would not apply. Importantly, the mere fact that the transaction may not be seen between independent parties does not mean that it should not be recognised. Associated enterprises may have the ability to enter into a much greater variety of arrangements than can independent enterprises, and may conclude ... Read more

TPG2022 Chapter I paragraph 1.141

Every effort should be made to determine pricing for the actual transaction as accurately delineated under the arm’s length principle. The various tools and methods available to tax administrations and taxpayers to do so are set out in the following chapters of these Guidelines. A tax administration should not disregard the actual transaction or substitute other transactions for it unless the exceptional circumstances described in the following paragraphs 1.142-1.145 apply ... Read more

TPG2022 Chapter I paragraph 1.140

In performing the analysis, the actual transaction between the parties will have been deduced from written contracts and the conduct of the parties. Formal conditions recognised in contracts will have been clarified and supplemented by analysis of the conduct of the parties and the other economically relevant characteristics of the transaction (see Section D.1.1). Where the characteristics of the transaction that are economically significant are inconsistent with the written contract, then the actual transaction will have been delineated in accordance with the characteristics of the transaction reflected in the conduct of the parties. Contractual risk assumption and actual conduct with respect to risk assumption will have been examined taking into account control over the risk (as defined in paragraphs 1.65-1.68) and the financial capacity to assume risk (as defined in paragraph 1.64), and consequently, risks assumed under the contract may have been allocated in accordance with the conduct of the parties and the other facts on the basis of steps ... Read more

TPG2022 Chapter I paragraph 1.139

Following the guidance in the previous section, the transfer pricing analysis will have identified the substance of the commercial or financial relations between the parties, and will have accurately delineated the actual transaction by analysing the economically relevant characteristics ... Read more

TPG2022 Chapter I paragraph 1.45

If the characteristics of the transaction that are economically relevant are inconsistent with the written contract between the associated enterprises, the actual transaction should generally be delineated for purposes of the transfer pricing analysis in accordance with the characteristics of the transaction reflected in the conduct of the parties ... Read more
Indonesia vs P.T. Sanken Indonesia Ltd., December 2021, Supreme Court, Case No. 5291/B/PK/PJK/2020

Indonesia vs P.T. Sanken Indonesia Ltd., December 2021, Supreme Court, Case No. 5291/B/PK/PJK/2020

P.T. Sanken Indonesia Ltd. – an Indonesian subsidiary of Sanken Electric Co., Ltd. Japan – paid royalties to its Japanese parent for use of IP. The royalty payment was calculated based on external sales and therefore did not include sales of products to group companies. The royalty payments were deducted for tax purposes. Following an audit, the tax authorities issued an assessment where deductions for the royalty payments were denied. According to the authorities the license agreement had not been registrered in Indonesia. Furthermore, the royalty payment was found not to have been determined in accordance with the arm’s length principle. P.T. Sanken issued a complaint over the decision with the Tax Court, where the assessment later was set aside. This decision was then appealed to the Supreme Court by the tax authorities. Judgement of the Supreme Court The Supreme Court dismissed the appeal of the tax authorities and upheld the decision of the Tax Court. The OECD Transfer Pricing Guidelines ... Read more
Denmark vs Takeda A/S and NTC Parent S.a.r.l., November 2021, High Court, Cases B-2942-12 and B-171-13

Denmark vs Takeda A/S and NTC Parent S.a.r.l., November 2021, High Court, Cases B-2942-12 and B-171-13

The issue in these two cases is whether withholding tax was payable on interest paid to foreign group companies considered “beneficial owners” via conduit companies covered by the EU Interest/Royalties Directive and DTA’s exempting the payments from withholding taxes. The first case concerned interest accruals totalling approximately DKK 1,476 million made by a Danish company in the period 2007-2009 in favour of its parent company in Sweden in connection with an intra-group loan. The Danish Tax Authorities (SKAT) subsequently ruled that the recipients of the interest were subject to the tax liability in Section 2(1)(d) of the Corporation Tax Act and that the Danish company was therefore obliged to withhold and pay withholding tax on a total of approximately DKK 369 million. The Danish company brought the case before the courts, claiming principally that it was not obliged to withhold the amount collected by SKAT, as it disputed the tax liability of the recipients of the interest attributions. The second ... Read more
German TP-Legislation updated as of June 2021

German TP-Legislation updated as of June 2021

German legislation on transfer pricing has been updated to align the rules with the OECD Transfer Pricing Guidelines 2017. The new amendments are effective as of fiscal year 2022. The update includes revised content on Substance over form Risk analysis Best method rule Use of interquartile range Aggregation of transactions Determination of actual ownership vs legal ownership DEMPE functions Valuation of Hard to value intangibles Click here for unofficial English translation 4-Verkuendetes-Gesetz ... Read more
2021: ATO Draft Practical Compliance Guidelines on Intangibles Arrangements, PCG 2021/D4

2021: ATO Draft Practical Compliance Guidelines on Intangibles Arrangements, PCG 2021/D4

The Australian Taxation Office (ATO) has issued draft Compliance Guidelines on intangible arrangements, PCG 2021/D4. These Guidelines will (when finalised)  set out the ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation of intangible assets, specifically, the potential application of the transfer pricing, general anti-avoidance rule (GAAR) and the diverted profits tax (DPT) provisions. The capital gains tax and capital allowances provisions will also be discussed in this Guideline where these may be considered alongside, or relevant to, the ATO’s transfer pricing, GAAR or DPT risk assessment. The draft Guidelines sets out ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets and/or involving a migration of intangible assets. The Guidelines applies to Intangibles Arrangements and focuses on tax risks associated with the potential application of the transfer pricing provisions. It also focuses on other tax risks that may be associated with Intangibles Arrangements, specifically ... Read more
Denmark vs NETAPP ApS and TDC A/S, May 2021, High Court, Cases B-1980-12 and B-2173-12

Denmark vs NETAPP ApS and TDC A/S, May 2021, High Court, Cases B-1980-12 and B-2173-12

On 3 May 2021, the Danish High Court ruled in two “beneficial owner” cases concerning the question of whether withholding tax must be paid on dividends distributed by Danish subsidiaries to foreign parent companies. The first case – NETAPP Denmark ApS – concerned two dividend distributions of approx. 566 million DKK and approx. 92 million made in 2005 and 2006 by a Danish company to its parent company in Cyprus. The National Tax Court had upheld the Danish company in that the dividends were exempt from withholding tax pursuant to the Corporation Tax Act, section 2, subsection. 1, letter c, so that the company was not obliged to pay withholding tax. The Ministry of Taxation brought the case before the courts, claiming that the Danish company should include – and thus pay – withholding tax of a total of approx. 184 million kr. The second case – TDC A/S – concerned the National Tax Tribunal’s binding answer to two questions ... Read more
Indonesia vs PT Nanindah Mutiara Shipyard Ltd, December 2020 Supreme Court, Case No. 4446/B/PK/Pjk/2020

Indonesia vs PT Nanindah Mutiara Shipyard Ltd, December 2020 Supreme Court, Case No. 4446/B/PK/Pjk/2020

PT Nanindah Mutiara Shipyard Ltd reported losses for FY 2013. The tax authorities issued an assessment where the income of the company was increased by a substantial amount referring to applicable transfer pricing regulations. Nanindah Mutiara Shipyard Ltd filed a complaint with the Tax Court, but the Tax Court upheld the assessment. An application for judicial review was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favor of Nanindah Mutiara Shipyard Ltd. The Tax Court had erred in assessing facts, data, evidence and application of the law. The decision of the Tax Court was canceled and the petition for judicial review was granted. Losses reported by Nanindah Mutiara Shipyard Ltd were not due to non-arm’s length pricing, but rather exceptional circumstances that occurred at the local company in the years following 2010. Excerpts: ” … a. that the reasons for the Petitioner’s petition for judicial review in the a quo case are positive corrections ... Read more
Uganda vs East African Breweries International Ltd. July 2020, Tax Appeals Tribunal, Case no. 14 of 2017

Uganda vs East African Breweries International Ltd. July 2020, Tax Appeals Tribunal, Case no. 14 of 2017

East African Breweries International Ltd (applicant) is a wholly owned subsidiary of East African Breweries Limited, and is incorporated in Kenya. East African Breweries International Ltd was involved in developing the markets of the companies in countries that did not have manufacturing operations. The company did not carry out marketing services in Uganda but was marketing Ugandan products outside Uganda. After sourcing customers, they pay to the applicant. A portion is remitted to Uganda Breweries Limited and East African Breweries International Ltd then adds a markup on the products obtained from Uganda Breweries Limited sold to customers in other countries. East African Breweries International Ltd would pay a markup of 7.5 % to Uganda Breweries and then sell the items at a markup of 70 to 90%. In July 2015 the tax authorities (respondent) audited Uganda Breweries Limited, also a subsidiary of East African Breweries Limited, and found information relating to transactions with the East African Breweries International Ltd for ... Read more
Switzerland vs Swiss Investment AG, February 2020, Administrative Court Zurich, Case No SB.2018.00094 and SB.2018.00095

Switzerland vs Swiss Investment AG, February 2020, Administrative Court Zurich, Case No SB.2018.00094 and SB.2018.00095

Two Swiss investors had established a structure for the management of a private equity fund in the form of a Swiss “Investment Advisor” AG and a Jersey “Investment Mananger” Ltd. They each held 50% of the shares in the Swiss AG and 50% of the shares in the Jersey Ltd. Swiss AG and Jersey Ltd then entered an investment advisory agreement whereby the Swiss AG carried out all advisory activities on behalf of Jersey Ltd and Jersey Ltd assumed all the risk of the investments. Both investors were employed by Swiss AG and Jersey Ltd had no employees execpt two directors who each received a yearly payment of CFH 15,000. According to the investment advisory agreement Jersey Ltd would remunerate the Swiss AG with 66% of the gross fee income. The Swiss AG would carry out all relevant functions related to investment advisory and recommend to Jersey Ltd acquisition targets which the latter would then evaluate and subsequently decides on ... Read more
New Zealand vs Cullen Group Limited, March 2019, New Zealand High Court, Case No [2019] NZHC 404

New Zealand vs Cullen Group Limited, March 2019, New Zealand High Court, Case No [2019] NZHC 404

In moving to the United Kingdom, a New Zealand citizen, Mr. Eric Watson, restructured a significant shareholding into debt owed by a New Zealand company, Cullen Group Ltd, to two Cayman Island conduit companies, all of which he still controlled to a high degree. This allowed Cullen Group Ltd to pay an Approved Issuer Levy (AIL) totalling $8 million, rather than Non-Resident Withholding Tax of $59.5 million. The steps in the arrangement were as follows: (a) Mr Watson sold his shares in Cullen Investments Ltd to Cullen Group, at a (rounded) value of $193 million, being $291 million less his previous $98 million shareholder advances. The sale was conditional on Cullen Investments Ltd selling its shares in Medical Holdings Ltd to Mr Watson and on Cullen Investments Ltd selling its shares in Vonelle Holdings Ltd to Maintenance Ltd which was owned by Mr Watson. (b) Cullen Group’s purchase of the Cullen Investments Ltd shares from Mr Watson was funded by a vendor loan from Mr Watson of ... Read more
Denmark vs T and Y Denmark, February 2019, European Court of Justice, Cases C-116/16 and C-117/16

Denmark vs T and Y Denmark, February 2019, European Court of Justice, Cases C-116/16 and C-117/16

The cases of T Danmark (C-116/16) and Y Denmark Aps (C-117/16) adresses questions related to interpretation of the EU-Parent-Subsidary-Directive The issue is withholding taxes levied by the Danish tax authorities in situations where dividend payments are made to conduit companies located in treaty countries but were the beneficial owners of these payments are located in non-treaty countries. During the proceedings in the Danish court system the European Court of Justice was asked a number of questions related to the conditions under which exemption from withholding tax can be denied on dividend payments to related parties. The European Court of Justice has now answered these questions in favor of the Danish Tax Ministry; Benefits granted under the Parent-Subsidiary Directive can be denied where fraudulent or abusive tax avoidance is involved. Quotations from cases C-116/16 and C-117/16: “The general principle of EU law that EU law cannot be relied on for abusive or fraudulent ends must be interpreted as meaning that, where ... Read more
Denmark vs N, X, C, and Z Denmark, February 2019, European Court of Justice, Cases C-115/16, C-118/16, C-119/16 and C-299/16

Denmark vs N, X, C, and Z Denmark, February 2019, European Court of Justice, Cases C-115/16, C-118/16, C-119/16 and C-299/16

The cases of N Luxembourg 1 (C-115/16), X Denmark A/S (C-118/16), C Danmark I (C-119/16) and Z Denmark ApS (C-299/16), adresses questions related to the interpretation of the EU Interest and Royalty Directive. The issue in these cases is withholding taxes levied by the Danish tax authorities in situations where interest payments are made to conduit companies located in treaty countries but were the beneficial owners of these payments are located in non-treaty countries. During the proceedings in the Danish court system the European Court of Justice was asked a number of questions related to the conditions under which exemption from withholding tax can be denied on interest payments to related parties. The European Court of Justice has now answered these questions in favor of the Danish Tax Ministry; Benefits granted under the Interest and Royalty Directive can be denied where fraudulent or abusive tax avoidance is involved. Quotations from cases C-115/16, C-118/16, C-119/16 and C-299/16: “The concept of ‘beneficial ... Read more
Korea vs CJ E&M Co., Ltd. , November 2018, Supreme Court Case no. 2017두33008

Korea vs CJ E&M Co., Ltd. , November 2018, Supreme Court Case no. 2017두33008

In 2011, a Korean company, CJ E&M Co., Ltd concluded a license agreement relating to the domestic distribution of Paramount films, etc. with Hungary-based entity Viacom International Hungary Kft (hereinafter “VIH”), which is affiliated with the global entertainment content group Viacom that owns the film producing company Paramount and music channel MTV. From around that time to December 2013, the Plaintiff paid VIH royalties amounting to roughly KRW 13.5 billion (hereinafter “pertinent royalty income”). CJ E&M Co., Ltd did not withhold the corporate tax regarding the pertinent royalty income according to Article 12(1) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Hungary Tax Treaty”). The Hungarian company was interposed between the Korean entertainment company and a Dutch company which previously licensed the rights to the Korean entertainment company. The Korean ... Read more

TPG2017 Chapter VI paragraph 6.91

The provisions of Section D.1.1 of Chapter I apply in identifying the specific nature of a transaction involving a transfer of intangibles or rights in intangibles, in identifying the nature of any intangibles transferred, and in identifying any limitations imposed by the terms of the transfer on the use of those intangibles. For example, a written specification that a licence is non-exclusive or of limited duration need not be respected by the tax administration if such specification is not consistent with the conduct of the parties. Example 18 in the Annex to Chapter VI illustrates the provisions of this paragraph ... Read more

TPG2017 Chapter VI paragraph 6.34

The framework for analysing transactions involving intangibles between associated enterprises requires taking the following steps, consistent with the guidance for identifying the commercial or financial relations provided in Section D. 1 of Chapter I: i) Identify the intangibles used or transferred in the transaction with specificity and the specific, economically significant risks associated with the development, enhancement, maintenance, protection, and exploitation of the intangibles; ii) Identify the full contractual arrangements, with special emphasis on determining legal ownership of intangibles based on the terms and conditions of legal arrangements, including relevant registrations, licence agreements, other relevant contracts, and other indicia of legal ownership, and the contractual rights and obligations, including contractual assumption of risks in the relations between the associated enterprises; iii) Identify the parties performing functions (including specifically the important functions described in paragraph 6.56), using assets, and managing risks related to developing, enhancing, maintaining, protecting, and exploiting the intangibles by means of the functional analysis, and in particular which ... Read more

TPG2017 Chapter I paragraph 1.128

Company S1 conducts research activities to develop intangibles that it uses to create new products that it can produce and sell. It agrees to transfer to an associated company, Company S2, unlimited rights to all future intangibles which may arise from its future work over a period of twenty years for a lump sum payment. The arrangement is commercially irrational for both parties since neither Company S1 nor Company S2 has any reliable means to determine whether the payment reflects an appropriate valuation, both because it is uncertain what range of development activities Company S1 might conduct over the period and also because valuing the potential outcomes would be entirely speculative. Under the guidance in this section, the structure of the arrangement adopted by the taxpayer, including the form of payment, should be modified for the purposes of the transfer pricing analysis. The replacement structure should be guided by the economically relevant characteristics, including the functions performed, assets used, and ... Read more

TPG2017 Chapter I paragraph 1.127

Under the guidance in this section, the transaction should not be recognised. S1 is treated as not purchasing insurance and its profits are not reduced by the payment to S2; S2 is treated as not issuing insurance and therefore not being liable for any claim ... Read more

TPG2017 Chapter I paragraph 1.126

Company S1 carries on a manufacturing business that involves holding substantial inventory and a significant investment in plant and machinery. It owns commercial property situated in an area prone to increasingly frequent flooding in recent years. Third-party insurers experience significant uncertainty over the exposure to large claims, with the result that there is no active market for the insurance of properties in the area. Company S2, an associated enterprise, provides insurance to Company S1, and an annual premium representing 80% of the value of the inventory, property and contents is paid by Company S1. In this example S1 has entered into a commercially irrational transaction since there is no market for insurance given the likelihood of significant claims, and either relocation or not insuring may be more attractive realistic alternatives. Since the transaction is commercially irrational, there is not a price that is acceptable to both S1 and S2 from their individual perspectives ... Read more

TPG2017 Chapter I paragraph 1.124

The structure that for transfer pricing purposes, replaces that actually adopted by the taxpayers should comport as closely as possible with the facts of the actual transaction undertaken whilst achieving a commercially rational expected result that would have enabled the parties to come to a price acceptable to both of them at the time the arrangement was entered into ... Read more

TPG2017 Chapter I paragraph 1.123

The key question in the analysis is whether the actual transaction possesses the commercial rationality of arrangements that would be agreed between unrelated parties under comparable economic circumstances, not whether the same transaction can be observed between independent parties. The non-recognition of a transaction that possesses the commercial rationality of an arm’s length arrangement is not an appropriate application of the arm’s length principle. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. It should again be noted that the mere fact that the transaction may not be seen between independent parties does not mean that it does not have characteristics of an arm’s length arrangement ... Read more

TPG2017 Chapter I paragraph 1.122

This section sets out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. Where the same transaction can be seen between independent parties in comparable circumstances (i.e. where all economically relevant characteristics are the same as those under which the tested transaction occurs other than that the parties are associated enterprises) non-recognition would not apply. Importantly, the mere fact that the transaction may not be seen between independent parties does not mean that it should not be recognised. Associated enterprises may have the ability to enter into a much greater variety of arrangements than can independent enterprises, and may conclude ... Read more

TPG2017 Chapter I paragraph 1.121

Every effort should be made to determine pricing for the actual transaction as accurately delineated under the arm’s length principle. The various tools and methods available to tax administrations and taxpayers to do so are set out in the following chapters of these Guidelines. A tax administration should not disregard the actual transaction or substitute other transactions for it unless the exceptional circumstances described in the following paragraphs 1.122-1.125 apply ... Read more

TPG2017 Chapter I paragraph 1.120

In performing the analysis, the actual transaction between the parties will have been deduced from written contracts and the conduct of the parties. Formal conditions recognised in contracts will have been clarified and supplemented by analysis of the conduct of the parties and the other economically relevant characteristics of the transaction (see Section D.1.1). Where the characteristics of the transaction that are economically significant are inconsistent with the written contract, then the actual transaction will have been delineated in accordance with the characteristics of the transaction reflected in the conduct of the parties. Contractual risk assumption and actual conduct with respect to risk assumption will have been examined taking into account control over the risk (as defined in paragraphs 1.65-1.68) and the financial capacity to assume risk (as defined in paragraph 1.64), and consequently, risks assumed under the contract may have been allocated in accordance with the conduct of the parties and the other facts on the basis of steps ... Read more

TPG2017 Chapter I paragraph 1.119

Following the guidance in the previous section, the transfer pricing analysis will have identified the substance of the commercial or financial relations between the parties, and will have accurately delineated the actual transaction by analysing the economically relevant characteristics ... Read more

TPG2017 Chapter I paragraph 1.45

If the characteristics of the transaction that are economically relevant are inconsistent with the written contract between the associated enterprises, the actual transaction should generally be delineated for purposes of the transfer pricing analysis in accordance with the characteristics of the transaction reflected in the conduct of the parties ... Read more
South Africa vs Sasol, 30 June 2017, Tax Court, Case No. TC-2017-06 - TCIT 13065

South Africa vs Sasol, 30 June 2017, Tax Court, Case No. TC-2017-06 – TCIT 13065

The taxpayer is registered and incorporated in the Republic of South Africa and carries on business in the petrochemical industry. It has some of its subsidiaries in foreign jurisdictions. Business activities include the importation and refinement of crude oil. This matter concerns the analysis of supply agreements entered into between the XYZ Corp and some of its foreign subsidiaries. It thus brings to fore, inter alia the application of the South African developing fiscal legal principles, namely, residence based taxation, section 9D of the Income Tax Act 58 of 1962 and other established principles of tax law, such as anti-tax avoidance provisions and substance over form. Tax avoidance is the use of legal methods to modify taxpayer’s financial situation to reduce the amount of tax that is payable SARS’s ground of assessment is that the XYZ Group structure constituted a transaction, operation or scheme as contemplated in section 103(1) of the Act. The structure had the effect of avoiding liability ... Read more
US vs. Exelon Corp, September 2016, US Tax Court

US vs. Exelon Corp, September 2016, US Tax Court

The case was about a sale and lease back arrangement characterizised as a loan by the US tax authorities referring to “substance over form”. The Court agreed with the tax authorities. “We have held that all of the test transactions failed the substance over form inquiry because petitioner did not acquire the benefits and burdens of ownership in the assets involved in the test transactions. We have also concluded that the test transactions are more similar to loans made by petitioner to CPS and MEAG because petitioner’s return on its investment was predetermined at the time petitioner entered into the test transactions. Accordingly, in 1999 petitioner exchanged the Powerton and Collins power plants for an interest in financial instruments. Such an exchange fails to meet the “like kind” requirement outlined in the Code and the regulations. Thus, petitioner must recognize the gain it received in 1999 on the sale of the Powerton and Collins plants under section 1001.” US-vs-Exelon-Corp-September-2016-US-Tax-Court ... Read more
Sweden vs. taxpayer april 2016, Swedish Supreme Administrative Court, HFD 2016 ref. 23

Sweden vs. taxpayer april 2016, Swedish Supreme Administrative Court, HFD 2016 ref. 23

The Swedish Supreme Administrative Court makes it clear that OECD guidelines can be used for interpreting Swedish domestic legislation in cases where the domestic legislation is based on OECD guidance and principles. It is also concluded, that the fact that an agreement is given a certain legal term does not mean that the Court is bound by that classification. It is the substance of the agreement – based on the facts and circumstances – that matters. Click here for translation Sweden-vs-Corp-HFD-2016-ref.-23 ... Read more
UK vs UBS AG, March 2016, Supreme Court, Case No [2016] UKSC 13

UK vs UBS AG, March 2016, Supreme Court, Case No [2016] UKSC 13

In this case the UK Supreme Court addressed the Ramsay approach, when it considered tax avoidance schemes which involved composite transactions designed to avoid payment of income tax on bankers’ bonuses. According to the Supreme Court the Ramsay case did not develop a special rule for tax avoidance schemes; instead it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. The Ramsay principle established that the analysis of the facts depended upon the purposive construction of the statute. While this was not a new special rule for tax avoidance cases, the approach had proved particularly important in such cases. Excerpts from the Supreme Court Judgement “The Ramsay approach 61. As the House of Lords explained in Barclays Mercantile Business Finance Ltd v Mawson, in a single opinion of the Appellate Committee delivered by Lord Nicholls, the modern approach to statutory construction is to have regard to the purpose of a ... Read more
Indonesia vs P.T. Sanken Electric Indonesia Ltd, February 2016, Tax Court, Case No. Put.68357/PP/M.IA/15/2016

Indonesia vs P.T. Sanken Electric Indonesia Ltd, February 2016, Tax Court, Case No. Put.68357/PP/M.IA/15/2016

P.T. Sanken Electric Indonesia Ltd. – an Indonesian subsidiary of Sanken Electric Co., Ltd. Japan – paid royalties to its Japanese parent for use of IP. The royalty payment was calculated based on external sales and therefore did not include sales of products to group companies. The royalty payments were deducted for tax purposes. The tax authorities denied the deduction as the license agreement had not been registrered in Indonesia. Furthermore, the royalty payment was not found to have been determined in accordance with the arm’s length principle. P.T. Sanken Electric Indonesia Ltd appealed the decision of the Tax Court. Judgement of the Tax Court The tax court set aside the assessment and decided in favor of taxpayer. Click here for translation Indonesia PUT 68357-PP-MIA-15-2016 ... Read more
Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

A Ab had in 2009 from its majority shareholder B, based in Luxembourg, received a EUR 15 million inter-company loan. A Ab had in 2009 deducted 1,337,500 euros in interest on the loan. The loan had been granted on the basis that the banks financing A’s operations had demanded that the company acquire additional financing, which in the payment scheme would be a subordinated claim in relation to bank loans, and by its nature a so-called IFRS hybrid, which the IFRS financial statements were treated as equity. The loan was guaranteed. The fixed annual interest rate on the loan was 30 percent. The loan could be paid only on demand by A Ab. The Finnish tax authorities argued that the legal form of the inter-company loan agreed between related parties should be disregarded, and the loan reclassified as equity. Interest on the loan would therefore not be deductible for A Ab. According to the Supreme Administrative Court interest on the loan was tax deductible. The Supreme Administrative ... Read more
Mexico vs Operadora Unefón, SA de CV, April 2013, Superior Chamber of the Federal Court of Fiscal and Administrative Justice, Case No 14253/08-17-05-3/1259/11-S2-08-04

Mexico vs Operadora Unefón, SA de CV, April 2013, Superior Chamber of the Federal Court of Fiscal and Administrative Justice, Case No 14253/08-17-05-3/1259/11-S2-08-04

A restructuring contract dated 16 June 2003 was entered between NORTEL NETWORKS LIMITED and CODISCO INVESTMENTS LLC and promissory notes were issued by OPERADORA UNEFÓN, S.A. de C.V. Following an audit, an assessment was issued by the tax authorities, where the transaction was recharacterised and priced on an aggregatet basis taking into account the totality of the arrangement. Judgement of the Court The court upheld the assessment. According to the court, when the tax authorities carries out an audit of transactions between related parties, it must do so based on the structure and contractual agreements as determined by the associated enterprises. However, the general rule provides for two exceptions where the tax authorities may disregard the form and recharacterise the transactions for tax purposes. The first exception occurs when the economic substance of the transaction differs from its form. The second exception occurs when, although the form and substance of the transaction coincide, the arrangements relating to the transaction, taken ... Read more
Nederlands vs "Paper Trading B.V.", October 2011, Supreme Court, Case No 11/00762, ECLI:NL:HR:2011:BT8777

Nederlands vs “Paper Trading B.V.”, October 2011, Supreme Court, Case No 11/00762, ECLI:NL:HR:2011:BT8777

“Paper Trading B.V.” was active in the business of buying and selling paper. The paper was purchased (mostly) in Finland, and sold in the Netherlands, Belgium, France, and Germany. The purchasing and selling activities were carried out by the director of Paper Trading B.V. “Mr. O” who was also the owner of all shares in the company. In 1994, Mr. O set up a company in Switzerland “Paper Trader A.G”. The appointed director of “Paper Trader A.G” was a certified tax advisor, accountant, and trustee, who also acted as director of various other companies registered at the same address. The Swiss director took care of administration, correspondence, invoicing and corporate tax compliance. A couple of years later, part of the purchasing and selling of the paper was now carried out through “Paper Trader A.G”. However, Mr. O proved to be highly involved in activities on behalf of “Paper Trader A.G”, and the purchase and sale of its paper. Mr. O ... Read more
US vs Container Corp., May 2011, US COURT OF APPEALS, No. 10-60515

US vs Container Corp., May 2011, US COURT OF APPEALS, No. 10-60515

In this case a US subsidiary, Container Corp, had paid guaranty fees to its foreign parent company Vitro in Mexico. In the US tax return, the fee had been considered analogous to payments for services, and the income was sourced outside the United States and not subject to withholding tax. The IRS held that the guaranty fees were more closely analogized to interest and thus subject to withholding taxes of 30 %. The Tax Court issued an opinion siding with Container Corp. The Commissioner brought the opinion before the US Court of Appeals. The Court of Appeals also found in favor of Container Corp. “To determine what class of income guaranty fees fall within or may be analogized to, the court must look to the “substance of the transaction”. The Commissioner contends the guaranty fees are more closely analogized to interest, while Container Corporation argues that the fees are more closely analogous to payment for services.” “The source of payments ... Read more
Italy vs “Philip Morris”, May 2002, Supreme Court, Cases No 7682/2002

Italy vs “Philip Morris”, May 2002, Supreme Court, Cases No 7682/2002

At issue in the Philip Morris case was the scope of the definition of permanent establishments – whether or not activities in Italy performed by Intertaba s.p.a. constituted a permanent establishment of the Philip Morris group. According to the tax authorities the taxpayer had tried to conceal the P.E. in Italy by disguising the fact that the Italian company was also acting in the exclusive interest of the Philip Morris group. The Court of Appeal set aside the assessment issued by the tax authorities, and the tax authorities in turn filed an appeal with the Supreme Court. Judgement of the Supreme Court The supreme court set aside the decision of the court of first instance and remanded the case with the following instructions: “…According to Art. 5(5) of the OECD Model, structures having the authority to conclude contracts in the name of the enterprise cannot be regarded as independent persons. This power, according to the Commentary (sub-article 5(5)(33)), must not ... Read more