Netherlands v Restr Corp, September 2017, Court of ZWB, BRE 15/5683

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Court

District Court Zeeland-West Brabant

Date of judgment

19-09-2017

Date of publication

27-10-2017

Case number

BRE - 15 _ 5683

Legal fields

Tax law

Special characteristics

First instance - multiple

Content indicator

BRE 15/5683

Corporation Tax (Section 8b), transfer pricing, burden of proof

The District Court deems it plausible that the interested party had already transferred activities related to purchasing, sales and logistics within the group before 2010. In the year in question, it closely resembles a contract manufacturing company. In view of this, the Inspector has not made it sufficiently plausible that the price agreement for the stakeholder's activity within the group was rightly corrected.

Law References

Corporation Tax Act 1969 8b

Locations

Rechtspraak.nl

V-N 2017/62.2.2

Tax Advice 2017/23.8

V-N Today 2017/2565

Viditax (FutD), 27-10-2017

FutD 2017-2674 with annotation from Fiscaal up to Date

Mr. F.C. van der Bogt annotated in NTFR 2017/2925

Enriched ruling

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Ruling

DISTRICT COURT ZEELAND-WEST-BRABANT

Tax law, three-judge chamber

Location: Breda

Case number BRE 15/5683

judgment of 19 September 2017

Ruling as referred to in Section 8.2.6 of the General Administrative Law Act (Awb) in the proceedings between

[interested party], established in [place 1] ,

interested party,

and

the inspector of the tax authorities,

the inspector.

1 Origin and course of the proceedings

1.1.

The tax inspector imposed a corporate income tax assessment on the interested party for the year 2010, calculated on the basis of a taxable amount of EUR 188,342,906 (assessment number [assessment number] .V.06.0112; hereinafter: the assessment), and by simultaneous decision charged EUR 5,661,286 in tax interest. In addition, by decision € 10,573,819 in losses was settled.

1.2.

In a decision on objection dated 15 July 2015, the Inspector upheld the assessment and the decision on levy interest.

1.3.

The interested party lodged an appeal against this by letter dated 20 August 2015, received by the district court on 24 August 2015. In connection with this appeal, the court clerk charged the interested party a court fee of € 331.

1.4.

The inspector submitted a statement of defence.

1.5.

After having been given the opportunity to do so by the court, the interested party reiterated in writing, after which the inspector duplicated his statement in writing.

1.6.

The parties submitted further documents before the session. Copies of each of these documents were provided to the other party.

1.7.

The hearing took place on 8 June 2017 in Breda. For an overview of the persons who appeared at the hearing and the proceedings there, the District Court refers to the official record, a copy of which was sent together with a copy of this judgment. The court has closed the investigation and announced its decision in writing.

2 Facts

Based on the documents in the case and the hearings at the session, the following facts have been established:

2.1.

The interested party is the parent company of a fiscal unity for corporation tax, of which, among others, [A BV] forms part. The operational activities of the interested party consist of the processing of zinc concentrate and related raw materials. For this purpose, [A BV] operates a zinc smelter in [place 2]. For many years, the interested party has been part of a multinational group of companies, since 2007 known as the [group]. In 2007, the [group] was created as a result of the spin-off and merger of certain assets of the [A group] and the [B group] .

2.2.

Before 2003, the interested party performed, within the [C group] and later the [A group], all necessary functions in the overall value chain of a smelter as owner of the relevant assets and bearer of all risks associated with its activity. It concluded independently the relevant purchase agreements, supply agreements, hedging arrangements and the like.

2.3.

From 2003 onwards, the interested party increasingly assigned activities other than production proper to a global organisational structure, the Global Marketing & Services team (hereinafter GMS). This cooperation, laid down in the [Agreement], made it possible to achieve economies of scale in, among other things, purchasing, sales and the deployment of personnel. The costs associated with GMS were passed on to the operating companies concerned. The benefits achieved with GMS were accounted for by the participating operating companies. Also after the interested party became part of the [group] in 2007, the cooperation through GMS was continued. To this end, a Consultancy Agreement was concluded between, among others, [A BV] and the (top) holding company [A NV] listed on the Brussels Stock Exchange. In this agreement it has been agreed, inter alia, that [A NV] will provide services for the benefit of [A BV] in the fields of strategy and business development, marketing, sales, finance, legal support, information technology, human resources and environment. [A NV] invoices the costs of these services to [A BV] with a surcharge of 7.5%. In the Statement of Service Level Intentions the division of tasks is described. A number of employees of [A BV] have also been seconded to GMS.

2.4.

In the context of [project X], [B NV] (hereinafter referred to as [B NV] ) was incorporated on 9 April 2009. [B NV] was based in Belgium. It provided support services to the smelters through GMS and managed and administered the purchase of all raw materials and the sale of all products and by-products. On 1 July 2009, [B NV] took over the working capital, i.e. raw materials, work in progress, products and by-products and debtors, of the various smelters, including that of [A BV] by means of a Business Transfer Agreement. A Cooperation Agreement (hereinafter: CoopA) was also concluded between [B NV] and, inter alia, the interested party. Under this CoopA, [B NV] supplies the raw materials to the smelters. The latter process the raw materials and deliver the resulting product back to [B NV]. Under the CoopA, the latter was entitled to a reimbursement of its costs with a mark-up of 7.5% and a reimbursement of 3.487% of its equity. An 'EBIT passback' clause in the CoopA ensured that the results associated with the commercial process of buying and selling were returned to the smelters. The CoopA had a term of two years. Also, as a result of the transfer of activities, a number of employees were transferred from the interested party to [B NV].

2.5.

On 24 February 2010, the [group] decided to move the group's headquarters, which were partly located in London and partly in Brussels, to Switzerland ([project Y] ) with effect from 1 July 2010. In the new structure, the management of production planning, purchasing, logistics and sales was centralised at [A AG] (hereinafter [A AG] ) in Zurich, in order to avoid exposing the smelters to the associated financial risks. As of 2010, approximately 100 employees work in Switzerland. On 28 June 2010, [A AG] took over the activities of [B NV] by means of a Business Transfer Agreement (BTA). The CoopA was terminated by means of a Termination Agreement. For the termination of the CoopA the interested party received an amount of € 28,351,364 as compensation (hereafter: the conversion fee). The conversion fee was calculated assuming a remaining term of the CoopA of one year.

A Manufacturing Services Agreement (hereinafter: MSA) was concluded between [A AG] and the smelters. Under this MSA the smelters are entitled to a fee based on their cost of smelting plus a 10% mark-up.

2.6.

On 8 June 2012, the Interested Party filed its corporate income tax return for the year 2010, showing a taxable profit of € 42,641,089, including the conversion fee. After setting off an amount of € 10,573,819 in losses, a taxable amount of € 32,067,270 remains.

2.7.

On 22 November 2014, the tax inspector issued a corporate income tax assessment for 2010 for a taxable amount of €188,342,906. The inspector increased the conversion fee by €156,275,636 to €184,627,000 because he is of the opinion that the most important core functions will also be fulfilled by the interested party after the implementation of [project Y].

2.8.

By letter of 24 December 2014, the interested party objected to the correction applied by the inspector. On 1 April 2015, the interested party gave the inspector notice of default and requested a ruling on its objection within two weeks. Because the inspector did not decide on the objection within those two weeks, the interested party lodged an appeal on 16 April 2015 with this court for failure to decide in time. On 2 July 2015, this court ruled and instructed the inspector to rule on the objection within two weeks of its ruling. On 15 July 2015, the inspector issued a ruling on the objection in which he upheld the assessment.

2.9.

With regard to the assessment of corporate income tax for the year 2009, a determination agreement was concluded between the parties on 20 May 2014. This agreement includes the following.

"The decision regarding [project Y] was taken in 2010 and is not part of the agreements concluded in the framework of [project X].

The implementation of the [project Y] will lead to tax disputes between Party A [court addition: interested party] and Party B [court addition: the inspector] in the year 2010 (and thus not in the year 2009). The [project X] with the ebitpassback clause will not lead to a settlement in the year 2009.

3 Dispute

3.1.

The following points are in dispute between the parties.

1. Did the Inspector rightly make corrections to the transfer prices and conversion fee applied by the interested party?

Does the Convention between the Kingdom of the Netherlands and the Swiss Confederation for the avoidance of double taxation in the area of taxes on income and capital 1951 ('the Convention') preclude the application of an adjustment to the transfer prices used?

3. Was the conversion fee taxed in the correct year?

Interested party answers questions 1 and 3 in the negative and the second question in the affirmative. The inspector is of the opposite opinion.

3.2.

The parties base their views on the grounds adduced by them in the documents originating from them and in the hearing.

3.3.

The interested party primarily requests that the appeal be allowed, that the ruling on objection be annulled, and that the assessment be reduced to a taxable amount calculated in accordance with its tax return of € 32,067,270. If the court is of the opinion that the conversion allowance has not been taxed in the correct year, the interested party concludes, in the alternative, that the assessment should be reduced to a taxable amount of € 3,715,906.

3.4.

The Inspector concluded, as the Court understands it, that the appeal was unfounded. In the alternative, the Inspector concluded that the appeal was well-founded, that the decision on the objection should be set aside and that the assessment should be reduced to a taxable amount of € 141,494,019.

4 Assessment of the dispute

4.1.

Article 8b of the Corporation Tax Act 1969 (hereinafter: Wet Vpb) reads, in so far as relevant, as follows:

"If an entity participates, directly or indirectly, in the management or supervision of, or in the capital of, another entity and conditions are agreed upon or imposed between these entities in respect of their mutual legal relationships (transfer prices) that deviate from conditions that would have been agreed upon in economic transactions by independent parties, the profits of these entities shall be determined as if the latter conditions had been agreed upon.

2. (...)

3. The entities referred to in paragraphs 1 and 2 shall include in their records information indicating how the transfer prices referred to in that paragraph were arrived at and whether the resulting transfer prices are subject to terms and conditions that would have been agreed upon in the course of trade by independent parties."

Administration obligation

4.2.

Insofar as the Inspector states or intended to state that the interested party has not complied with the administration or documentation obligation of Section 8b(3) of the Vpb Act, the Court does not follow him in this. The interested party has drawn up and had drawn up various reports in which the conditions for granting and the method of calculating the conversion fee have been included and assessed. It has also substantiated its position with regard to using the net cost plus method for the annual fee in such a manner. In the District Court's opinion, the interested party has thus fulfilled the administration or documentation obligation referred to above. The court also notes that even if the interested party did not meet the obligation of administration or documentation, this would not lead to the application of the evidence sanction referred to in Article 27e(1) of the General Law on State Taxes, because the inspector did not issue an information decision in which deficiencies in the administration were found.

Burden of proof

4.3.

The inspector disputes that the interested party receives an arm's length payment for the functions she performs and the position she occupies within the [group]; according to the inspector, there is no question of at arm's length transfer prices. In this respect, the applicant took the position that the Inspector has an increased burden of proof. According to the applicant, this can be deduced from case law (especially from Supreme Court 28 June 2002, ECLI:NL:HR:2002:AE4718), literature (BNB 2002/343) and the rationale of the regulation. After all, it must be prevented that the inspector takes the place of the entrepreneur.

4.4.

A reasonable distribution of the burden of proof implies that the party who asserts that transfer prices agreed between associated parties are not business-like and on that basis require correction when determining the fiscal profit, must make his assertion plausible in the event of a dispute. This means that the inspector has the burden of proving that the conversion fee and the applied transfer price method do not comply with the at arm's length principle. The inspector has a 'double' burden of proof in this respect. First of all, the inspector must prove that it was immediately clear when the transaction was entered into that it was not done with a view to the business interests of the companies involved. If the tax inspector succeeds in this, he must make the impossibility of the price applied plausible (cf. Supreme Court 28 June 2002, ECLI:NL:HR:2002:AE4718). Contrary to what the interested party has stated, there is no reason to increase the burden of proof. The annotation in the BNB to the above-mentioned judgment does state: "Based on the legal regime until 1 January 2002, the tax inspector has, in my opinion, a very heavy burden of proof in this type of situation", but in the opinion of the court, this view - insofar as it must be understood as a plea for an increase of the burden of proof in a legal sense - finds no support in law or jurisprudence.

Transfer price - annual fee

4.5.

The Inspector states that the smelting activities fulfil the most important core function within the value chain. The interested party manages the control of the smelting processes on its own. The functions performed by [A AG] mainly relate to purchasing and sales. These activities do not control the process. Furthermore, the planning and logistics departments of [A AG] carry out these functions jointly with the relevant departments of the interested party. The inspector hereby states that the interested party itself performs the core function and is in control of the associated risks. There are strongly interwoven activities and transactions in which both parties have unique 'intangibles'. Just like [A AG], the interested party has always been an entrepreneur and must therefore also be remunerated as an entrepreneur and not as a producer of wages. The Inspector also states that the contract production agreements submitted by the interested party are not comparable to the MSA concluded by the interested party, but concern purchase and sale agreements. Since no comparable third parties could be found, the net cost plus method advocated by the interested party could not be applied, according to the Inspector. In order to determine the annual transfer price between the interested party and [A AG], the Inspector considers the profit split method the most appropriate method because both companies have important functions within the group as entrepreneurs. Moreover, as the inspector also stated at the hearing, he was told during inspections in [location 2] in the past that nothing would change as regards the activities in [location 2].

4.6.

With regard to the calculation of the conversion fee, the Inspector states that the interested party wrongly assumed in its calculations that there would be a loss of income for the period of one year. The conversion fee calculated by the interested party is lower than the annual profit previously achieved. It is true that the calculation was based on a lower cash flow in perpetuity, but according to the Inspector, different input variables were used for that valuation. In addition, according to the Inspector, the calculation contains a calculation error of €50 million and the cash flows were discounted in a real sense at a discount rate in the nominal sense, which is undisputedly incorrect.

4.7.

In support of his assertions, the Inspector submitted various memos prepared by the Tax Authorities. The memo dated 22 November 2014 states that the Tax and Customs Administration is of the opinion that, with the analysis of functions, risks and assets, it is abundantly clear that the interested party had every reason to file returns in which the residual profit is included in the result of [place 2]. The interested party incorrectly assumes that the activities carried out by GMS up to and including the period [of project X], whether or not as part of [A NV] or [B NV], were not carried out at the expense and risk of [place 2]. The work carried out by GMS was at the expense and risk of the smelters, and therefore also at the expense and risk of [Site 2]. As a result, [Place 2] had all the 'entrepeneurial functions' at its disposal.

In the memo 'valuation aspects [stakeholder] of 15 December 2015' prepared by the Tax Authorities, the Inspector pointed out the costliness of the plant with huge investments and the complexity of the process, which made the activities carried out by the stakeholder unique. He further stated that in its figures, the interested party always assumes the entire group instead of the part of [A AG] that is related to the smelting activities in the Netherlands. In the memo, the inspector stated that the report of [W] does not make a good comparison since it, not visibly, draws together revenue and cost categories.

The inspector also pointed to the report from [Z] submitted by the interested party. According to the inspector, it follows from that report that [Z] is not familiar with existing third-party situations in the sector in which one party operates as a toller, i.e. as a producer of wages, for another party.

4.8.

In view of the facts and circumstances and the substantiation thereof (see also under 2.1. to 2.5.), the Court deems it plausible that the activities involved in purchasing, sales and logistics were gradually transferred by the interested party to other parts of the [group] in the years prior to 2010. The transfer of those activities started with the establishment of the GMS and was later carried out further by the establishment of the CoopA. In the court's opinion, in 2010 the interested party is still primarily engaged in zinc smelting and has taken on a more advisory role with regard to other activities, such as the purchase of raw materials; the final decisions, in which group-wide considerations may also play a role, are all taken in Switzerland. Based on these developments, the court concludes with the interested party that there is predominantly an activity in the Netherlands that bears a strong resemblance to the contract manufacturing business. All risks related to the purchase of the raw materials, the sale of the zinc and the other by-products, including the BLP, the logistics, the staff, the currency risks and the risk of fluctuations in the zinc price were also borne by [A AG] in 2010. On this basis, the Court is of the opinion that an acceptable business fee can be determined for the activities of the interested party within the [group] based on the net cost plus method, or at least that the Inspector has not made sufficiently plausible that application of such a method is not acceptable in this context. There is no difference of opinion between the parties regarding the cost basis of the net cost plus applied by the interested party. Nor has the Inspector put forward any defence against the level of the agreed mark-up of 10%. For the rest, the court has no reason to deviate from the agreed mark-up. This means that the Court finds no grounds for any adjustment of the transfer price determined by the interested party for 2010.

Conversion fee

4.9.

In order to calculate the amount of the conversion fee, the interested party assumed that the CoopA would be terminated. The Inspector argues that when calculating the conversion fee, the waiving of profits and costs inherent in, among other things, the activities of purchase and sale must be taken into account. As judged above under 4.8, this argument has no support in the facts; the interested party gradually transferred these activities in the years before 2010. Since these activities were no longer carried out by the interested party in 2010, there is no reason, contrary to the Inspector's assertion, to take them into account when determining the conversion fee. For the rest, the court found that the conversion fee taken into account by the interested party relates to the termination of the CoopA. During the hearing, the interested party stated that, when negotiating the conversion fee, its room for negotiation was considered as well as the possibilities of requesting a fee that related to a larger period of time than the last year of the CoopA. Thus, both the possibilities of compensation for breach of contract and compensation for future expectations were considered. According to the interested party, it appeared that compensation due to the poor prospects was not an issue; it is true that in the past major investments were made in the [Plant 2] smelter, but these mainly concerned the adjustment of the production process to the environmental standards introduced at the time. For the rest, the smelter in [site 2] is not so different from other smelters that this would justify a higher fee.

The Inspector did contradict this during the hearing, but he did not substantiate this contradiction, at least not sufficiently. Also in this respect, the District Court sees no reason for the correction of the transfer price applied as argued by the Inspector.

4.10.

It follows from the above that the Inspector has not met his burden of proof that no arm's length transfer prices are applied by the interested party. On that basis, the appeal should be declared well-founded. The remaining points of dispute do not need to be addressed.

5 Legal costs

5.1.

Interested party has requested the reimbursement of the actual legal costs. The starting point for the reimbursement of professional legal expenses is that the amount of the reimbursement is calculated taking into account the fixed standards of the Administrative Law (Procedural Costs) Decree (hereinafter, the Decree). Article 2, third paragraph, of the Decree, however, offers the possibility to deviate from the fixed standards in the Decree in special circumstances. There are grounds for awarding procedural costs in deviation from the fixed standards if the inspector is to blame for issuing a decision when it was clear at the time that that decision would not stand up in proceedings brought against it (see Supreme Court 13 April 2007, ECLI:NL:HR:2007:BA2802) or if the administrative authority acted with far-reaching carelessness (see Supreme Court 4 February 2011, ECLI:NL:HR:2011:BP2975).

5.2.

The interested party has claimed that the tax inspector acted carelessly by ignoring the facts proven by her and by basing the assessment solely on his own assumptions. The interested party repeatedly provided the inspector with more information, while the inspector did not do what could be expected of him when substantiating the assessment. The Court considered that the Inspector's defence mainly consisted of asserting a different transfer pricing method against that which was put forward by the Interested Party in the context of the obligations imposed on it by Article 8b(3) of the Vpb Act. However, this does not mean that the Inspector acted in a seriously negligent manner. In this respect, the Court will take into consideration that it appears from the documents in the case that the Inspector also performed a fact-finding investigation and also prepared various calculations and had them prepared. Furthermore, in the District Court's opinion, it cannot be said that the Inspector litigated against his better judgement. In the opinion of the Court, it was not certain in advance that the position of the Inspector was untenable. Therefore, there are no special circumstances involved. The court will therefore award legal costs on the basis of the fixed standards of the Decree.

5.3.

The costs for professional legal assistance provided by a third party have been determined on the basis of the Decree at € 2,967 (1 point for filing the notice of objection with a value per point of € 246, 1 point for filing the notice of appeal, 0.5 point for filing the reply to the appeal, 1 point for appearing at the hearing with a value per point of € 495 and a weighting factor of 2 in view of the gravity of the case).

6 Decision

The court

- declares the appeal to be well-founded;

- quashes the decision on the objection;

- reduces the tax assessment to a taxable profit of € 42,641,089 and a taxable amount of € 32,067,270 and sets the loss carry-over decision at € 10,573,819;

- reduces the tax interest decision accordingly;

- orders the inspector to pay the interested party's legal costs amounting to €2,967;

- orders the inspector to reimburse the interested party for the court fee of €331.

This ruling was given on 19 September 2017 by C.A.F.M. Stassen, chairman,

M.H. van Schaik and R.C.H.M. Lips, Judges, and pronounced in public on the same day in the presence of W.C.C. Koreman-de Bok, Registrar.

Registrar, Chairman,

Copy sent to parties by registered mail on:

This ruling need not be implemented until the ruling has become final. The judgment is irrevocable if no appeal is lodged or no decision is taken on the appeal lodged within six weeks of the judgment being sent (Section 27h(3) and Section 28(7) of the AWR).

Legal remedy

Parties may lodge an appeal against this judgment with the Court of Appeal in 's-Hertogenbosch (Tax Chamber), P.O. Box 70583, 5201 CZ 's-Hertogenbosch, within six weeks of the date of delivery.

The following should be observed when lodging an appeal:

1 - a copy of this ruling should be submitted with the notice of appeal;

2 - the notice of appeal must be signed and must at least state the following

a. the name and address of the appellant

b. a date;

c. a description of the ruling against which the appeal is lodged

d. the grounds for the appeal.

Citizens may lodge an appeal digitally. To do so, use the forms on Rechtspraak.nl / Digital loket bestuursrecht.