Roj: SAN 1128/2018 - ECLI:EN:AN:2018:1128

Id Cendoj: 28079230022018100093

Organ: Audiencia Nacional. Contentious Chamber

Seat: Madrid

Section: 2

Date: 22/02/2018

Appeal No.: 568/2014

Decision No:

Procedure: Procedimiento ordinario

Rapporteur: MANUEL FERNANDEZ-LOMANA GARCIA

Decision type: Judgment

Audiencia Nacional

Chamber for Contentious-Administrative Proceedings SECOND SECTION

Appeal No.: 0000568 / 2014

Type of Appeal: ORDINARY PROCEDURE

General Registry No.: 00569/2014

Applicant: COLGATE PALMOLIVE HOLDING SCPA

Attorney: BLANCA RUEDA QUINTERO

Lawyer: ANTONIO MOLINS

Defendant: CENTRAL ECONOMIC ADMINISTRATIVE COURT

State Attorney

Rapporteur: IImo. Mr: D. MANUEL FERNÁNDEZ LOMANA GARCÍA

S E N T E N C E N C E Nº:

IImo. Mr. President:

MR JESÚS MARÍA CALDERÓN GONZALEZ

Ilmos. Judges:

D. MANUEL FERNÁNDEZ LOMANA GARCÍA Dª. CONCEPCIÓN MÓNICA MONTERO ELENA

D. FERNANDO ROMÁN GARCÍA

Dª. SANDRA MARIA GONZÁLEZ DE LARA MINGO

Madrid, on the twenty-second day of February two thousand and eighteen.

Before the Chamber for Contentious-Administrative Proceedings of the National High Court, an appeal no. 568/2014 has been heard on behalf of COLGATE PALMOLIVE HOLDING SCPA, appearing represented by Attorney Blanca Rueda Quintero and assisted by Counsel Antonio Molins, against the Resolution of the Central Economic-Administrative Court of 9 October 2014 (RG NUM000 and NUM001 ); the Administration being represented and defended by the State Attorney. The amount has been ﬁxed at €12,615,796.78.

FACTUAL BACKGROUND

FIRST.- On 19 December 2014, a contentious-administrative appeal was filed against the Resolution of the TEAC of 9 October 2014 (RG NUM000 and NUM001 ), which dismissed the appeal filed against the fraud by law agreement and the appeal for reconsideration filed against the settlement corresponding to the financial years 2006 and 2007, for the concept of Corporate Income Tax.

SECOND.- After several formalities, a lawsuit was filed on 8 May 2015. The State Attorney's Office filed a response on 12 June 2015.

THIRD - Documentary evidence was admitted and declared relevant. Briefs of conclusions were filed on 2 and 28 July 2015. On 27 June 2016, the appellant company submitted a written statement in which it provided a copy of the STS of 20 May 2016 (Rec. 2945/2014 ) and on 29 June 2016, a copy of the Resolution of the TEAC of 5 July 2016 (RG NUM002 and NUM003 ). This documentation was forwarded to the State Attorney's Office, which filed a written statement of allegations on 8 November 2016. The vote and ruling was scheduled for 8 February 2018.

The Judge-Rapporteur is Mr MANUEL FERNÁNDEZ LOMANA GARCÍA, who expresses the opinion of the Chamber.

GROUNDS OF LAW

FIRST - The impact of the STS 20 May 2016 (Rec. 2945/2014 ) and the Resolution of the TEAC of 5 July 2016 (RG NUM002 and NUM003 ) on the present appeal.

In application of the provisions of Article 277.2 of the LEC, it is appropriate to take into account the ruling of the STS of 20 May 2016 (Rec. 2945/2014 ) and the Resolution of the TEAC of 5 July 2016 (RG NUM002 and NUM003) because, although they are documents submitted after the closing arguments, they are documents notified to the appellant after the closing arguments and are undoubtedly relevant to the resolution of the dispute. The Abogacía del Estado does not object to those documents being assessed by the Board, stating, however, that the regularisation was not only due to the existence of fraud by law.

In fact, the contested decision contains two grounds on which the disputed adjustment is based. Thus, pp. 62 to 67 analyse the 'adjustment arising from the fraudulent evasion proceedings brought against the parent company of the ﬁscal group'. This adjustment results in the refusal of the Administration to allow the deductibility of the following items: "financial expenses" and "amortisation of goodwill" in the financial years 2006 and 2007. Pages 37 to 62 analyse the second reason for adjustment: "valuation of the transactions between the related entities CP Europe and the controlled company CP España".

The first ground for adjustment, therefore, is based on the existence of fraud by law and concerned the deductibility of financial expenses and the amortisation of goodwill. This fraudulent operation gave rise to the adjustment corresponding to 2002, 2003, 2004 and 2005 -which is the one judged by the SC-; the adjustment corresponding to the financial years 2006 and 2007 -which we are judging in this ruling- and the adjustment corresponding to the financial years 2008, 2009, 2010 and 2011 -which has been judged by the TEAC in the Resolution provided-.

However, the STS 20 May 2016 (Rec. 2945/2014 ) upheld the entity's appeal and annulled the ruling of this Chamber, understanding that there was no fraud by law, since - according to the Court's criteria - the Administration did not prove that the determining reasons for the transaction were solely ﬁscal. The TEAC, as soon as it became aware of the STS, issued the Resolution of 5 July 2016 (RG NUM002 and NUM003 ) annulling the settlements corresponding to the financial years 2008, 2009, 2010 and 2011, which were based solely on the existence of fraud by law and affected both the deductibility of the ﬁnancial expenses and the deductibility of the amortisation of the goodwill.

Logically, our ruling must do the same, as the ground on which the regularisation was based - the existence of fraudulent evasion of law - has been declared unlawful by the Supreme Court.

This means that it is not necessary to analyse the various arguments set out on pp. 8 to 46 of the application. Certainly, the appellant articulates several grounds to support the illegality of the adjustment based on fraud but, in view of the STS and the subsequent Resolution of the TEAC, it is not necessary to dwell on them, as the adjustment made in the Agreement on the basis of the oft-repeated ground must be annulled.

In summary, the first ground for adjustment is annulled as being contrary to law, all with reference to the reasoning of the STS 20 May 2016 (Rec. 2945/2014 ) and the Resolution of the TEAC of 5 July 2016 (RG NUM002 and NUM003 ), the content of which is known to the parties.

SECOND - On the

The reasoning in the previous Ground implies that our analysis must focus on the second reason for the regularisation. That is: on the "valuation of the transactions between the related entities CP Europe and the controlled company CP España".

It is appropriate to begin by describing the regularisation carried out in general terms, and then to go down to the grounds on which it is based.

The entity COLGATE PALMOLIVE COMPANY (CP COMPANY or CP USA) is a US-based multinational group engaged in the manufacture and marketing of non-durable consumer products relating to oral hygiene; personal hygiene; home care (cleaning products) and pet nutrition.

The group is present in more than 200 countries and started its activities in Spain in 1954. This is the year in which its subsidiaries in Spain COLGATE PALMOLIVE SA (CP SPAIN) was incorporated. In addition, in the periods under review, the group operates in Spain through the company COLGATE PALMOLIVE HOLDING SA (CP HOLDING ESPAÑA), which is essentially a holding company for the shares of CP ESPAÑA, as well as for the shares of the group's subsidiaries in Portugal and Greece. CP HOLDING ESPAÑA is in turn 76.76 % owned by NORWOOD INTERNATIONAL INC, based in the USA, which in turn is wholly owned by CP COMPANY, and the remaining 23.24 % by COLGATE PALMOLIVE NETHERLANADS VB, a company resident in the Netherlands, which is wholly owned by CP COMPANY.

With effect from January 2005, the group carried out a restructuring of its business model, its operations and its transfer pricing policy in Europe which, as the Inspectorate reasons, "determined a signiﬁcant restructuring of beneﬁts between the group's entities resident in different jurisdictions" and which "very signiﬁcantly" affected CP SPAIN. Thus, it is indicated that "the gross operating margins of the Spanish marketing entity have fallen from around 65% of sales, where they were previously, to values closer to 42%. Likewise, net margins have fallen from around 16% before the restructuring, to values close to 3.5%".

The restructuring carried out in 2005, which is set out in the Transfer Pricing MasterFile Documentation Report (hereinafter MasterFile), is as follows: It is decided to set up a group entity, COLGATE PALMOLIVE EUROPE SARL (CP EUROPE), resident in Switzerland, as " principal entrepreneur" for the operations in Europe, which " organises production "upstream" in the supply chain and supervises "downstream" marketing operations".

As a consequence, entities characterised as 'marketers' (such as CP SPAIN would be) will no longer purchase directly from the group's product manufacturing entities or third parties (manufacturing entities) the goods sold in each country as they had been doing. From 2005 onwards, although these products are physically and directly shipped to Spain from the factories, from a 'legal and formal' point of view, it is CP EUROPE which invoices them to the Spanish marketing entity. As regards the transfer pricing policy, prior to 2005 the Spanish marketing entity remunerated the manufacturing entities using a cost plus method (i.e. the price of each product was determined on the basis of its manufacturing costs, to which a margin of 5% of the manufacturing costs was added as the manufacturer's profit) and retained the residual profit. From that date onwards, the Spanish marketing entity is remunerated using the method of the net margin on its sales (target of 2.5% of sales) and it is the Swiss entity that obtains the residual beneﬁt.

Along with the above modification, the marketing entities that had been paying royalties - at the rate of 5% of sales in the case of CP SPAIN - for the use of intangible assets (trademarks, trade names, know-how, etc.) to the parent entity of the group owning such assets (CP COMPANY), interrupt this stream of payments in favour of the US non-resident entity. Instead, under the new restructuring, it will be the Swiss entity, CP EUROPE, which from 2005 onwards will be responsible for remunerating the owner of the intellectual property, CP COMPANY, applying, as far as the Spanish territory is concerned, a royalty of 4.3%.

Finally, it should be pointed out that prior to 2005, the group had been operating through an entity resident in France, also called COLGATE PALMOLIVE EUROPE, which performed the functions of "headquarter" and which, at least since 1999, provided the manufacturing and marketing entities with a wide range of management and coordination services in the fields of supply chain, finance, accounting, administration, marketing, etc. This company was remunerated on a cost plus system at 6% - IT, treasury and innovation centre services from other entities were collected in the Headquarter and their cost was distributed to the operating entities without charging any margin.

In summary, in the pre-2005 model, the transfer pricing policy can be summarised as follows:

-Royalty from CP COMPANY: Royalty collection at 5% of sales.

-Manufacturers' remuneration: Cost increased to 5%.

-Remuneration to the French Headquarter: Cost increased to 6%.

-Remuneration of CP Spain: Residual result.

In the post-2005 model, the transfer pricing policy was therefore summarised as follows:

-Retribution of CP COMPANY: Royalty collection at 4.3% of sales.

-Manufacturers' remuneration: Cost increased to 5%.

-Remuneration of CP SPAIN: Target net margin on sales at 2.5%. Intra-group services: Cost increased to 6%.

-Remuneration of CP EUROPE: Residual profit.

Well, the thesis of the Administration is that "in order to value the transactions between CP EUROPE and CP SPAIN", "the net method should not be applied" "taking CP SPAIN as the tested party".

The administration argues that 'such a method.... is inappropriate in view of the characterisation of CP EUROPE as an entity that performs the functions of a service provider, which does not possess any intangible assets - not even valuable tangible assets - and which does not prove that it has actually assumed any of the risks of the multinational group's business in Spain, beyond those which, even if contractually attributed, it is practically impossible for it to bear. In accordance with the foregoing, it is considered that the appropriate method for valuing the transactions between CP EUROPE and CP SPAIN is the cost plus method, a traditional method which is based on attributing to the provider of those services -CP EUROPE- a gross margin on the costs it incurs which are attributable to the Spanish market".

"In the present case, and after the functional analysis carried out, it is considered that it is the Swiss entity CP EUROPE, which should be considered as the tested party, since: It is a newly created entity which does not possess intangible assets of any kind (unlike CP SPAIN, which, in addition to being the owner of the Proﬁden and Cristasol brands, must be recognised, at least, the intangible of the knowledge and development of the Spanish market in which it has been operating for more than 50 years during which, continuously, it has borne at its own expense and under its responsibility and management, significant advertising budgets) as the ownership of all the other intangibles belongs to CP USA. Nor does it even own any valuable tangible assets. It essentially acts as a service provider, mainly through other legal entities of the group, employing a small number of people, fewer than CP SPAIN itself, which is only one of the many European marketers. It has not been established that it actually bears any of the risks of the business in Spain, since, apart from services, and as regards its tasks relating to the acquisition of products, what it acquires from the manufacturing entities are those which are requested by the marketing entities, on the basis of the sales expectations made by the latter, which, moreover, carry out all the essential tasks relating to the management of the inventory. And, consequently, it is inappropriate to attribute to CP EUROPE the residual beneﬁt derived from the group's operations in Spain. On the contrary, that residual beneﬁt, once the remuneration of the owner of the intangible asset - CP USA - and of the service provider - CP EUROPE - has been reduced, must be attributed to Spain".

It is clear from the above description that, according to the applicant company, following the restructuring, CP SPAIN has changed from being a 'fully fledged distributor” (it was essentially responsible for all areas of the distribution process) to being a 'limited risk distributor' (it only performs certain functions). He became a principal entrepreneur CP EUROPE. Hence the reallocation of prices and the consideration of CP SPAIN as a tested party.

The Administration, on the contrary, argues, after a thorough examination of the functions, assets and risks before and after the application of the model contained in the MasterFile document, that CP EUROPE cannot be qualified as a "principal entrepreneur", being in fact Head Quarter. This implies that the tested party must be CP EUROPE and the applicable method must be the cost plus method. Therefore, it does not consider the valuation method used by the group to be appropriate and applies another one, which implies a reallocation of beneﬁts. In short, what, in our case, the Administration is doing is questioning the value given by the parties to the transaction and, it should be specified, in view of the circumstances accredited in the financial years 2006 and 2007; based on the operating reality of the group as it has been verified.

THIRD.- Logically, when the Administration questions the transfer prices, it must set out the arguments on the basis of which it reaches the conclusion that the method used by the claimant company is not the appropriate one.

However, before analysing the specific arguments put forward by the administration, the Board must reply to two pleas in law raised in the application in general. The applicant sets out its opposition to the contested measure on pp. 46 to 99 of the application. On pp. 59 to 66 it submits that the contested measures infringed the principle of legitimate expectations. On pp. 66 to 72 it alleges inconsistency on the part of the Spanish administration in relation to the administrations of other countries.

Starting with the first, i.e. the infringement of the principle of legitimate expectations, it is argued that when the Administration inspected the financial years 2002 to 2005 it did not question the new restructuring of the company, which, as we have described, is said to have been operational since 2005. It is reasoned that if the administration did not question the model in that year, it cannot question it afterwards, as this would go against its own acts and would harm the principle of legitimate expectations.

It is true that the administration was aware of the new restructuring and of the document called Master.File, among others. But it is also true that the administration reasoned in the Settlement Agreement for the years in question that 'these agreements or contracts relate to a set of relationships between related parties intended to produce economic effects in the future. These relationships must be assessed and qualified speciﬁcally in the years in which these economic effects occur, in view of their content and tax significance and in accordance with the provisions of the rules governing transactions between related companies". The TEAC, for its part, replies to the appellant's arguments on pp. 8 to 13, reasoning that what is being questioned is the valuation of the transactions "carried out in years subject to verification which are not time-barred". insisting that, irrespective of the content of the contracts submitted at the time, "the operations and transactions carried out in the years under review are subject to analysis and valuation, determining whether or not they were carried out at market value".

The Abogacía del Estado, for its part, on p. 26 to 28, maintains that there can be no harm to legitimate expectations, since "there is no record that the Administration has made any pronouncement validating said plan, and even less is there a record of verification and conformity of the 2005 financial year from which it appears that, in fact, the Administration examined the operations carried out and adjusted to said new plan, indicating that they were correct".

The STS of 28 February 2017 (Rec. 614/2016 ) analyses the scope of the principle of legitimate expectations, reasoning: "The principle of protection of legitimate expectations, related to the more traditional principles, in our legal system, of legal certainty and good faith in relations between the Administration and individuals, entails, according to the doctrine of the Court of Justice of the European Union and the case law of this Chamber, that the public authority may not adopt measures that are contrary to the expectations induced by the reasonable stability of its decisions, and on the basis of which individuals have adopted certain decisions. Or, in other words, the virtuality of the principle invoked may entail the annulment of an act of the Administration or the recognition of the obligation of the latter to respond to the alteration (produced without prior knowledge, without sufficient transitional measures to enable the subjects to adapt their conduct and proportionate to the public interest at stake, and without the due corrective or compensatory measures) of the usual and stable circumstances, generating well-founded hopes of maintenance (Cfr. SSTS of 10 May, 13 and 24 July 1999 and 4 June 2001). But this is on the understanding that the necessary assumptions for the application of the principle invoked cannot be assessed in the mere expectation of an invariability of the circumstances, and that neither the principle of legal certainty nor that of legitimate expectation guarantee that situations of economic advantage that entail an enrichment that is considered unjust must remain irreversible".

The aforementioned judgment also states, in relation to the principle that no one can come against his own acts that: "like any subject of law, the Administration may be obliged to observe in the future the conduct which it has followed in previous, unequivocal and definitive acts, creating, deﬁning, establishing, establishing, ﬁving, modiﬁcating or extinguishing a certain legal relationship. These acts may be express, by means of which the will is explicitly manifested, presumed, when the ﬁction of silence operates in the cases provided for by the legislator, or tacit, in which the declaration of will is implicit in the administrative action in question". However, such a link requires that the will externalised in the previous acts appears to be 'unequivocal and definitive'.

In the present case, as we have described, in the Settlement Agreement corresponding to the financial years 2002 to 2005, the Administration expressly indicated that the agreements or contracts which give rise to the issues now under consideration would be assessed and qualified "specifically in the financial years in which those economic effects occur, in view of their content and tax significance and in accordance with the provisions of the rules governing transactions between related companies". There can therefore be no question of legitimate expectation, since there are no unequivocal or deﬁnitive acts from which the Administration's intention to the extent claimed by the applicant can be inferred. Nor, of course, has any expectation been generated in the appellant company, since it was expressly indicated to it that the administration reserved the exercise of its power to examine the transactions for future years. As the Abogacía del Estado points out on p. 27, taking up the appellant's statements, 'the change from the previous business plan had to be made gradually over time, over several years'. This justifies the Administration's conclusion that the specific financial years must be analysed and that, for the purposes of the principle of legitimate expectations, neither the previous nor the subsequent financial years are decisive, especially when there is no evidence of an absolute identity of situations.

On the other hand, as we have said, on pp. 66 et seq. the applicant maintains that the Spanish administration's conduct is inconsistent with that of other European administrations which have accepted the restructuring and the recalculation of transfer prices.

On p. 13 of the Agreement states that "as the taxpayer was informed during the procedure, in application of the provisions of Article 8b of Council Directive 77/799/EEC on mutual assistance between the competent authorities of the Member States of the EU, as amended by Council Directive 2004/56/EC of 21 April 2004, the Spanish tax administration participated, together with the tax administrations of other Member States, in a simultaneous control that affected various entities of the group, with a view to exchanging the information obtained in the proceedings carried out. This has made it possible to share information on various aspects of the group's pricing policy and its application, which is not always homogeneous, in subsidiaries in various European countries. On this basis, the Agreement responded to the company's arguments by reasoning that "it must be borne in mind that the purpose of the simultaneous controls provided for in Council Directive 77/799/EEC on mutual assistance between the competent authorities of the Member States of the EU is to exchange information obtained in the actions carried out by each administration. This legislation does not foresee that the Tax Authorities exchanging such information must reach a common solution or result. The conclusions reached by each administration, maintaining or modiﬁcating the transfer prices set in each country, do not bind the action of a different tax administration". Furthermore, the Agreement indicates that neither Belgium nor the Netherlands participated in the simultaneous control, which means that "these Administrations will have reached the conclusions they have deemed appropriate on the case within their sphere of competence but, in any case, without having had access to the information exchanged in the simultaneous control". Lastly, it points out that the applicant company omits all information on the States in which the model is most similar to the Spanish model - France and Austria - which, incidentally, the applicant company does not even mention in the complaint. The TEAC adds on pp. 58 and 59 that "the circumstances that may arise in the subsidiaries of each of the administrations involved are different and prevent the conclusions from being transferred from one to the other".

It is true that, in accordance with Directive 77/799/EEC - applicable to the case - "the ﬁscal authorities of the Member State of taxation have the power to request from the authorities of another Member State any information necessary for the correct assessment of the tax of a taxpayer" - CJEU of 9 October 2014 (C-326/12). However, the Directive does not require the criterion of one administration to take precedence over that of another, regardless of the fact that the greatest possible homogeneity is desirable.

For this reason, the Chamber, agreeing with the TEAC, considers that the circumstances existing in each case should be taken into account. In fact, the proceedings to which the appellant refers, carried out in different EU countries, produce different results, which is a consequence of the concurrent and proven circumstances in each country. Thus, the application itself states that the Netherlands, Belgium, the United Kingdom and Italy, on analysing the situation existing in their countries, concluded that the applicant company's operations were valid. Portugal, however, adopted a different solution, requiring the submission of a supplementary declaration with a compensation. On p. 71, the appellant itself admits that the administration adopted a different solution from that agreed in the countries referred to above, opting for the Portuguese solution. But by reasoning in this way, it is implicitly acknowledging that the solution will depend on the circumstances of the case. As the TEAC maintains, the circumstances in each country must be taken into account, as the circumstances existing in the subsidiaries may be different. In fact, there is no evidence in the file from which we can infer that the factual circumstances of these are identical in all cases. And, on the other hand, as indicated in the Agreement, "the group's pricing policy and its application has not always [been] homogeneous in the subsidiaries of various European countries". The uniqueness of the Spanish case is also highlighted on pages 21 to 25 of the non-conformity report and, finally, it is significant that the appellant omits any reference to France and Austria, limiting itself to highlighting the countries in which the result obtained has been favourable to a greater or lesser extent.

FOURTH - Having rejected the above arguments, what we must now analyse is whether or not the arguments put forward by the administration to reject, in the years under discussion, the application of the transactional net margin method are correct and sufficient. The Board, for reasons of clarity, has chosen to make a presentation in which, simultaneously, the reasons given by the Administration and the arguments given by the appellant are described, setting out, at the same time, our opinion.

For this purpose, in addition to the Settlement Agreement, we must take into account, as the Agreement itself does, the non-conformity report on pp. 5 to 90, where the Administration's reasons are set out and justified.

A.- We have already described in the Second Ground of Law the change in the group's operations derived from its restructuring. However, we recall that until 2004, the contracts on the basis of which the structuring of the group was articulated were basically made up of:

- "Licensing contract linking CP Spain with CP Company: assignment by the group's US parent company of elements of intellectual property (brands, parts, designs, know-how, etc.) in exchange for payment of a royalty of 5% of net sales in Spain.

Intra-group service contract which the French Headquarter provided to the Spanish entities of the group and which, although it was signed by the parent company of the Spanish group - CP Holding, SA - due to its object and content, the services provided essentially concerned the marketing entity. In turn, since 1998 and in force after the restructuring, there has been a service contract between the two Spanish companies, CP Holding and CP España, which provides for the provision by the former of certain services (mainly strategic and policy advice) to the latter.

-Although there is no record of any contractual reference to this, the acquisition of all the products sold in Spain to the group's manufacturing entities was carried out using the manufacturing cost plus 5% as the valuation method.

As of 1 January 2005, the contracts are:

- "Distribution contract: links CP Spain with the new entity CP Europe, the Spanish entity is maintained as the distributor of the products sold under the group's global brands in Spain, although the Swiss entity is now deﬁned as the "principal employer".

-Service contract: linking these same entities, with the Spanish company CP Spain now providing a series of administrative, accounting, logistical and financial services to the Swiss company.

-A contract called subrogation of licence and related matters, signed by the parent entity of the group, CP Company, the Swiss entity, CP Europe, and the Spanish marketing company, CP España. This peculiar contract, which has no parallel in the other European distributors, establishes a compensation or indemnity in favour of the Spanish marketing entity, which CP Europe undertakes to pay".

B.- The justification for the restructuring, given by the applicant company, is the 'change from an essentially decentralised model in which each manufacturing or marketing subsidiary of the group essentially ran "its own business", to one in which a series of strategic functions have been centralised in terms of logistics and supply, manufacture and marketing (an idea expressed under the name One Colgate Europe)'.

This results in a new 'realised attribution of functions and risks' which 'is used as a basis for characterising the entities of the group for the purpose of ﬁxing transfer pricing policy'. Specifically:

- "CP Company is characterised as the parent shareholder and licensor of the group's intellectual property. It oversees and participates in most functions and processes, essentially strategic ones.

The manufacturing entities are characterised as limited-risk manufacturing entities.

-Marketing entities, such as CP España, SA, are characterised as distributors, also with limited risk.

Service providers (e.g. Irish technology and financial co-ordination centres or product category centres) are characterised as non-risk support entities.

- The new Swiss entity, CP Europe, is characterised as the "Entrepreneurial principal for operations in Europe relating to global branded products".

As indicated in the Agreement -p.12-, 'on the basis of this classification, the group starts by assigning a remuneration that it considers "market" to the marketing entities (also to the manufacturers and support entities, although none of these are located in Spain) and attributes the residual beneﬁt "logically also market" (page 77 of the MasterFile) to CP Europe (called CPCH in the MasterFile)'.

A further clarification is also indicated: although when describing and selecting the method adopted to value the transactions between CP EUROPA and CP SPAIN, the 'method adopted is referred to as the resale price method, in reality the net margin method is used, since as the document itself acknowledges (page 92, for example) the magnitude determined in the comparables is not the gross margin - which would correspond to the resale price - but the operating margin or net margin, i.e. after deducting the general and operating sales expenses'.

In sum, it is concluded that, according to the abovementioned MasterFile document, 'the transfer pricing policy which complies with the arm's length principle is that which:

-Guarantees a target (net) operating margin of 2.5% of the sales of the marketing entity, for the products sold under global brands that CP Spain acquires from CP Europe. The remainder of the beneﬁt, the residual, is attributed to CP Europe.

- For products sold under local brands (only Proﬁden in the Spanish case) the above pricing policy is essentially followed and CP Europe is characterised as a contract manufacturer which is remunerated with a cost-plus of 6 %, with the residual beneﬁt remaining with CP Spain".

C) The functional and risk analysis carried out by the Inspectorate is set out on pp. 25 to 74 of the non-conformity report. Without prejudice to reproducing its contents, we would like to highlight the following points:

1.- The report begins by indicating that, beyond the reassignment of functions proposed in the MasterFile, the inspection has tried to "analyse and specify which functions have been effectively transferred from CP Spain or other entities to CP Europe and the way in which the latter entity has effectively assumed them. It has also sought to examine which risks have been transferred to CP Europe and what their economic significance is".

In the Board's view, this information is relevant. It is a question of knowing the reality of what happened in the years under review, verifying the actual implementation of the restructuring as documented. As highlighted in the MasterFile itself, 'since the transfer pricing system designed is based on a planned reallocation of functions and risks from several group entities to the Swiss entity CP Europe "to the extent that this entity does not manage to assume those functions and risks, the precision of the analysis diminishes that reallocation of functions is essential for the characterisation of the group entities and, therefore, has an impact on the market remuneration of each of them'. It is not sufficient to design a new restructuring, but its actual implementation must be examined.

The reasoning of the TEAC - p. 22 - is thus understood, according to which, the core of the debate focuses on the fact that, after examining the functions, analysis and risks, "CP Europe cannot be considered as a principal entrepreneur but as an entity that carries out the functions of a service provider, which does not prove that it has actually assumed any of the risks of the multinational group's business in Spain and that it does not possess any intangible assets".

2.- Assets, functions and risks of CP SPAIN.

2.1.- Assets.

It is stated that CP SPAIN "did not transfer any tangible or intangible assets other than the inventories of the entity at 31/12/2004 (diligence 8)".

The Inspectorate acknowledges that the tangible assets consisting of the inventories were transferred, without prejudice to clarifying, as we shall see in more detail later, that "although CP España legally disassociated itself from its ownership since 2005, in the years under review it continued to carry out the fundamental management activities of the same".

With regard to intangibles, it makes two clarifications: On the one hand, it indicates in clause 16.3 of the distribution contract in force as of 2005, that " in the event of termination, the goodwill in the distribution business, the customer lists, customer relationships and any registrations, authorisations or licences are transferred to CP Europe in exchange for reasonable remuneration". The Inspectorate indicates that if the 'possible transfer of these elements to CP Europe' is foreseen, this can only be because they are not held by CP Europe, but by CP SPAIN. On the other hand, in relation to intangible assets (trademarks, patents, trade names, etc.), it is true that according to the new model CP SPAIN does not pay royalties to CP COMPANY, being CP EUROPE who pays them, "who uses them in our country is the seller CP SPAIN"; but, despite this, "CP Europe does not sublicense the intellectual property acquired from CP Company, so the right to use that intellectual property is being paid by CP Spain since 2005 in the price of the products acquired".

The Inspectorate concludes that after the restructuring and in the years under discussion, 'all the assets, both tangible [with the qualification indicated] and intangible, which it used before the restructuring, continue to be used after the restructuring' by CP Spain.

The appellant, at pp. 74 et seq. argues, in relation to tangible assets, that the comparison made by the Inspectorate, taking into account the period 2004 to 2007, should be broader - it proposes the period 1989 to 2007 - because if that had been done, it would be clear that there was a constant decrease in tangible assets; and, in relation to the arguments relating to intangible assets, it merely states that it 'does not understand' them, but without offering any further explanation.

In the Board's view, the Inspectorate's finding must be understood as a whole. It is not that, as the appellant states - p. 74 et seq. of its application - the Inspectorate does not take into account that the implementation of the model is gradual. What the Inspectorate is saying is that, having examined what happened in the financial years 2005 to 2007, it is recorded that no assets were transferred "other than the inventories of the entity existing at 31/12/2004" and, with regard to these assets, the entity CP SPAIN "continues to carry out the fundamental activities for the management of the same". In any case, as the TEAC reasons on p. 44, contrary to the reasoning of the company, the period used by the Inspectorate to verify the comparison of tangible assets - before and after the restructuring - is reasonable. The appellant claims that the comparison should be made over a longer period, but the period of comparison "is closer to the change of model (between 2001 to 2004 and 2005 to 2007) and with sufficient perspective and we understand that it should have some effect on the assets, functions and risks, because if it remains the same, the purpose of the restructuring cannot be understood".

The TEAC, on pp. 27 and 28, adds, in relation to intangible assets, that "this conclusion that little or nothing has changed in this neuralgic point" is supported "by the statements that the Company itself makes in the "Form 10-K Annual report Pursuant to section 13 or 15 (d) of THE SECURITIES EXCHANGE ACT FOR THE FISCAL YEAR ENDING DECEMBER, 31, 2008". And in relation to the inventoried assets, it adds that, in addition to the fact that there was no change in the effective management, they were "subsequently repurchased by CP España from the Swiss entity, at a higher price than the price at which they were sold".

2.2.- Functions.

The Inspectorate repeatedly asked the company about the changes that had taken place in relation to the existing staff and departments in the company. This, in our opinion, is logical, since if the functions that had been carried out by CP SPAIN are altered, such a change must be reflected in its organisational structure. As indicated on p. 28 of the report, the company avoided answering these questions. The Inspectorate insists that it is aware that these changes are gradual, but this statement could be contradicted by the appellant's own position, which applies the transfer pricing change as from 1 January 2005, considering the restructuring as completed and finalised as from that date.

However, and in contrast to the company's denial, the Inspectorate - p. 29 - notes that, despite the reduction in functions implied by the restructuring, the workforce has increased in 2006 and 2007. Specifically, in 2004 and 2005, the workforce remained stable at 68 workers and in 2006 and 2007 it increased to 72 and 78 respectively. A further comparison, for the period 2000 to 2007, shows that the measured stability of the workforce has been maintained. However, if the examination is carried out by dividing the staff by department, it is also observed that, despite the restructuring, the average stability of the staff by department is maintained - p. 29-. The Inspectorate describes the functions carried out by each department and highlights the lack of collaboration of the appellant entity, to conclude on p. 32 that "not having identified the staff's lack of cooperation, the Inspectorate has not been able to identify the reasons for the increase in the number of staff in each department". 32 that "the entity has not identified the modiﬁcations in persons or departments, nor the processes and functions of CP España that change before and after the restructuring, the fact is that in view of those carried out since 2005 it is not easy to guess what additional functions a distributor could perform in this market and which would have been left unperformed...".

In the Board's opinion, the lack of alteration of the workforce is not on its own a decisive fact but, in conjunction with others, it is. The fact is that, as the Agreement states, that lack of alteration is accompanied by the non-existence of differences between 'the functions performed by the Spanish entity before and after the restructuring of the group'.

Against this argument, p. 88 of the application states that the restructuring does not necessarily entail the dismissal of part of the staff, which, we insist, is true; but the institution should have been in a position to explain how the staff had been reorganised in accordance with the new restructuring, which it has not done. Since this change is not justified, and there is no evidence of any alteration in the functions and departments of the company, it is reasonable to conclude that the restructuring, at least in the years inspected, did not really entail any change.

It will become clear in the course of the explanation that, in fact, there was no signiﬁcant change in the functions performed. In any case, as the TEAC reasons, after describing on p. 29 and 30 the functions performed by CP SPAIN, it should be stressed that "the entity has not wished and/or been able to justify whether CP Spain performed other functions prior to the restructuring, which it has ceased to do since the restructuring" - p. 30-. 30-.

2.3- Risks.

As indicated in the report, the MasterFile identifies 14 types of risks and attributes them essentially to CP EUROPE.

The Inspectorate stresses that an attempt was made to have the Spanish entity itself "identify the main items of expenditure or costs associated with the risks transferred in 2005, which would have been borne in previous years. However, once again, CP Spain avoided answering this question (see question 21 in diligence 19 and its reply)". An attempt was also made to obtain information regarding CP EUROPE, requesting the identiﬁcation of the costs incurred in 2006 and 2007, but "as can be seen in the answer to question 22 diligence 19, no answer could be obtained from that perspective either". However, after examining the available information, the Inspectorate concludes that "no expenses or costs have been identified in those years [2006 and 2007] that correspond to the indicated risks" and, moreover, the company acknowledges that the risks related to "market, distribution channel damages, adverse regulatory measures, environmental risk, product quality defects and warranty, have not generated any adverse economic effect in 2006 and 2007" - p. 33 of the non-conformity report-.

In the complaint, the company, in order to rebut the Inspectorate, sets out the consequences of a hypothetical scenario which, if it were to occur, would involve risk-taking by CP EUROPE - a scenario in which market conditions would lead to a price reduction of 10% or a decrease in sales volume of 20%. The Inspectorate does not deny this possibility, what it argues is that, on the basis of the existing data, the actual assumption of such risks is practically impossible, indeed it has not occurred. In other words, what the Inspectorate maintains is that a system has been designed in which, de facto and given the existing experience, the risks are not assumed by CP EUROPE. The Board considers that the Inspectorate's conclusion is correct.

2.3.1. Credit risk.

This risk relates to the possibility that credits granted to customers may be uncollectible. The MasterFile states that 'out of what can be considered a total of 10 points, 8 are attributed to CP Europe and 2 to CP Spain'. In other words, the bulk of the risk is attributed to CP EUROPE.

The Inspectorate analyses this risk in detail on pp. 33 to 35 of the report. It stresses that this risk will be borne by "CP Spain up to a maximum of 1% of the net sales of the previous year". The above would imply that the credit risk would have been transferred to CP EUROPE from €1.13 million unpaid in 2006 and €1.28 million unpaid in 2007. However, the amounts unpaid in 2006 were €36,796 and €16,617 in 2007. The Inspectorate points out that this trend of low unpaid amounts has been constant for a long time - starting in 2001.

On the other hand, it points out that, according to the MasterFile, CP EUROPE establishes the customer qualiﬁcation guidelines to be followed by subsidiaries. The inspection requested that the guidelines be provided and the only thing it could obtain in this respect is a statement indicating that 'these guidelines are to assess the risk of customers based mainly on the knowledge and historical experience of each of the customers and the effective compliance with payment deadlines and who does this is the Customer Service Department of CP Spain, which is the one with knowledge and experience'.

It therefore concludes that 'it is... difficult to interpret how the credit risk can be attributed mainly to CP Europe, which does not carry out any credit risk management action - not even at the elementary level of having established general guidelines - and which would only assume the corresponding cost from a threshold of defaults which, by far, has not occurred historically and which is highly improbable, as shown by the data for 2006 and 2007'.

In short, as stated in the Settlement Agreement - p. 52 - 'CP Europe's shareholding in CP Europe is not at all historical and is highly unlikely, as shown by the data for 2006 and 2007'. 52 - 'CP Europe's involvement in credit risk management is limited to instructing CP Spain to assess the risk based on its knowledge and historical experience of those customers'.

Again in the complaint, it is insisted that there could be scenarios in which CP Europe could assume such risks. The Inspectorate, we insist, does not deny this possibility, what it says is that based on the existing data and experience, de facto, such a possibility is practically impossible or very remote. As the TEAC reasons -p. 37- "the Inspectorate does not intend to claim that [the risk] does not exist. Naturally, the risk of bankruptcy always exists, but what is assessed here, in the terms contemplated by the OECD Guidelines (section 9.4.1), already mentioned), is the significance of the risk from an economic point of view, which will depend on its volume and the foreseeability of its materialisation". In the Board's opinion, the data provided by the administration on this point are reasonable and have not been contested by the appellant.

2.3.2. Exchange rate risk.

This risk, which refers to the possibility of incurring losses as a result of exchange rate differences in the sale and purchase of products, is attributed in the MasterFile to CP EUROPE. It is discussed on pp. 35 and 26 of the non-conformity report.

However, as stated on p. 52 of the Settlement Agreement, "its importance in previous years (2001 to 2004).... Exchange differences generally generated beneﬁts in CP Spain and in 2001 alone a net loss of just over EUR 11 000 was generated, offset by net beneﬁts of over EUR 368 000 in the following three years. When the entity was asked about the magnitude of the possible losses caused for this reason to CP Europe from 2005 onwards (question number 16 of diligence 19), it did not reply, only now raising through the statement of allegations a hypothetical scenario in the event of a possible 20% devaluation of the currency".

Thus, the report states that 'if one looks only at the past [the entity did not provide data] this risk factor, far from exposing it to losses, was a generator of beneﬁts for CP España and, in any case, its quantitative importance is very small. Perhaps because this risk was not considered very high is what explains why CP España did not then have exchange rate risk hedging instruments, which are very common in the market when there is a signiﬁcant exposure to this factor'.

Again in the complaint, the possibility is raised of a hypothetical scenario in which the risk would impact on CP EUROPE. Therefore, the TEAC replies that "the reasoning of the interested party is no more than a reiteration of the statement of the attribution of the risk to CP Europe in the master ﬁle, but does not refute the conclusions of the Inspectorate regarding the low incidence of the risk, the example of the potential scenario being so exceptional that it disqualifies it from assessing the probability of the risk". The Board shares the Administration's view.

2.3.2. Inventory risk.

This refers to the possibility of incurring losses as a result of holding product inventory. In the MasterFile this risk is attributed to CP EUROPE. It is discussed on pp. 36-38 of the report. There, it is stated that the costs incurred are "rather modest", on average for the financial years 2001 and 2002. The average for the years 2001 to 2004 is not more than 60.000 €.

But what the Inspectorate emphasises is the management and control of the inventory, which, logically, should have been fully assumed by CP EUROPE. However, from the actions carried out by the Inspectorate it appears that "the management and control of the inventory was carried out in 2006 and 2007 by CP Spain staff and the logistics operator (in terms of the physical count), without any intervention of any person from CP Europe in this activity".

For all these reasons, it is concluded that 'we find ourselves here once again with a risk of very limited economic importance and for which no intervention in its management by CP Europe is accredited'.

As stated in the Settlement Agreement - p. 53 - 'the person with whom CP Europe has a relationship of trust and confidence in the company's management has been established'. 53, 'the person contacted by the logistics operator for the purposes of this inventory control and differences is Mr Anibal, an analyst in the CP Spain Finance Department, without any contact having been established in this regard with any employee of the Swiss entity'. The Board considers that the evidence provided by the administration and not contested by the appellant is clear.

2.3.4.- Risk of launching new products.

This refers to the costs incurred in the research and development and market launch of new products. In the MasterFile it is mainly attributed to CP EUROPE. It is discussed on pp. 38-40 of the report.

The Inspectorate notes that the MasterFile itself indicates that 'the group's R&D is centralised in the North American parent company, CP USA, recognising only modest efforts in Europe'.

That said, the report indicates that what is inconsistent is "locating the risk of R&D activity in CP Europe", when the group itself locates "the main R&D functions in CP USA, ...with the beneﬁts derived from this activity also being located there (CP USA is the sole owner of the R&D effort and receives the remuneration for the intangibles)...".

As stated in the Agreement - p. 53 - 'the only costs associated with this risk that occur in Europe are the costs of the Belgian entity and the advertising and promotion costs for the launch of the new products which, moreover, are the same as those incurred for the launch of new products prior to the 2005 restructuring since the advertising and promotion costs incurred for the launch of the new products, both before and after 2005, are borne - and managed - by the distributing entities'.

It adds that: "As for the quantitative importance of this risk, the Inspectorate tried to get the group to identify the losses incurred by CP Europe in 2006 and 2007 for this item (answer to question 11 of diligence 19), however, no information was provided. CP Spain has only identified a single specific case of failure concerning Time control toothpaste, where against budgeted sales of EUR 1,2 million for that product in 2006, only EUR 0,5 million were realised. However, as the Inspectorate points out, the risk must be measured by the costs incurred in the development of the product and, for this purpose, Spain bears all the advertising and promotion costs necessary for the launch of the product and the main part of the creation and development of the product is borne by CP USA".

As stated in the Report, "the statement that the failure to launch new products has no cost for CP Spain cannot be shared, since both the very signiﬁcant advertising and promotion costs of the new products and the costs of the European Innovation Centre, in this case indirectly, are borne by the Spanish distributor. And, in any case, this risk is borne in the same terms as before 2005".

As the TEAC argues in its Resolution -p. 39 - the complainant "does not contest the arguments put forward by the Inspectorate". Despite the claim to the contrary, "the impact of these CICs (Category Innovation Centre), compared to that of CP USA, is practically negligible". And as for the costs of advertising and promotion, regardless of their calculation, "the assumption with independent character and not subsumed in the margin of 2.5 attributed, appears in the accounts of the subsidiaries distributors". This is in response to the arguments contained in the application on this point, as the Board shares the arguments put forward by the administration.

Risks related to supply and production.

This refers to purchasing and procurement, production planning and under-utilisation of production capacity. In the MasterFile they are mainly attributed to CP EUROPE, as this entity is considered to be the strategic decision-maker in this area. The analysis of these risks is made on pp. 40-42 of the report.

The Inspectorate requested the taxpayer to identify the changes that had taken place in these matters since 2005. As stated in diligence 18, no reply was received. Information was requested from the Swiss tax authorities, but no reply was received.

It should be noted that, according to diligence 25 "even three years after the restructuring, the Logistics Department and Customer Service Area of CP Spain continues to carry out the function of planning supplies to the factories based on the information of orders coming from the commercial area of the entity. These orders are placed to the factories by people from this department; factories that are determined by CP USA (not by CP Europe).

of the group in Spain and keep the list of dominated copackers, independent entities that carry out tasks of handling the goods received from the factories, mainly for advertising purposes". There are

The file contains communications between CP Spain staff and the staff of the suppliers' factories concerning the complaint of goods not received on time.

Therefore, the Inspectorate concludes, 'the relationship with the manufacturers of the products in the periods under verification remains with the entity CP Spain. No change or activity of CP Europe has been in this respect".

The Inspectorate highlights the case of SUQUINSA. In diligence 14, the representative of the Spanish entity stated that the relationship with this manufacturer is carried out by the Swiss entity. However, in the diligence extended to SUQUINSA on 15 March 2010, paragraph 5), this entity identified the persons responsible for CP Spain, Mr. Virgilio, Mr. Luis Pedro and Mr. Marco Antonio as those with whom it relates in different areas such as technical specifications, specific orders and the decision not to continue with the contracting of certain products. Also attached to this diligence are the e-mails that prove the correspondence in these areas with the persons indicated. In short, as the Inspectorate reasons, the “beneﬁt" was obtained by the Swiss entity without even having had any contact with the manufacturer of the products and, therefore, without carrying out any function relating to the manufacture of those products".

In reply to the arguments contained in the application, it is insisted that those risks have been assumed by CP EUROPE. However, to this argument, the TEAC -p. 42- and the Inspectorate, that "it is not sufficient with a generic statement of assumption of risks and the indication of some theoretical examples by the entity, when from the analysis contrasted with reality, it is clear that the incidence of the same will be practically null". Adding that the possibility of these risks being assumed, de facto, by CP EUROPE is "a probability so remote that it is almost impossible; to which it is added that the management and control of the risk has continued in many areas at the headquarters of the Spanish entity. It can be concluded that in the light of the OECD criteria on Transfer Pricing, the restructuring of the risk has been practically nominal". The Board shares the Administration's argument, as it is the reality derived from the existing evidence that must be taken into account, not the existence of a generic assumption of risk.

3.- Assets, functions and risks of CP EUROPE.

3.1. Assets.

These are analysed on pp. 43 and 44 of the report. The Inspectorate begins by indicating that the question regarding the financial resources of the Swiss entity (diligence 19) was not answered. However, as indicated, it was possible to obtain information through multilateral control.

Well, from this information it can be deduced that the capital with which CP EUROPE is constituted is €13,000. The Inspectorate adds that "the modest capital of the Swiss entity is not explained by a transitional situation, since at the end of 2007, this accounting heading remains unchanged".

As reasoned on p. 51 of the Agreement, 'in the balance sheet closed at 30-9-2005 - the first one drawn up by CP Europe - shows total assets of FRF 460 million (EUR 296 million), most of which are claims on the CP group's own entities, of which more than FRF 200 million relate to receivables from group entities (remember that under the new transfer pricing system CP Europe sells its products to distributors), another FRF 35 million are loans to group entities and FRF 154 million is the year-end valuation of the inventory. In other words, if the amounts represented by the claims against the group itself and the stocks (which are produced by the manufacturers and sold by the distributors) are deducted, CP Europe's total assets amount to approximately FRF 71 million, i.e. EUR 45 million, which is not a very significant amount compared with the FRF 36 million shown in the accounts of CP Spain which, as has been said, is only one of the distributing entities in Europe. Liabilities amount to €135 million. The balance sheet does not recognise, in general, any intangible assets, which is logical, as the owner of these assets is CP USA.

If we take the balance sheet of CP EUROPE as at 31/12/2009, we can see that the share capital remains at €13,000; that most of the assets are represented by balances with group companies and the value of the inventory; that there is a "modest" intangible asset, "for which no information is provided".

Therefore, the Inspectorate concludes, 'in view of the small amount of share capital, the negative net position of tangible assets recognised to third parties in the balance sheet and the absence of intangible assets, it is certainly questionable whether CP Europe's financial capacity is appropriate to its characterisation by the group as a "principal undertaking".

It is true that, as stated in the complaint, the volume of tangible assets is higher in CP EUROPE than in the French Headquarter company. The administration does not deny this, but it is worth remembering that the Inspectorate's argument is that the assets - excluding the rights against the group itself and the stocks - do not represent "a very relevant amount if compared to the 36 million that appear in the accounts of CP Spain which, as has been said, is only one of the distributing entities in Europe". On the other hand, in relation to the investments alleged by the taxpayer, in manufacturing moulds and with a financial investment in the Polish company CP Manufacturing (Poland), the TEAC has already replied to these arguments indicating that "there is no documentation supporting these points" -p- 45- and, in its claim, the appellant does not indicate where the error of assessment of the TEAC lies, limiting itself to insisting on the existence of such investments.

On the other hand, in relation to intangible assets, we have already said that the Inspectorate reasons that in clause 16.3 of the distribution contract in force from 2005, "in the event of termination, the goodwill in the distribution business, customer lists, customer relations and any registrations, authorisations or licences shall be transferred to CP Europe in exchange for reasonable remuneration", pointing out that if the "possible transfer of these elements to CP Europe" is envisaged, this can only be because CP SPAIN, not CP EUROPE, has them. In any case, later on, we will refer to the so-called "Subrogation of License and Distribution Agreement and related matters", to the group's system of objectives and its remuneration policy.

3.2.- Functions.

The Inspectorate tried - diligence 18 - to get the inspected entity to describe the operational changes resulting from the restructuring carried out: this information was never provided.

When assessing the impact of the functional changes, the Inspectorate takes into account that, as described above, there was already a Headquarter in France, so that the maintenance of these functions by CP EUROPE does not imply a change in the functions of CP SPAIN. In this line, it is recalled that the Headquarter, before 2005, already performed functions of: "Marketing, promotion and advertising; procurement and manufacturing; human resources; finance and accounting; legal; distribution and transport". The question is what has changed in relation to these functions after the restructuring process.

The Administration does not deny that CP EUROPE carries out some activity, but what happens is that, as will be seen, taken as a whole, the change in the performance of functions is not signiﬁcant in relation to the situation existing prior to 2005. In other words, we believe, with the Administration, that we must examine the facts ascertained.

Functions relating to management or strategic direction.

It is in this area that the MasterFile gives a greater role to CP EUROPE. Hence, in diligence 18, an attempt was made to delve into the functional changes that, on this point, could have occurred with the restructuring - the inspectorate analyses them on pp. 46 to 50 of the report.

The Inspectorate complains about the lack of information provided, but argues that the information available indicates that "all the significant strategies identified by the Spanish entity are those of the group as a whole and are applied globally and, in some cases, several years before 2005. It is therefore highly striking that the MasterFile attributes a very secondary role to CP USA in this area.

Indeed, of the strategic decisions identified as most important, the Inspectorate has been able to obtain information on the so-called CBP (Colgate Business Planning). However, the Spanish entity acknowledged that this strategy, together with the so-called CDT (Customer Development Teams), have not been devised by CP EUROPE, but by CP USA. If the plans are designed by CP USA and executed by CP SPAIN, the Administration asks, what is the role of CP EUROPE? The inspected entity replies that it is to ensure the implementation of the plan.

However, in relation to CBP, the Inspectorate has been able to ascertain that the President of CP EUROPE, refers to the "Global CBP Team" for additional support and suggests to the General Managers of the subsidiaries to "contact people in New York (not in Switzerland)", who actually manage the implementation of the plan, which is managed directly with the subsidiaries.

Moreover, from the general information on the group that has been obtained, it appears that "all the general strategies mentioned (CDT; CBP; FTG and BS) are also mentioned and, in some cases, described in detail in the group's 2006 and 2007 annual reports at global level, i.e. those drawn up by the group's parent company in the USA".

In sum, without prejudice to the more detailed analysis contained in the report, "the information obtained does not make it possible to visualise how the strategic management functions claimed to have been carried out by the Swiss entity have materialised. Where documentation is available, it appears that CP Europe merely ensures and coordinates the implementation of global or general group strategies devised by CP USA, even several years before 2005. Moreover, the execution of those strategies is referred to the subsidised entities themselves, as does CP Spain'. The Board considers that, on this point, the administration's findings are supported by the facts and must be upheld.

Functions relating to intellectual property.

These are analysed on pp. 50 and 51. It is noted that the role attributed to CP EUROPE is very limited, as the owner of the intellectual property is CP USA.

However, it was indicated by the inspected company that CP EUROPE takes over the "corporate governance and reputation activities". In other words, CP ERUOPE "coordinates the implementation" in Europe of the decisions taken by CP USA. To justify this, the Action Grid document is provided, but it is identical in content to the one sent before 2005 by the French Headquarter.

As regards advertising and promotion expenses, as described on pp. 50 and 51, it turns out that the expenses incurred by CP SPAIN for the development of the group's global brands are more than 20 times higher than what the Swiss entity allocates to our market.

3.3.3.3.- Functions relating to product development.

These are analysed on pp. 51 to 53 of the report. This is one of the functions on which most emphasis is placed in the MasterFile. Hence, the Inspectorate requested information to this effect, as CP EUROPE is attributed the functions relating to the overall product strategy (product mix). The entity finally indicated that "there are no speciﬁc instructions, but that the inﬂuence in the product mix is done through different tools".

It was indicated that a Category Innovation Centre (CIC) had been created where new products to be launched on the market are conceived, tested and developed. But it turns out that these centres already existed before 2005 (in Italy and the United Kingdom) and their cost has been borne by CP SPAIN on the basis of the intra-group services contract with the French Headquarter. However, these centres are also considered by the group itself as service providers working on behalf of the owner of the intellectual property (CP USA). They are therefore paid on a cost-plus basis and do not have the right to exploit any intangible assets they may develop. As the report states: "If the creation and development of new products were primarily a task for CP Europe, it would be CP Europe that should own the result of these R&D activities and should be paid, via royalties, for the assignment to the group of the use of this intellectual property. On the contrary, it is CP USA that is charging CP Europe royalties for the assignment.

Regarding the Go to Market strategy, also alleged, it was requested that the creator of the strategy be identified and it was answered that it was unknown, but that it was "coordinated" by CP EUROPE. However, no documentation was provided to support this information; moreover, from the 2007 annual report it appears that this strategy is designed globally and with effects outside Europe. Again, the Board understands that the reasons given by the Administration must be shared and are sufficiently supported.

3.3.4.- Functions relating to procurement and manufacturing.

These are analysed at pp. 53 to 57. The Spanish entity argued that these functions were assumed by CP EUROPE since 2005 and that, consequently, it could not provide information. An international information injunction was sent to Switzerland, but no reply was received.

However, based on the information available, the Inspectorate notes:

-According to the MasterFile the demand forecast is to be managed by CP EUROPE.

The Inspectorate requested information from the Logistics Director of CP SPAIN on the functions performed by his Department in 2006 and 2007. The information is very relevant and from it it was deduced that:

-The planning of supplies for the factories, based on information from orders from the commercial area, was carried out by this Department. That is to say, with the information from the CP SPAIN salesmen, the Logistics Department of CP SPAIN placed the orders to the factories for the products to be produced.

-To do this, they grouped the products by category. Whoever was the factory to which the orders were placed, it was decided by CP USA.

-The Logistics Department of CP SPAIN managed the problems that could arise with the products from the factories. As well as the supervision of the logistics and warehouse operator.

The relationship with the co-packers who handle the goods already manufactured to obtain certain services was also carried out by the same Department.

It is stated that CP EUROPE calculated the safety stock by means of a computer application, but apart from the fact that no document was provided to this effect, it appears that this application was developed by an independent company and used by the Group worldwide.

In short, the reasons given by the Administration are sufficient to understand that in this function, the management is really carried out by CP SPAIN.

3.3.5.- Functions relating to logistics and transport.

The functions related to logistics and transport, in the MasterFile, are essentially attributed to manufacturers and distributors -they are analysed in the report on pp. 57 to 59-. The only function attributed to CP EUROPE is that "relating to packaging and labelling processes and standards". However, as inﬁere from diligence no. 18 "not a single change in these matters has been identiﬁed since the restructuring". It is acknowledged that delivery logistics is the responsibility of CP SPAIN.

Warehouse logistics is attributed by the taxpayer to CP EUROPE. However, the information available indicates that the actual management is still carried out by CP SPAIN. Thus, information has been requested from FCC Logística, an independent entity that provides the warehouse logistics service in Spain (with the exception of the Canary Islands) and it turns out that they only deal with people from CP ESPAÑA, with whom they negotiate prices, incidents, etc. There are only two specific contacts in relation to two contracting projects - one in 2007 and the other in 2009 - in relation to CP EUROPE personnel. The same is true for the entity in charge of storage in the Canary Islands, for which it has been acknowledged that CP EUROPE does not perform any tasks. In our opinion, the facts derived from the evidence are clear, without any further comment being necessary.

3.3.6.- Functions relating to sales.

These are analysed on pp. 59 to 62. In the MasterFile a prominent role is attributed to CP EUROPE. The Inspectorate requested information to this effect and the entity replied that CP EUROPE is the one who elaborates the general pricing and discount strategy, but the fact is that "there is no documentary evidence".

As for the management of international contracts, these are contracts in which the conditions of sale of the group's products are negotiated with large customers. These are contracts which generate costs, not revenue, which are modest in amount and which were already being carried out by CP SPAIN before 2005. Moreover, the contracts for this purpose with CARREFOUR and AHOLD already existed before 2005 and have been maintained.

As regards advertising, promotion and launching of new products:

-No documents from CP EUROPA on guidelines on advertising, promotions, etc. are provided. The only document provided are power-point presentations from 2010.

-No changes have been identified in the guidelines after 2005.

-No change has been identified in the persons or entities with whom they contracted.

If the documentation on new product launches is examined, the similarity with the intra-group services performed by the French Headquarter prior to 2005 is apparent.

There is therefore no evidence of the prominent role attributed by MasterFile to CP EUROPE. 3.3.7.- Functions relating to corporate services.

These are analysed on pp. 62 and 62. They are mainly attributed to provider entities, such as financial and technological entities, where CP EUROPE is assigned a secondary role. For example, the entity has a centralised treasury system managed by an entity resident in Ireland (CP Support Services). As for the ﬁscal planning, which is said to be taken over by CP EUROPE, the answer was tersely "no change" and as for human resources, the answer was also "no change".

3.4.- Risks.

They have been described above when describing the risks of CP SPAIN.

4.- On pp. 21 et seq. reference is made to the contract signed between CP EUROPE and CP SPAIN, by which the former undertakes to pay the latter a decreasing percentage of the net sales of CP SPAIN in the years 2005 to 2009 Subrogation of License and Distribution Agreement and related matters'. Compensation which, initially, was not agreed with any other marketing entity, although it appears that in the case of Portugal compensation has also been granted. The Inspectorate indicates that it tried to clarify various aspects of the agreement - claims 3 to 9 - and no reply was received. The Inspectorate points out that this contract was extended "on 25 November 2010, that is to say, in the final part of the inspection", and was included in the file "at the initiative of the taxpayer himself".

The Inspectorate acknowledges that this agreement has allowed "CP España's pre-tax profits during these five years to remain at the same levels as in the years prior to the restructuring, around 14% of sales, although the operating profit has fallen drastically". But he adds, "from the ﬁscal point of view, it should be remembered that CP Spain is taxed under the special regime of ﬁscal consolidation and this fact is also different from the rest of the European distributors of the group. And on this point, the fact is that the positive taxable base of CP Spain, substantially originated by the compensation received by CP Europe, has been largely offset in the years under review by the negative base of its parent entity, CP Holding SAL, which is mainly generated by the ﬁnancial expenses and the deductibility of the ﬁnancial goodwill arising from the intra-group acquisition of the shares of the Greek subsidiary".

The TEAC refers to this agreement on pp. 45 to 51 of the Resolution. It insists that no explanation has been given "as to the legal or economic basis of a decision of the magnitude of the compensation paid in Spain" and stresses that, in any event, the compensation "has had no ﬁscal effects".

And it concludes, with reasoning which the Chamber shares, "...leaving aside this consideration, since the negative basis of CP HOLDING would also have reduced the profits of the consolidated group if all operating profits had been taken into account, what is important is that, in accordance with the arm's length principle, the operating profit of the Spanish entity is that which truly corresponds to the analysis carried out and not that substantially reduced in the years under review. Therefore, since the value agreed between the related parties does not correspond to the market value, it is determined in accordance with the characterisation of the entities and the method considered to be the result of the checks carried out. And all this regardless of whether the impact in terms of tax collection is minimised by the circumstances of the compensation referred to, which determines a negative adjustment by the Inspectorate, since, in the opinion of this Court, what is essential is that the qualiﬁcation of the income and the determination of the price of the transactions complies with the principle of full competition in accordance with the reality of the operations carried out".

Finally, pp. 66 to 72 of the report analyse the group's target system and remuneration policy. The results are taken from measures 17 and 20 to 26 of the file.

The bonus model with which remuneration is ﬁxed is described in detail on pp. 67 et seq. We would like to point out that 60% of the bonus depends on the achievement of the Company's objectives - the remaining 40% on individual objectives. Two variables are used to calculate the company's targets. Sales - weighted at 25% - and Local Controllable Profit (Local Controllable Porﬁt or LCP). The Inspectorate investigated how the LCP was derived in 2007. Its investigation showed that a first element to take into account was the aggregation of magnitudes corresponding to three entities: CP SPAIN, CP HOLDING SPAIN and CP EUROPE. In 2007, the LCP amounted to €37,230 thousand and was made up of two variables 56.273 thousand € (Total Market Profit), minus 10.175 thousand € (local ﬁxed expenses) and 8.868 thousand € (local advertising expenses).

However, what the Inspectorate highlights is that of the LCP magnitude -37,230 thousand €-, 88.95%, i.e. 33,137 thousand €, corresponds to the profit that the Swiss entity CP EUROPE has derived from the Spanish market, while 11.05% is the part of the LCP that has been appropriated by Spain.

In other words, "the magnitude that the group uses to ﬁx the bonus of the employees in the Spanish entity (LCP) rests very mainly on the beneﬁts that the Swiss entity CP Europe has made in the Spanish market and which correspond to the difference between the transfer price paid by CP Spain to the Swiss entity and the cost of the products sold in Spain". As the administration points out, this way of calculating the bonus 'does not seem to make any sense'. because if the pricing system designed by the company is taken as true, the Spanish entity 'would not have any capacity to influence the beneﬁt realised by CP Europe. That is to say, this beneﬁt should correspond to the functions, assets and risks that the Swiss entity brings into play (the beneﬁt "goes" to Switzerland, because the functions, assets and risks are there) and there would be nothing CP Spain's employees could do to change it. Since their only mission is to sell, they would only be able to affect the magnitude of sales, not the beneﬁt". As the Inspectorate points out, the bonus fixing system remains similar to the one in place prior to 2005.

The complaint states that the Inspectorate has not carried out a proper calculation and that the data has been misinterpreted, attaching, at the pleadings stage, some examples provided in Annexes 10 and 11. However, the Chamber understands that these documents prepared by the company do not undermine the data used by the Inspectorate, given the immediacy with which the latter were obtained. In our opinion, the system of setting the amount of the bonuses does not make sense, as the Administration maintains, since Spanish workers are being paid on the basis of results which they do not participate in obtaining.

FIFTH.- As reasoned, among others, in the recent STS of 2 March 2017 (Rec. 1029/2016 ), the OECD Guidelines "are not normative sources and therefore cannot be invoked in cassation". However, the Chamber reasons that the aforementioned guidelines "entail a mandate addressed to the tax administration which, in the context of verification proceedings - as the law expressly states - must conform to the technical criteria and guidelines set out therein", although, "they do not commit the Courts of Justice, when ruling on the legal proceedings for which they are competent, to assess the procedural evidence with full subordination to those Guidelines, which do not condition or qualify their powers of free assessment of the evidence".

In the present case, the TEAC focuses the debate precisely, among others, on p. 43 of the Resolution when it reasons, after examining the evidence, that "the restructuring of the risk has been purely nominal", not real. The whole effort of the Inspectorate has been aimed at demonstrating that, although nominally CP EUROPE has assumed functions and risks, the fact is that in reality, at least in the years under examination, no significant change has taken place. Once that conclusion is reached, the Inspectorate argues that the valuation made by the company for the calculation of transfer prices is inadequate and uses the one it considers correct.

Without prejudice to what we will reason below, it seems to us that this way of proceeding on the part of the Administration is legitimate. Indeed, once the Inspectorate has carried out an analysis of the assets, functions and risks existing before and after the restructuring, it can be concluded that the tested party and/or the valuation method used are inappropriate. The tested party was referred to in OECD Guideline 3.18 as the party whose functional analysis is the least complex and for which the beneﬁt indicator is examined - "As a general rule the tested party is the party to which the transfer pricing method can be applied most reliably, and for which the most robust comparables exist, i.e. it will normally be the party whose functional analysis is the least complex". In other words, the result of the actual - not nominal - examination of the assets, functions and risks may call into question the qualiﬁcation of a certain entity as a tested party and/or the valuation method used, which will allow the authorities to question the value given by the parties. It should be noted that it is a legal maxim, when it comes to the application of the law, to be guided by the reality of things and not by the denominations given by the parties -the principle of qualiﬁcation-.

Well, the Board, assessing the evidence provided by the Administration as a whole, considers that, in fact, although nominally there has been a restructuring which would justify the change in the transfer prices made by the company, in reality in the years under examination there has not been such a change.

We have already indicated, with regard to the assets, that, recognising that the volume of tangible assets is greater in CP EUROPE than in the French Headquarter company, this does not mean, discounting the rights against the group itself and the stocks, 'a very significant amount compared with the 36 million which appear in the accounts of CP Spain which, as has been said, is only one of the distributing entities in Europe'.

However, after the analysis carried out by the Inspectorate of the obligations assumed by CP EUROPE that justify the change in the transfer pricing calculation system, it appears that:

A.- In relation to the obligation to supply the distributor, although "formally" it is CP EUROPE which places the orders to the manufacturers, it is really the distributor who places them on the basis of its own sales forecasts.

B- In relation to the maintenance of stocks, which is supposed to be the responsibility of CP EUROPE, it is CP SPAIN that ﬁxes the sales forecasts in our country, supervises all the management of the warehouse, negotiates with the stockists and resolves any incident.

C.- The third of the obligations assumed by CP EUROPE is the obtaining and organisation of the customs clearance of the imported products, having been recognised -Diligence 15- that the entity does not carry out "directly", any management task with the Customs Agent.

D.- Certainly, CP EUROPE assumes the risk of non-payments above a certain amount (1% of sales), but we have already seen how the Inspection justifies the very high improbability that this risk materializes.

E.- CP EUROPE assumed that adequate facilities were available for the storage, handling and dispatch of the goods to the distributor and its customers. We have already seen, in detail, that it is CP SPAIN who carries out these activities.

F.- CP EUROPE also assumes the distribution of materials and support services in various areas. Certainly, these materials are provided to the Spanish entity, but they are provided and rendered by entities of the group other than CP EUROPE (in the case of the financial and technological ones) and, in other cases, the role of CP EUROPE is that of coordinator, without it having been accredited that the Swiss entity is the author or creator of that information or materials provided.

G. - CP EUROPE has also contractually assumed the development of Marketing and new product launch strategies. We have described how this is not really the case, as it is CP USA that designs the strategies.

H.- As for the obligation to obtain the licences for the intellectual property belonging to CP USA, the Inspectorate reasons that "it is one of the characteristics of the restructuring itself, without CP Europe having had to perform any function to obtain them (they were granted in 2005 - recently created - after the termination of the contract with the distributors). In other words, it is CP USA, the ultimate owner of all the entities in the group, which has decided to transfer them to CP Europe, and which can revoke that decision at any time (as it did in 2004 with CP Spain)".

I.- Finally, the contract states that CP Europe will carry out those activities and tasks that are requested by the distributor, and there is no evidence that any request has been made.

If to the arguments described throughout this judgment we add what has now been reasoned, the conclusion, in our opinion, can only be that the Administration is right, since in reality - remember that certain functions were already being carried out by the French Headquarter - there is no significant change in the situation existing prior to the restructuring in the years in question.

This being so, it is not surprising that the Agreement reasons that "the existence of transactions between related entities, the Spanish and Swiss entities, determines the application of the regime provided for in Article 16 of the Consolidated Text of the Corporate Income Tax Law (TRLIS) and in its implementing regulations, mainly Chapter V of Title I of the Corporate Income Tax Regulations (RIS), taking into account the change of regulation introduced by Law 36/2006 applicable, in the case of ColgatePalmolive, as from the financial year 2007". Adding that "in relation to the existence of transactions between related companies, it is also necessary to take into account Article 9 of the Spanish-Swiss Double Taxation Agreement, inspired by the OECD Model Agreement, which provides that the profits of associated companies may be adjusted when the conditions present in their commercial or financial relations differ from those that would be agreed between independent entities. This article recognises the so-called arm's length principle, the interpretation of which must take into account the OECD Doctrine, contained in the Commentary to Article 9 itself and its 1995 Transfer Pricing Guidelines, which have been significantly updated in 2010".

As reasoned in the Agreement, the Board shares the reasoning, "according to the exhaustive description contained in the verification file, the characterisation of CP Europe as a "principal trader" is inappropriate, it being more correct to consider that such an entity is in reality a service provider. It is therefore considered that the method chosen by the group to value the transactions is inappropriate and that the appropriate valuation method is the cost plus method. This method, in addition to being a traditional method (and therefore preferable under our internal regulations and the Guidelines), is, in accordance with the OECD Guidelines (paragraph 2.32 and 2.39 in the 2010 version), particularly appropriate for valuing the provision of services". The fact is that 'the valuation method applied by Colgate Palmolive is not appropriate, as it results in the residual profit of the group's operations in Spain being concentrated in the CP Europe entity, which makes no sense if the economic activity of each entity (CP USA, CP Spain and CP Europe) in the overall business in our country is taken into account. The Guidelines themselves highlight in their chapter 7 dedicated to intra-group services (paragraph 7.31, before and after 2010) the cost plus method, together with the comparable free price, as the method to be used to value this type of services between related entities.

The work of the Joint Transfer Pricing Forum of the European Union, which also assumes that this is the method most frequently used to value this type of transaction".

The Inspectorate adds, quite reasonably, that "until 2005, the group itself valued transactions between the French Headquarter, with the role of service provider, and the other entities of the group - including CP Spain - using the cost plus method".

The consequence of all the above is that, as stated on p. 73 of the report -reasoning endorsed by the Agreement- "in order to value the transactions between CP Europe and CP Spain, the transactional net margin method, taking CP Spain as the analysed party (Tesdet party), is inappropriate. Instead, it is considered that the most appropriate method for valuing the transactions is the cost plus method, the traditional method, which is based on attributing to the provider of those services - CP Europe - a gross margin on the costs it incurs which are attributable to the Spanish market [it should be recalled that following the analysis carried out it has been concluded that CP Europe cannot be considered as a principal trader, but rather as an entity which performs the functions of a service provider]'. This means that, in the years in question, it is not correct to attribute to CP EUROPE the residual profit derived from the group's operations in Spain, but rather that this residual profit, deducting the remuneration of the owner of the intangible asset -CP USA- and of the service provider -CEP EUROPE-, should fall on CP SPAIN. The calculations are set out in pp. 74 to 81 of the report, as well as in pp. 59 to 62 of the Agreement. The Board, particularly in the absence of any arguments to the contrary, considers them to be correct.

For all the foregoing reasons, the plea is dismissed.

SIXTH - Costs.

There is no order as to costs as the appeal has been upheld in part - Article 139 LJCA - and therefore each party must bear its own costs and the common costs in half.

Having regard to the legal precepts cited and others of general and pertinent application, the Chamber gives the following judgment.

WE DECIDE

To uphold in part the contentious-administrative appeal brought by the Solicitor Ms. Blanca Rueda Quintero on behalf of COLGATE PALMOLIVE HOLDING SCPA against the Resolution of the Central Economic-Administrative Tribunal of 9 October 2014 (RG NUM000 and NUM001 ); which we annul in part for not being in accordance with the law and in the terms set out in the first ground of law, with the legal consequences inherent in that declaration and we uphold the rest of the contested Resolution as being in accordance with the law. There is no order as to costs.

Enter the judgment in the book of its class and once ﬁrmed, send a copy of the judgment together with the administrative file to the place of origin of the latter.

The present judgment is subject to appeal in cassation, which must be prepared before this Chamber within 30 days from the day following that of its notification; in the document preparing the appeal, compliance with the requirements established in article 89.2 of the Law on Jurisdiction must be accredited, justifying the objective interest of the appeal.

PUBLICATION. - The foregoing judgement has been read and published by the IInd Judge Mr. MANUEL FERNÁNDEZ LOMANA GARCÍA, the Chamber being in public hearing on the same day of its date, of which, as Counsel for the Administration of Justice, I certify.