Use of transfer prices worldwide 2019 – Review of the case law

In the beginning 2020 Bloomberg published a review of the key decisions that fell into 2019 in various countries that are actively applying the market price principle. Danny Beeton of Arendt & Medernach in his report [1] presents how international taxpayers have dealt with several jurisdictions In 2019 and what lessons can be learned from the transfer pricing perspective In 2020

In recent years, we have seen intensive work on further reports on the different aspects of transfer pricing, which are intended to ensure that the OECD guidelines propose as much as possible to define how, in economic practice, developing companies of international scope should apply the market price principle.

On the other hand, by observing disputes between taxpayers and tax authorities and courts on global commercial transactions, it can be felt that the OECD Transfer Pricing Guidelines are still insufficiently detailed to maintain the seamless nature of business.

Ultimately, it is the case-law that sets the conditions for applying the market price principle in certain situations, often for the benefit of expert testimony, which may serve as a guide to practitioners.

In many cases, it is only at the stage of discussion in court that the principle of market price can be applied in certain situations, often for the benefit of expert testimony, which may become a reference point for practitioners from other jurisdictions.

In 2019 an interesting mix of transfer pricing cases was presented, both before national and international courts, and with regard to transfer prices between operators and the assignment of profits to permanent establishments

one The greatest challenges currently facing the authors of the Guidelines and their subsequent modifications are to keep up with these groundbreaking decisions.

In 2019 an interesting mix of transfer pricing cases has been presented, both in national and international courts, and in relation to transfer prices between operators and the allocation of profits to permanent establishments. The following are the key conclusions that can be drawn from the analysis of these decisions, and the short description of these cases which seem to be the most interesting.

Conclusion of the review of the case law on transfer pricing in 2019

• It is acceptable to suggest that an additional income be attributed to the taxpayer on account of the ‘accident’ benefits it has provided to the related party, but the appropriateness of this procedure may be called into question, indicating the scope of the contract with the related party, the presence of another party which is formally obliged to provide services which are an incidental result of the role of the taxpayer.
• Licensing fees appear to be more likely to be contested on the grounds that intellectual property has little value on the local market, as evidenced by the need for the taxpayer to devote a large amount to marketing and (unfortunately) a description of the local market in its own transfer pricing report. Consistency should be maintained between the global setting of licence fees and local transfer pricing reports.
• Transfer prices for group capital management companies and their loans, guarantees and cash pooling rules are still contested and are more difficult to defend due to the lack of specific guidance in this area (when such a document is drawn up). The courts do not yet seem to appreciate the complexity and size of these transactions and the need to simplify approaches.
• In situations where losses have been reported for a long time (for many years), an unrecognised transaction, in particular a marketing service, is often attributed, or possibly a service gap, to enable global customers to win contracts. In such cases, the functional analysis of the taxpayer may be crucial and too general in nature may not be helpful.
• Transfer pricing reports from other jurisdictions may be used to demonstrate that the local taxpayer has not achieved sufficient income, which may lead to a change in the burden.
• The courts are willing to accept evidence of differences in comparability between the taxpayer and potential benchmarks, but the impact of these differences should be quantified.

Characteristics of selected decisions

Denmark

Decision on Microsoft Danmark ApS in the Danish court The Supreme was taken 31 January 2019 The problem was not the level of the commission earned by the local sales subsidiary, but whether this commission should also have been made with the second set of sales for which the subsidiary is not contractually liable.

In particular, the taxpayer was responsible for making software available to the general public on the market, while another subsidiary was responsible for making software available to computer manufacturers on the market.

The tax administration argued that the public marketing of software increased the likelihood of buying computers equipped with software, so that the taxpayer should receive an additional commission from this sale.

The Court of First Instance held that any effect on the computer sales of software to users constitutes a ‘accidental’ advantage, and that no charges should be charged under the OECD Guidelines on Transfer pricing.

This decision confirmed the benefit of a functional analysis which clearly defines the role of the taxpayer and the potential benefit of recourse to certain short discussions in the OECD Transfer pricing Guidelines.

EU

Decision on StarbucksManufacturing EMEA BV in the EU Court of Justice of 24 September 2019 The question was whether the interpretation of the Dutch tax rules allowed an incalculable market economy calculation of taxable income. The taxpayer was a producer of roasted coffee beans for the Starbucks cafe throughout the region.

He bought beans, baked them using group technical intellectual property (for which he paid the license fee) and sold them to a cafe. The Commission noted that the royalty was differentiated so as to obtain only a simple profit margin from the taxpayer, on the grounds that it was a simpler party.

The Commission came to the conclusion that, by licensing intellectual property and being at the centre of business, the taxpayer was an entrepreneur, not a simpler party, and that there was no evidence of an independent party to the licensing agreement involving a similar method of calculating the royalty.

For these reasons, the Commission concludes that the tax ruling granted illegal State aid.

The Commission's approach has the following aggressive and controversial features:

• • State aid reduction can be applied to both taxation and expenditure;
• • the separate ‘normal’ tax law of each Member State must always include the principle of market price implicitly;
• • all tax interpretations or previous price agreements that contain non-market related prices must include the ‘selectiveness’ necessary to meet the State aid challenge.

The decision of the Court of First Instance in Starbucks (against the Commission) confirms that it is for the Commission to demonstrate that the outcome of the transfer pricing calculation differs significantly from the result at market conditions, rather than merely to conclude that a different method of calculation should be applied. It also confirms the keyity of the existence or similar trading arrangements on the open market in relation to decisions in transfer pricing disputes and the need to confirm, not merely to state thatone the party is simpler and the only one to be examined for transfer pricing purposes

Italy

Decision on Anon in the Lombardy Regional Tax Commission (Case 928/20/2019) on 5 September 2019 The problem was the persistent losses of the taxpayer, which, according to the tax administration, were caused by the failure/loss of the rest of its group (which was profitable) for the local marketing services that the taxpayer performed for it on its behalf.

The Court of First Instance rejected this argument because there was no solid evidence of such a service. He also accepted the taxpayer's explanations of the external economic factors underlying the losses.

This decision confirms the willingness of the tax administrations to argue that there is another unrecognised transaction when the taxpayer continues to report a loss, as well as the continued inconsistency of the courts as to how the argument is answered. In this case, the court applied (relatively) sophisticated tests as to whether there were factors for the comparability of economic circumstances in order to explain the losses and whether there was sufficient evidence of the alleged unrecognised transaction rather than merely a claim.

Luxembourg

Decision on Anon in the Administrative Court (No 42043C) on 17 July 2019 The case concerned interest rates on the shareholder loan. As there was no interest rate support, the tax administration attributed much lower. The taxpayer then drew up two ex post transfer pricing reports, of which second confirmed the interest rate applied.

The Court of Appeal previously ruled that since the two reports used different methods and came to different conclusions, neither could be accepted. Moreover, the taxpayer did not explain why the calculation of the tax administration was incorrect, and indeed first the report showed that the tax administration's interest rate was at market conditions.

The Court of Appeal ruled that second The report was unreliable due to differences in comparability in the different sizes and simplicity of the taxpayer compared to the benchmark borrowers. It seemed that high interest rates were not consistent with the low risk posed by the immovable properties of taxpayers.

This case illustrates the need to carry out comparative tests before the pricing of related parties is established, to maintain consistency in the presentation to the court and to ensure effective technical criticism of the indicators and calculations of the tax administration.

Spain

The decision on IKEA Distribution Services in the national appeal court was taken on 6 March 2019 The problem was that the net margin of the company fell below the taxpayer's own calculations at market conditions in a specific year.

Notwithstanding the fact that the average margin for the taxpayer was at all times on market terms, the court held that income adjustment should be made as the margin should be within this range each year.

However, the Court of First Instance accepted that the market scope could be determined on the basis of the average performance of the comparators over the years and then applied over the years.

second The issue was the amount of income adjustment. The tax administration argued that the scope of taxpayers was not reliable because of the difference in comparability between the size of the reference companies and the size of the taxpayer - probably the suggestion that there were economies of scale in its distribution activities.

In local law, this unreliability may mean that the income adjustment should concern the median rather than the lower limit of the range. The Court of First Instance held that differences in size were not sufficient to make the market coverage of the taxpayer unreliable, so the adjustment should only apply to the lower limit of scope.

This decision confirms the willingness of the courts to consider differences in the comparability of economic conditions and the need to analyse sets comparable to any size-related patterns, etc.

Sweden

The decision on Absolut Company AB in the Swedish Supreme Administrative Court was published on 19 June 2019 In this case, the point was that the net margin of the US taxpayer subsidiary was higher than the market price In one year. The tax administration therefore adjusted the taxpayer's income upwards.

The Court considered that the margin of the subsidiary was affected by unusual market conditions (i.e. „Economic conditions) and that it is important that the margin of the subsidiary was reduced the following year to ensure that its average margin was at market conditions by two years. On this basis, the court considered that the correction of the taxpayer’s margin was not appropriate.

This case illustrates the risk of having transfer pricing reports in a group that states that prices do not comply with the market price principle, even if this results in a higher margin for the local taxpayer – such documents may be required and may be taken into account in audits and disputes in other jurisdictions.

Authors:

Konrad Kłos, a junior tax consultant, Russell Bedford Katowice

Leszek Dutkiewicz, partner Russell Bedford Poland. Associated with the company from 2011. Director of RBP office in Katowice. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services.

He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices. Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.