EMEA transfer pricing case law December 2013

Transfer pricing case law in Europe(updated December 2013)

Transfer pricing case law in Europe 2

Contact

Ágata UcedaEMEA Transfer Pricing Director

E: [email protected]: 020 5419 268

Sirathorn B.J. DechsakulthornEconomist


Jian-Cheng KuTax Advisor



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What is transfer pricing?

Profit allocation within multinational company

Intercompany prices for goods and services

Arm's length principle


What is the problem?

Aligning transfer pricing (business economics) with tax structuring (law)

Documentation

Double taxation

Penalties and interest


Legal framework

OECD Model Tax Convention - article 9

OECD Transfer Pricing Guidelines

Updated July 2010

Netherlands: Article 8b Corporate Income Tax Act


Legal framework transfer pricing in Europe

Article 9 OECD Model Tax Convention

Arm's length principle applies to related party transactions

1. Where [related parties] and […] conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.


Legal framework transfer pricing in Europe

OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

Published in 1995 as a revision of the 1979 OECD Report Transfer Pricing and Multinational Enterprises

Elaboration on arm's length principle

After 15 years of no changes, the OECD released a new version of the OECD Guidelines on July 22, 2010: TP-method selection: introduction of a most appropriate method rule Practical application of transactional methods Guidance on comparability analysis Introduction of a chapter on business restructurings


Legal framework in Netherlands

Arm's length principle implemented in local tax legislation

Netherlands: Article 8b Corporate Income Tax Act

Related parties Shareholding Management / control Supervision

Arm's length principle

Documentation requirements

Dutch tax authorities

Coordination group transfer pricing

APA-team


2013 – Cross Guarantees

Dutch Supreme Court 1 March 2013 (11/01985)

Facts

X BV jointly participates in a (third-party) credit arrangement with other group companies;

X BV is jointly and severally liable for all the receivables that the creditor had on the other group companies under the credit arrangement; and

The recourse (of X BV against the other group companies) that arises from such joint and several liability cannot be claimed until the full amount outstanding under the credit arrangement has been repaid.

Advocate-General

Application of the Supreme Court’ s ruling of 25 November 2011 by analogy: it can be assumed that a third party would not be willing to provide a guarantee only if, at the moment of granting the guarantee, no guarantee fee could be determined.

Supreme Court Ruling

The Supreme Court ruled that a credit loss resulting from a cross-guarantee agreement was not deductible. The main argument behind this decision viewed the cross-guarantee as an arrangement that originated from shareholder motives.


2011 - Intercompany loans

Dutch Supreme Court 2011 (08/05323, 10/05161, 10/04588)

X BV

A BV

Loan: EUR 5.3million

100%

Facts (08/05323)

X BV sells its securities portfolio to A BV (within fiscal unity) for EUR 5.3 million against acknowledgement of debt

A BV books the debt on its overdraft facility on which an interest rate of 5% applies

The debt is converted into a loan:

Term of 10 years Interest rate of 5%, not paid but accrued Pledge on securities portfolio; no other

collateral or securities Upon transfer of seat of X BV and A BV to the Netherlands Antilles, X BV

deducted a loss on its loan in the amount of EUR 1.2 million due to a decrease in value of the securities portfolio and, therefore, the increased chance that A BV would not be able to repay the loan



Dutch Supreme Court 2011 (08/05323, 10/05161, 10/04588)

The Dutch Tax Authorities disallowed the deduction taking the standpoint that the loan is not a business motivated loan.

The Dutch Supreme Court ruled that:

In principle the civil law arrangement is decisive; three exceptions in which loan arrangement is disregarded.

A non-business motivated loan is defined as an intercompany loan that:

carries an interest rate which given the terms and conditions of the loan is not at arm's length; and

which a third party would not have granted given the debtor risk involved.

In case of a non-business motivated loan, any losses arising from such loan are not deductible for Dutch corporate tax purposes.

At the same time, the lender still has to report an arm's length interest which equals the interest that the borrower would have paid in case it had borrowed from a third party with a guarantee from the lender.


2011 – Captive Insurance

Lower Tax Court of The Hague 2011 (AWB 08/9105) Facts:

Dutch company (OpCo) operates a hotel and leisure business

OpCo also sold its customers a travel cancellation insurance on the basis of an 'opting-out' system

The insurance policies were issued by an unrelated Dutch company (InsureCo) for which OpCo effectively paid 1.5% insurance premium

InsureCo reinsured the risk with another Dutch company (ReinsureCo)

ReinsureCo entered into a Retrocession Agreement with Ireland Company (IrelandCo), a sister company of OpCo

ReinsureCo has no employees and was managed by a captive service company (Ireland MS)

OpCo(Dutch group)

InsureCo(Third party)

Agreement for provision of insurance services

IrelandCo(Dutch group)

ReinsuranceAgreement

Retrocession Agreement

ReinsureCo(Third party)

Ireland MS(Third party)

ManagementServices


2011 – Captive Insurance

Lower Tax Court of The Hague 2011 (AWB 08/9105)

The Dutch Tax authorities disregarded the Captive and adjusted OpCo's profit with IrelandCo's profit

The Lower Tax Court ruled that the taxpayer had a business reason to restructure and establish a captive insurance company in Ireland

In addition, the Lower Tax Court assessed the functions, risks and assets of DutchCo and IrelandCo and held that an arm's length remuneration for IrelandCo would be a mark-up of 10% on IrelandCo's administrative expenses. The remainder of IrelandCo's profit is allocated to OpCo

The case is currently pending judgement at the Dutch Supreme Court

OpCo(Dutch group)

InsureCo(Third party)

Agreement for provision of insurance services

IrelandCo(Dutch group)

ReinsuranceAgreement

Retrocession Agreement

ReinsureCo(Third party)

Ireland MS(Third party)Management

Services


2010 - Royalties to Liechtenstein

District Court of Breda March 2010 (09/2639) (no appeal yet)

Facts:

Dutch BV engaged in manufacturing and sales of cleaning chemicals

Group company in Liechtenstein 'owning' recipes and manufacturing know-how

License agreement between BV and Liechtenstein

Royalty payments of substantial amounts from BV to Liechtenstein


2010 - Royalties to Liechtenstein

Court disallowed royalty deductions:

No documentation apart from license agreement

No evidence that Liechtenstein had developed recipes

No evidence that Liechenstein owned IP: No specific knowledge at company management (trust) No R&D-activities

No active role of Liechtenstein in provisions agreement

Liechtenstein did not deliver recipes, know-how or other performances

Royalty payments were deemed non-arm's length and considered as a cover for payments to a tax haven that had no economic basis.

Substance!


2009 - Cleaning products - domestic!

District Court of Breda 2009 (07/174) (no appeal)

Company B had significant tax losses…

60% 40%

100%

Brothers!

Physical delivery of cleaning products

Invoice InvoiceA BV

(Netherlands)B BV

(Netherlands)

Mr. X(Netherlands)

Mr. Y(Netherlands)

Unrelated supplier


2009 - Cleaning products

Court adjusted profits of A and B

Purchase prices for cleaning products were not arm's length

B made significant profits just by purchasing and on-selling products with A as its only customer

The audit revealed that A could have negotiated the same prices with the unrelated supplier

Transaction had no economic merit but was only aimed at using tax losses in B

Transfer pricing in domestic situation

Affiliation through family relationship



Dutch Supreme Court 2008 (43 849)

100% 100%

76%

24% Loan: EUR 6 million

Before 1995 After 1995

Group C(Multinational)

Group of individuals BGroup of

individuals AGroup of

individuals A


Holding(Netherlands)



Holding

No other assets or liabilities than shares in Group C and loan from Holding

Loan features

No loan agreement

No repayment schedule

Interest around 5%, not paid but accrued

No collateral or securities

Group C

Losses from 1996 to 2000 of EUR 12 million

Negative equity since 1997

No dividend payments since 1995



In 2001 Group C sells the loan to Holding of EUR 6 million for the fair market value of EUR 3 million to another group company and claims a loss of EUR 3 million. The Higher Court and later Supreme Court disallow the deduction of this loss:

Loan completely non-arm's length: a third party would never have granted this loan and assume this level of credit risk

Holding has only assumed the credit risk for the benefit of its shareholders

Questions / open points:

Why not just adjust the interest rate?

Does this imply reclassification of debt to equity?

What about the interest payments?

Interesting supreme court case in 2011!

100%

76%

24%

Loan: EUR 6 million

Group of individuals A


Holding(Netherlands)


2007 - IP sale-and-license-back

District Court of Breda 2007 (05/1352) (no appeal)

100% 100% 100% 100%

Sale of trademark

January 1994 July 1994

Royalty payments

License-back of trademark

Holding BV(Netherlands)

A BV(Netherlands)

B BV(Netherlands)

Holding BV(Netherlands)

A BV(Netherlands)

B BV(Dutch Antilles)


2007 - IP sale-and-license-back

Facts

Initially A BV develops, manufactures and markets sporting shoes

Sale and license-back of trademark 'B' in January 1994.

Trademark is also trade name of B BV

In July 1994, B BV moves to Dutch Antilles

In 1999 the royalty is increased from fl. 2.00 per pair to fl 2.50 per pair, resulting in annual royalties of around HFL 300K

Court disallowed royalty deductions:

Royalty payments were not proven to be at arm's length

B BV had no employees managing the trademarks

No business motives for transactions, only a tax motive

Sale-and-license back was disregarded (!) for tax purposes


2009 - Coca-Cola

Spanish Supreme Court 2009 RJ210/1324

No royalty payments to IP-owner (US)

100% 100%

Sale of concentrate

The Coca-Cola Company

(US)

A SL(Spain)

B AG(Switzerland)


2009 - Coca-Cola

Facts

Spanish customs authorities adjusted price of concentrate sold by B (Switzerland) to A upwards.

Coca-Cola used the increased prices also for transfer pricing purposes, which was challenged by Spanish tax authorities

Court ruled that Coca-Cola was allowed to use customs value for transfer pricing purpose:

Although customs and transfer pricing methods are different, they have a common goal: to determine the fair market value of the products sold

If a tax authority determines the fair market value of a transaction, it should use the same value for other taxes


2009 - DSG

Facts: Sale of extended warranties in Dixons shops in UK (Dixons,

Currys, PC World) Sales of (i) insurance products insured by Cornhill and 95 percent

reinsured with the Dixons group's Isle of Man insurance company (‘DISL’) and later (ii) service contracts sold by a third party (‘ASL’), the risk on which was all insured with DISL

In both DISL ultimately met all claims Under neither structure was there any transaction directly between

members of the Dixons group structures

Main issues: whether a ‘provision’ had been made or imposed by means of a

series of transactions; and the reinsurance/insurance premiums paid to DISL


2009 - DSG

Held: ‘Provision’ had been ‘made or imposed’ between DSG (the stores

operator) and DISL - DISL would insure the extended warranty business written in DSG's stores on particular terms

This was a perfectly competitive market and that plenty of insurers would be able and willing to take on the book

All the bargaining power lay with the Dixons UK group given: DSG's point of sale advantage DSG's size and brand strength The relative weakness of DISL which was entirely dependent on DSG

for its business loss ratios had become stable and predictable; DISL did not face very

great risk

All excess DISL profit over and above a ‘normal’ rate of return on minimum regulatory capital was to be handed back to the UK


2010 - Zimmer

Facts: In 1995 ZUK switched from selling in France (via an affiliate) through a

buy/sell arrangement to a commissionaire structure

Commissionaire structures are a civil code concept - crucially, commissionaires do not take title to products - 'principal' sells directly to ultimate customer

Structure allows profit to be retained in 'principal' who would otherwise have sold products to commissionaire under a buy/sell arrangement - functions and risks involved with buying and holding stock and the credit risk of selling the goods appear to have been passed to the principal

Allows principal to benefit from domestic tax rate or loss tax advantages (eg loss reliefs) and reduces tax in the commissionaire's jurisdiction

French authorities therefore argued that commissionaire was instead taxable as a permanent establishment of the principal, arguing that the commissionaire could bind ZUK


2010 - Zimmer

Conseil D'Etat:

A sales contract concluded by a commissionaire does not bind the principal as regards the commissionaire's client

Commissionaire therefore cannot be a permanent establishment of the principal

However:

Parties acting otherwise than in accordance with commissionaire documentation will still be at risk of PE analysis

Tax authorities can still attack commissionaire structures on TP principles: one function is effectively being split between two entities functional analysis may reveal need for repricing if commissionaire is

adding value (eg intangibles)


2010 - SGI

Facts:

Belgian company SGI granted interest free loan to affiliate in France and paid director's remuneration to Luxembourg company which was SGI minority shareholder/ managing director

both transactions challenged by Belgian tax authorities as gratuitous advantages

rules less favourable than would have been if advantages had been granted to Belgian company

arguably deterred non-Belgian companies from establishing themselves in Belgium

Matter referred to the ECJ

Belgian Government justified rules on basis that they safeguarded the appropriate allocation of taxing rights, prevented tax avoidance and prevented abusive practices


2010 - SGI

ECJ upheld rules:

Sympathetic to allocation of taxation rights argument

Justified where legislation: specifically targets wholly artificial arrangements; or has the objective of preventing tax avoidance and can be read together

with the need to preserve the balanced allocation of taxation rights subject to the requirements of proportionality

Proportionality: taxpayer must have opportunity to establish commercial justification for

the transactions in question taxation arising from challenge had to be confined to the gratuitous part

Cross-border transfer pricing rules which are more restrictive than domestic equivalents can therefore be justified subject to the above criteria


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EMEA transfer pricing case law December 2013