emea transfer pricing case law december 2013
DESCRIPTION
EMEA transfer pricing case law - updated December 2013TRANSCRIPT
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
E: [email protected]: 020 5419 359
Jian-Cheng KuTax Advisor
E: [email protected]: 020 5419 911
Transfer pricing case law in Europe 3
DLA Piper in the Netherlands
DLA Piper Nederland is part of DLA Piper, a global law firm
The Amsterdam office was established in 1916
More than 250 employees work at our Amsterdam office, including over 125 lawyers, civil law notaries and tax advisers who provide outstanding legal services to both national andinternational clients
Transfer pricing case law in Europe 4
DLA Piper world-wide presence
Transfer pricing case law in Europe 5
What is transfer pricing?
Profit allocation within multinational company
Intercompany prices for goods and services
Arm's length principle
Transfer pricing case law in Europe 6
What is the problem?
Aligning transfer pricing (business economics) with tax structuring (law)
Documentation
Double taxation
Penalties and interest
Transfer pricing case law in Europe 7
Legal framework
OECD Model Tax Convention - article 9
OECD Transfer Pricing Guidelines
Updated July 2010
Netherlands: Article 8b Corporate Income Tax Act
Transfer pricing case law in Europe 8
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.
Transfer pricing case law in Europe 9
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
Transfer pricing case law in Europe 10
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
Transfer pricing case law in Europe 11
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.
Transfer pricing case law in Europe 12
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
Transfer pricing case law in Europe 13
2011 - Intercompany loans
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.
Transfer pricing case law in Europe 14
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
Transfer pricing case law in Europe 15
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
Transfer pricing case law in Europe 16
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
Transfer pricing case law in Europe 17
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!
Transfer pricing case law in Europe 18
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
Transfer pricing case law in Europe 19
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
Transfer pricing case law in Europe 20
2008 - Intercompany loans
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
Group C(Multinational)
Holding(Netherlands)
Transfer pricing case law in Europe 21
2008 - Intercompany loans
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
Transfer pricing case law in Europe 22
2008 - Intercompany loans
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
Group C(Multinational)
Holding(Netherlands)
Transfer pricing case law in Europe 23
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)
Transfer pricing case law in Europe 24
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
Transfer pricing case law in Europe 25
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)
Transfer pricing case law in Europe 26
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
Transfer pricing case law in Europe 27
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
Transfer pricing case law in Europe 28
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
Transfer pricing case law in Europe 29
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
Transfer pricing case law in Europe 30
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)
Transfer pricing case law in Europe 31
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
Transfer pricing case law in Europe 32
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
Transfer pricing case law in Europe 33
DLA Piper Nederland N.V.
Amstelveenseweg 6381081 JJ AmsterdamT 020 5419 888F 020 5419 [email protected]
This presentation has been produced by DLA Piper Nederland N.V. This publication is a general overview and discussion of the subjects dealt with. It should not be used as a substitute for taking legal advice in any specific situation. DLA Piper Nederland accepts no responsibility for any actions taken or not taken in reliance on it. If you would like further advice on any of the information within this presentation, then please contact any of thecontacts.