It’s time for ITR’s annual review of the biggest transfer pricing disputes of the year.
Once again, multinationals found themselves up against determined tax authorities in high-stakes cases across the world. In some instances, courts were asked to intervene and settle the issues in dispute.
All in all, it was a busy year for tax officials and judges, so here is a recap of the most important cases.
Australia v Rio Tinto
On July 20, Rio Tinto agreed to pay A$613 million ($424 million) to the Australian Taxation Office following a dispute concerning profit-shifting allegations against the global mining company.
This was one of the biggest tax settlements in Australian history.
The mining company was accused of moving profit to its marketing centre based in Singapore. The tax authority pursued the company in 2021 for its intra-group dividend financing after launching an initial investigation in 2017 over its 2020 tax returns.
The agreed sum was in addition to an already paid A$378 million, bringing the total cost to almost A$1 billion in tax.
The additional profits made from Rio’s Australian-owned commodities are set to be taxed in the jurisdiction in the years to come, according to ATO’s deputy commissioner Rebecca Saint.
“The resolution of these matters means that ordinary Australians can have confidence that even the biggest companies are held to account to pay their tax due,” she said in a statement.
Peter Cunningham, CFO of Rio Tinto in London, at the time welcomed the end of years of disputes with the ATO.
“We are glad to have resolved these longstanding disputes and to have gained certainty over future tax outcomes relating to our Singapore marketing arrangements,” he explained in a statement.
Denmark v Maersk Oil and Gas
The Maersk group was highly profitable during the financial years of 1986 to 2010, but its Danish parent Maersk Oil and Gas reported losses during that time.
The Danish tax agency – known as SKAT – blamed an aggressive transfer pricing (TP) arrangement, leading to a dispute (No BS-41574/2018 and BS-41577/2018).
According to the tax administration, the business model allowed the company to never make a profit from its operations.
Maersk Oil and Gas issued a know-how licence agreement to subsidiaries in Algeria and Qatar. When such a licence is obtained, expenditure is borne by the subsidiary and the company takes the revenue from the extraction in these areas.
The additional income received by the parent company came from a royalty rate of 1.7% from the subsidiaries.
In 2018, Maersk Oil and Gas appealed a decision from the Danish courts that said the transaction was a TP arrangement.
However, the courts recognised that there was no basis for annual remuneration in royalties from the entities in both countries. They also found that the controlled transactions should be at arm’s length and were not following the price that would have been set by independent parties.
In March, the Danish courts required the case to be reconsidered by the tax administration.
Jakob Krogsøe, partner at Bech-Brunn and the lawyer representing the Maersk group in its case, told ITR at the time that he was surprised by the toughness of the authorities.
“If you spoke to my litigating colleagues who have led or conducted these high-profile TP cases, they would probably conclude that the approach from the tax authorities is quite aggressive,” said Krogsøe.
On May 5, SKAT filed an appeal.
Fiat Chrysler Finance Europe and others v European Commission
In 2012, the Luxembourg tax authority approved a transfer pricing agreement made between the jurisdiction and Fiat Chrysler Finance Europe, previously known as Fiat Finance and Trade.
In October 2015, the European Commission concluded that Luxembourg had provided illegal state aid to the Fiat group. The Commission held that the European nation had used the wrong arm’s-length principle (ALP) to approve the advance TP arrangement.
In 2019, the EU General Court upheld the Commission’s ruling. Fiat and the Irish state, which was an intervener at first instance, then appealed the case (No C-885/19 P and C-898/19 P) to the Court of Justice of the EU (CJEU).
The CJEU set aside the General Court’s 2019 ruling and annulled the Commission’s original judgment on November 8.
The EU’s highest court affirmed that the Commission should rely on the national tax law of the member state – the reference framework in question – when deciding matters involving state aid.
This ran counter to the Commission’s argument that the ALP is an autonomous principle of EU law that is enshrined in Article 107 of the Treaty on the Functioning of the European Union.
While the Fiat ruling potentially opens the door for member states to develop their own TP rules, it does preclude the Commission from investigating whether countries have deviated from a particular national law, including the TP reference framework.
France v McDonald’s France
The US fast-food company agreed to pay €1.25 billion ($1.31 billion) to the French tax authority (‘le fisc’) on June 16 following an investigation into its transfer pricing arrangements.
It was one of the biggest tax settlements in French history.
Chief prosecutor Jean-Francois Bohnert called the €1.25 billion sum “a genuine punishment”.
Meanwhile, Stéphane Noël, president of the Paris tribunal, said it was a "case of importance" and added he was “very attached to the idea that financial justice must be a priority".
From 2009 to 2020, the company allegedly dodged €469 million in tax through transactions in Luxembourg and Switzerland, as well as in Delaware in the US.
After Judge Eva Joly’s accusations in 2015, le fisc took a close look into the company’s affiliates as the corporation was registering no profit despite years of growth.
The Parquet National Financier, a French judicial institution, found that royalties were increased from 5% to 10% in 2009. This enabled the fast-food business to shift profit abroad and avoid paying all its taxes.
A public interest fine of €508 million and €737 million in back taxes and penalties were included in the settlement.
France v ST Dupont
The French tax authority (‘le fisc’) issued a pricing adjustment following an audit of the French luxury pens and leather goods manufacturer ST Dupont. The company is owned by the Dutch firm D&D, which itself is owned by Broad Gain Investments in Hong Kong.
ST Dupont had subsidiaries located outside of France, including ST Dupont Marketing in Hong Kong.
In this case (No.19PA01644), the tax authority held that the prices at which ST Dupont sold its merchandise to ST Dupont Marketing were below the arm’s-length level and that royalty rates were not at arm’s length.
The investigation also showed that the manufacturer was making significant operating losses for the financial years from 2003 to 2009. Meanwhile, ST Dupont’s wholly owned subsidiary in Hong Kong was making sizeable profits over the same period.
The tax administration adjusted the losses reported by ST Dupont for corporation tax in France over the 2009, 2010 and 2011 financial years. In response, the French manufacturer appealed the tax authority’s decision to the Paris Administrative Court, which set aside parts of the tax assessment, including on royalty payments.
On April 13, the Administrative Court of Appeal of Paris dismissed the appeal of ST Dupont and upheld the ruling of the court of first instance.
HM Revenue and Customs v BlackRock
Most would remember the HMRC v BlackRock case (2022 UKUT 00199 (TCC)) not only because of the significant sums involved but also because of the tax authority’s firmness.
The dispute between HM Revenue and Customs (HMRC) and the American multinational investment corporation involved BlackRock’s inter-company loans that were carried out as part of the company’s acquisition of Barclays Global Investors in December 2009.
BlackRock had issued a short-term loan of $420 million (£353 million) at 2.2%, which was followed by $1.6 billion at 4.6%, then $1.4 billion at 5.2% and $500 million at 6.6%.
Questioning whether these loans were compliant with the arm’s-length principle, HMRC decided to revise three of them in 2012. In November 2020, the First-tier Tribunal (FTT) allowed BlackRock to appeal against HMRC.
But on July 19 2022, the Upper Tribunal (UT) ruled against BlackRock. It confirmed HMRC’s decision that denied the shareholder loan interest deductions involving $4 billion of loans.
The UT’s decision overturned the FTT’s ruling, handing victory to HMRC.
India v Kellogg India
The Income Tax Appellate Tribunal of India in Mumbai ruled in favour of Kellogg India (case ITA 7342/Mum/2018) – a licensed manufacturer of the Kellogg group in charge of selling and manufacturing certain products for the brand.
Based in Mumbai, Kellogg India began distributing Pringles products following a deal with AE Pringles International Operations, based in Singapore. The products were manufactured by a third-party contractor and distributed in India with cost-plus pricing of 5%.
In a transfer pricing report, Kellogg India said it considered itself a distributor of Pringles products and was responsible for the strategic and overall management of the Pringles business in India. AE was chosen as the tested party for benchmarking the international transaction of the import of finished goods.
The profit level indicator was determined at 50.07%. Yet, the revenue authorities disregarded the benchmark approach made by Kellogg India and decided that the Indian entity would be used as the tested party instead.
The Indian tax authority, the Income Tax Department, considered the transactional net margin method (TNMM) as the most appropriate method to be used for this transaction. The TNMM compares the net profit margin of a taxpayer arising from a non-arm’s-length transaction with the net profit margins realised by arm's-length parties from similar transactions.
Having selected eight comparable companies, the Indian tax authority determined the arm’s-length profit margin to be 4.33% using the TNMM.
On February 16, the tribunal concluded that AE should be considered the tested party and therefore ruled in favour of the Indian entity, stating that no adjustment to the ALP was required to be made.
India v Olympus Medical Systems India
The case (No 838/DEL/2021) involved Olympus Medical Systems India, a subsidiary of medical equipment supplier Olympus.
India’s Income Tax Department – the tax authority – conducted a transfer pricing audit after the company reported financial losses between 2012 and 2013. The audit led to an assessment being issued by the tax authority.
The tax office also initiated an audit investigation into Olympus India. This was due to the company’s failure to provide audited financials of its affiliated entities to help determine overall group profits and pricing levels.
In its appeal, Olympus argued that tax authorities were wrong to use the residual profit split method when defining the arm’s-length principle (ALP). It also suggested that authorities could not demand an adjustment of the price if they did not have all the information about the group’s profits.
The hearing took place on February 1, with the ruling following on April 20.
The Income Tax Appellate Tribunal, the second appellate authority for direct taxes, held that Olympus India should submit audited financials of its associated companies. Failure to do so would deem it necessary for the tax authority to use the residual profit split method to determine the ALP.
Norway v ConocoPhillips Skandinavia
ConocoPhillips Norway, which provides petroleum exploration and production services, owns the subsidiary ConocoPhillips Skandinavia (Copsas). The case (No LG-2021-38180) concerned a loan agreement between Copsas and ConocoPhilips Norway Funding, carried out in May 2013.
The agreement was a five-year loan with a limit of 20 billion kr ($2 billion). The interest rate on that loan was the Norwegian interbank offered rate (Nibor) of six months + 1.25%, and was based on an analysis made by the ‘big four’ firm PwC.
In March 2019, the Petroleum Tax Office of Norway, which is responsible for the taxation of Norwegian and international companies involved in oil and gas exploration and production, decided that the interest rate of the loan made in 2013 should have been Nibor six months plus 75 basis points, and was not at arm’s length.
As a result, Copsas filed a lawsuit against the adjustment and later an appeal with the Court of Appeal.
However, the court ruled in favour of the tax office on March 16, saying there was nothing wrong with its procedure for ensuring the agreed interest rate for the five-year loan followed the arm’s-length principle.
Volotea v Commission, and easyJet v Commission
Spanish airline Volotea and British budget carrier EasyJet’s cases (C-331/20 P and C-343/20 P) concerned the European Commission's investigation into an Italian regional law after airports in Sardinia were granted state financing. The funding was intended for the development of air routes on the island.
In July 2016, the Commission ruled that the measures were unlawful and that Volotea and easyJet had benefited from illegal state aid. The government assistance was deemed incompatible with the internal market in connection to activities at Cagliari-Elmas and Olbia airports.
The General Court dismissed actions by the airlines to annul the Commission’s decision. In May 2020, the two carriers followed up with an appeal to the CJEU to set aside the General Court’s decision.
On November 17, the CJEU annulled the Commission’s decision in the two cases on the basis that the EU executive body had made errors of law. The court said that the Commission had failed to determine that the transactions in question had given the airlines an advantage.
The CJEU set aside and annulled the General Court’s judgment concerning the two airlines. It held that the aid granted to the carriers was legitimate.
More to come
It’s fair to say that these TP rulings show that global tax authorities will not shy away from taking disputes to court.
Whether it’s navigating complex issues about the arm’s-length principle or responding to detailed information requests, there is little doubt that taxpayers encounter ever more stringent scrutiny from tax administrations.
All eyes will now be on 2023 – who knows what the year will bring?
