This article concludes the discussion from last week’s article.
3. “Metal Kft” vs. Hungary:
Metal Kft (Kft) is primarily involved in the production of metal and powder metallurgy at its facility in Moore, Hungary. The company markets its products to both related parties (54%) and independent customers. Additionally, Kft pays royalties for trademarks and brand names, interest on loans and cash pool accounts, and utilizes management services within the group. While the group as a whole reported a profit, Kft itself incurred a loss. In analysing sales to related parties and applying the Transactional Net Margin Method (TNMM), Kft segmented its financial data, excluding extraordinary costs related to inefficient plant operations and quality issues with the goods.
As a result of Kft’s transfer pricing (“TP”) audit, the Hungarian tax authorities:
In this case, however, the Court identified deficiencies in the tax administration's analysis, particularly regarding the definition of transactions and the application of transfer pricing (TP) methods. The Court has requested a reassessment of the transactions between the related parties, based on a clearer factual foundation.
4. Illichmann Castalloy s.r.o. vs. Slovakia:
llichmann Castalloy s.r.o. (IC), an Alicon Group company, is active in the production and sale of aluminium foundry and sand moulds and kernels. It operates under Alicon Castalloy limited, headquartered in Vienna. The company mainly carried out transactions related to the sale of aluminium foundry products to related parties in Austria and Germany. Given that the group was loss-making, it used the profit-sharing method (PSM) when examining the transfer pricing methodology for the sale of goods, distributing the total group losses to all companies in the group, including llichmann Castalloy s.r.o.
As a result of IC's transfer pricing test, the Slovak tax administration:
In this case, the court ruled in favor of IC, rejecting the tax administration's approach to the transfer pricing (TP) analysis. The court argued that low-risk companies could also incur losses. Additionally, inconsistencies were identified in the comparability analysis conducted by the tax administration.
The proceedings at issue call into question several important aspects in defining the TP for loss-making companies and in describing the analysis carried out in the TP documentation:
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Ask questionCompanies that operate at a loss for an extended period of time remain in the sights of tax administrations, including the Latvian State Revenue Service, especially if these companies are part of a multinational group of companies and carry out controlled transactions.
This article looks at a number of court cases in European countries that show how complex and difficult it is for companies and tax administrations to scrutinise the transfer pricing of loss-making companies.
In everyday life, companies have to use an option such as borrowing money for various specific purposes. A significant increase in debt can present the company with challenges that impact balance sheet performance and potential tax risks.
One solution to the problem of increasing debt can be to capitalise the loan – a process whereby the creditor invests its debt rights as a financial asset in the borrower's equity.
This article describes the nature of the loan transaction and its capitalisation with practical examples of possible situations dealing with both corporate income tax (CIT) and transfer pricing (TP) aspects.
The Organisation for Economic Co-operation and Development (OECD) is known to be a unique forum and a globally recognised centre of expertise that enables member states, including Latvia, to effectively address matters of interest to it regarding the adequacy of transfer prices.
This article looks at the guidance developed by the OECD on Amount B for associated enterprises performing the function of a distributor of goods within a group of companies.
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