In this regular review of the key transfer pricing cases from last year, we take a look at the details of the cases. You can review transfer pricing cases in Australia and Europe in parts one and two of the series.
In the last of three-part series, those transfer pricing cases in the Americas are summarized and analyzed.
Cameco Corporation, Supreme Court of Canada (Case No. 39368)
On Feb. 18, 2021, the Supreme Court of Canada dismissed the application for leave to appeal by the Canada Revenue Agency, or CRA, with regard to the case of Cameco Corporation. This appeal was in respect of the June 26, 2020 decision of the Federal Court of Appeal not to allow the appeal by the CRA in respect of the decision of the Tax Court of Canada in 2018 (see Transfer Pricing Cases of 2020 and Transfer Pricing Cases of 2018). The CRA’s reasons for recharacterizing the actual transaction continued to be viewed as insufficient.
Avery Dennison Chile S.A., Tax Court of Chile (Case No. RUTo96.721.090-0)
On March 31, the Tax Court of Chile published its decision in the case of Avery Dennison Chile S.A. The taxpayer carried out distribution and marketing activities for related parties and also transferred its surplus funds to the group’s financial center via loans. The court found that the use of the interquartile range was not required by the OECD Transfer Pricing Guidelines and that it was sufficient that the taxpayer’s distribution and marketing margin was inside the full arm’s length range, unless the tax administration could show that the rejected 50% of benchmarks were insufficiently comparable. This conclusion was similar to the one in Blackstone/GSO Debt Funds Europe S.à.r.l. (see below).
With regard to the interest rates on the loans, the court decided that the taxpayer’s methodology was appropriate and that no adjustment was merited. The taxpayer only received Libor with no risk spread, but this was held to be reasonable because the loans should be compared to short-term deposits between banks. It was thought to be important in this respect that the term of the loans was capped at six months.
The Coca-Cola Company and Subsidiaries, United States Tax Court (Case No. 31183-15)
On Dec. 2, 2021, the United States Tax Court published its decision in the case of the Coca-Cola Company and Subsidiaries. The court decided not to reconsider its decision of 2020 (see Transfer Pricing Cases of 2020), partly because there had been no substantial error of fact or law. It, therefore, held for the tax administration, which had benchmarked the net margins of the taxpayer’s subsidiaries rather than accepting that they were risk-taking manufacturers under license.
The decisions in the transfer pricing cases of 2021 suggest the following themes:
- Comparability adjustments are required when using an internal CUP such as a bank loan as a benchmark for a subordinated and/or unsecured loan unless it can be shown that there was no market for such loans;
- The arm’s length price includes the terms and conditions, but the economic factors that are specific to the transaction should determine which terms and conditions are imputed for any particular related party transaction;
- Long-term losses can be justified by economic factors;
- The full arm’s length range can be used unless the observations outside the interquartile range have been shown to be unreliable; and
- Deviations from the arm’s length range (e.g. interest-free loans) can be justified by the economic considerations of the parties.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Danny Beeton is of counsel in the London and Luxembourg offices of Arendt & Medernach.
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