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CaseK.2012/328,22March2012–BursaTaxCourt- Turkey
A
B
FRA
TUR
• AisresidentinFrancewithnoPEinTurkey• Aisanautomobilemanufacturer• BisaresidentinTurkey• AandBsignedan“AgreementontheProvision
ofCentralizedInformationSystemServices”• Theservicesconsistedof:
• theuseofsoftwareprogram• technicalandadvisoryservices
• Thesoftwareprogramwas(likely)anindustryspecific,tailor-madesoftwareprogram
• Thetaxadministrationqualifiedtheremunerationfortheuseofthesoftwareprogramasaroyalty
Legalbackground• 10%residualwithholdingtaxaccordingtoarticle12(2)oftheDTCFRA-TUR
• Article12(3):“Theterm“royalties”asusedinthisarticlemeanspaymentsofanykindreceivedasaconsiderationfortheuseof,therighttouseorthetradingofanycopyrightofliterary,artisticorscientificworkincludingcinematographfilmsandcinematographfilmandrecordingsforradioandtelevision,anypatent,trademark,designormodel,plan,secretformulaorprocessorforinformationconcerningindustrial,commercialorscientificexperience,orfortheuseof,ortherighttouse,industrial,commercial,orscientificequipment.”
• Article4oftheProtocol:“Withrespecttoparagraph3ofArticle12,remunerationfortechnicalservices,includinganalysesorstudiesofascientific,geological,ortechnicalnature,orforengineeringworksincludingplanspertainingthereto,orforconsultationorsupervisoryservicesshallnotbeconsideredasremunerationpaidforinformationreferringtoexperienceacquiredintheindustrial,commercialorscientificfield.”
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Findingsofthecourt• Thecourt ruled infavour ofthetax authorities• According to thecourt theterm «royalty»includes thepayments for the
use ofthesoftware program by theTurkish company• Suchincomequalifiesaccording tothecourtasagainreceived“for
information concerning, industrial, commercial orscientific experience”– i.e.know-how.
• But:thepayments for thetechnical services did not fallunder article 12onthebasis ofarticle 4oftheProtocol
• Thedecision contains very limitedreasoning
CaseITANo.3399/Ahd/2010, 19August2011–IncomeTaxAppellateTribunalAhmedabad
A
B
RUS
IND
• AisresidentinRussia• Itisspecializedininstallation ofgasund
liquid pipelines• Joint venturewith anIndiancompany(B)
fortheexecution ofaturnkeyproject• Taxpayerwasresponsible forproviding
technical guidanceandconsultancyinrespectofproject management
• 3%ofthegrossproject consideration asremuneration forA;97%forB
• Taxrateifarticle7(businessprofits) wouldbeapplicable– 40%
• Taxrateifarticle12(royalties)wouldbeapplicable – 10%
Jointventure
C
3%
97%
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Findingsofthecourt
• Thecourt held that theresponsibilities were clearly segregated betweenthejoint venture partners
• Thedecision contains arather detailed analysis ofthe(contractual)activities ofA
• Thetaxpayer (A)did according to thecourt notrender construction work inIndia – only technical services
• Therefore, the taxpayer only received aremuneration for technical services• Theincome is,therefore, taxable atarateof10%and notarateof40%-
calculation oftheincome?
CaseABLLCandBDHoldingsLLCvCommissioner ofSouthAfricanRevenueService, TaxCourt13276
ABLLC
X
US
SA
BDHoldingsLLC
• ABLLCand BDHoldingLLCrenderedconsultancy services inSAto anairline
• Thetwo LLCswere treated as asingleappellant
• 17employees were made available• Three core employees spent more than
183days inSA• Employees were present from Feb
2007until May2008• Employees were granted exclusive use
ofX’s boardroom• SARStaxed fees paid in2007and 2008;
and thesuccess fee paid in2009wasalsotaxed
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Legalbackground• Article 5DTCUS-SA
• “(1)ForthepurposesofthisConvention, theterm‘permanentestablishment’ meansafixedplaceofbusinessthrough whichthebusinessofanenterpriseiswholly orpartly carried on.
• (2)Theterm‘permanentestablishment” includesespecially –• [a- j]
• (k)thefurnishing ofservices,including consultancy services, withinaContracting Statebyanenterprisethrough employeesorotherpersonnelengagedbytheenterpriseforsuchpurposes,butonlyifactivities ofthatnaturecontinue(forthesameoraconnectedproject) withinthat Stateforaperiodorperiodsaggregating morethan183daysinanytwelve-monthperiod commencingorendinginthetaxableyearconcerned.”
Findingsofthecourt• Thequestionwaswhether theapplication ofarticle 5(2)(k)DTCUS-SA
requires that theconditions ofarticle 5(1)DTCUS-SAare met• According to thecourt theOECDCommentary could provide no assistancein
this respect because theOECDMCdoesnotcontain anarticle similiar to article5(2)(k)DTCUS-SA.
• Instead,Vally Jplaced reliance ontheUSTechnicalExplanations,i.e.theapplication ofarticle 5(2)(k)DTCUS-SAdoesnotrequire that theconditionsofarticle 5(1)DTCUS-SAare met.
• 183day threshold wasmet• Thecourt ruled that thetwo LLCshave aPEinSouthAfrica (solely)based on
article 5(2)(k)DTCUS-SA• But:the court even concluded that therequirements ofarticle 5(1)DTCUS-SA
were met• Taxes due+penalty of100%+interest;decision is final(no appeal)
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3– QuarkSystemsPvTLtdv.ITO• QSS:developmentofspecializedsoftwarefor
mediacompanies(layoutfornewspaperandperiodicals)
• QSPvT:localsubsidiary• ContractbetweenQSSandQSPvT:QS
providesservicestocustomersofQSSfacingtechnicalissuesregardingthesoftware
• RemunerationofQSPvT:cost-pluswithamark-upof13,5%(TransactionNetMarginMethod)
• Courtcase– LitigationoccursinIndia– TaxpayerisQSPvT– Yearofassessment:2003/04– Issue:determinationofthefeefortaxpurposes
QSSARL
QSPvT Ltd
100%shareholding
CH
IndiaTechnicalservices
Fee
3– QuarkSystemsPvTLtdv.ITOProcedure• Taxpayer
– selectedascomparablesthecompanies operatingintheIT/ITenabledservices
• Taxauthorities (audit):– Excluded oneof thecompaniessinceitwasarecentoneandlossmaking– Excluded the+/- 5%asprovidedbydomesticlaw
• Appeal(Commissioner ofIncomeTax):– TAarerightintheexclusionofthelossmakingcompanyascomparable– TAarewrongintheexclusionofthe5%marginasprovidedbydomesticlaw
• AppealtotheIncomeTaxAppelateTribunal– Aloss-makingcompanycanbeincluded ascomparable(noissues)– Nonetheless,incasu,therewasnoproperanalysisandastart-upwithlossescouldnotbe
considered ascomparable– Thetransactionsinquestionwerealsonotcomparabletotheactivitiesofthetaxpayer’s.
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3– QuarkSystemsPvTLtdv.ITOIssuesforfurther discussion regardingremuneration oftechnicalservices• Howshouldtheremuneration fortheseservicesbeset?• Incaseofassociatedenterprises, whatisarm’s length remuneration?
– Whichmethodscould beapplicable?– Ifcomparables required,whataretherightcomparators?Whatconditionsinwhat
concerns theentity?Whatconditionsinwhatconcernsthetransactions?
• Specificissuesfordevelopingcountries– HaveTaxAuthoritiesthecapacityofapplyingOECDguidelines?– Whatdocuments shouldberequired?
QuarkSystemsPvt. Ltd.
QSSA• Developerofspecialisedsoftware
formediacompanies• Softwareusedforpagelayoutof
newspapers
QuarkSystemSARL(Switzerland)(“QSSA”)
QuarkSystemsPvt. Ltd.(India)(“QSPL”)
100%
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QuarkSystemsPvt. Ltd.
Serviceagreement• QSPLwasacaptiveunitandworked
exclusivelytoQSSA• ProvidedservicesexclusivelytoQSSA• Typesofservices:
– TechnicalservicestoQSSAandcustomers
– Advisoryservicestocustomers• Fees =costsplus10%initially(4
months)butchangedtocostsplus13.5%
QuarkSystemSARL(Switzerland)(“QSSA”)
QuarkSystemsPvt. Ltd.(India)(“QSPL”)
100%
QuarkSystemsPvt. Ltd.
• Determinationofprice:– UsedtheTransactionalNetMarginMethod(“TNMM”)– IdentifiedcompaniesoperatinginInformationTechnology/InformationTechnologyEnabledServicessector
– IncludedImercius TechnologiesIndiaPvt. Ltd.(tele-marketer)whichwasacompanyshowinganet lossandwasinstart-upphaseofbusinessoperations
– IncludedDataMatrixTechnologiesLid.whichmadesalesof31.27%toassociated concerns
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QuarkSystemsPvt. Ltd.• RequirementsofTNMM:– comparesthenetprofitmarginofataxpayerarisingfromanon-arm’slengthtransactionwithnetprofitmarginsrealizedbyarm'slengthpartiesfromsimilartransactions
– examinesthenetprofitmarginrelativetoanappropriatebasesuchascosts,salesorassets
– usuallyappliedtotheleastcomplexpartythatdoesnotcontributetovaluableoruniqueintangibleassets
– importanttochoosetheappropriatebasetakingintoaccountthenatureofthebusinessactivity
QuarkSystemsPvt. Ltd.
• AdjustmentmadebyTransferPricingOfficer(“TPO”):– ExcludedImercius Technologies IndiaPvt. Ltd.ongroundsthat• itisacontinuous loss-makingcompany• notfunctionallycomparablewiththetestedparty
– Excludedmark-up (Indiaallowed5%mark-up atthetime)
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QuarkSystemsPvt. Ltd.
• TaxpayerraisedadditionalargumentforexclusionofDataMatrixTechnologiesLid.fromcomparablestatingthat itmadeamistakewhenitwasincluded
QuarkSystemsPvt. Ltd.• Ruling:– Basicrequirementsoffunction,assetsandrisksanalysiswerenotmetbytaxpayertojustifyinclusionofImercius TechnologiesIndiaPvt. Ltd.
– Salessupportandtechnicalservicesinherentlydifferentincharacterandscopefromtele-marketingservices
– Riskanalysisshowedthatthetwoentitieswerenotonevenground
– However,acompanycannotbeexcludedfromlistofcomparables merelybecauseitissufferinglosses
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QuarkSystemsPvt. Ltd.
• Rationaleforruling– Decisionunderscores importanceofsearchstrategyandfunctional analysisofbothtestedandcomparablecompanies
– Acceptanceofloss-making companyafterdetailedanalysis ongrounds thatitispartandparcelofeconomicactivityisnoteworthy
Technicalfeesandtransferpricing
• Casehighlightssomeofthechallengesfacingmulti-nationalenterprises(“MNEs”)toobtainsuitablecomparables
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Technicalfeesandtransferpricing
• OtherchallengesfacingMNEs:– Determinationofcoststoprovideservices– Identificationofcomparableenterprises– Determinationofappropriatemark-up forspecialised services
– Iswithholding taxonservices acost?
4– CopesulvsFederalUnion• Copesul:Brazilian resident withmachinesand
other equipments• SEP:SurfaceEngineering product (Canada)• Siem:SiemensPowerGeneration (Germany)• Transactions:
– Copesulaskedfortechnicalservice from these twocompanies
• Normativebackground(7ºor12º...ornoneofthem?)– Art.7ºcanNOTbeapplicablesinceunderdomesticlaw
considersthesepaymentsas“revenue”butnotas“profits”.
– Art.12isnotapplicablesinceacircularorder(COSIT1/200)establishesthattechnicalservicesthat donotincorporateatransferoftechnology,arenotroyalties(Art.12)butshouldbeframedunderArt.21.
– Brazil’streatiesnormallyallowforsourcetaxationofotherincome
SEP
Copesul
Canada
Brasil
Technicalservices
Fee
Germany
Siem
Fee
Technicalservices
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4– CopesulvsFederalUnionDecisionofthecourts:• Taxpayer(Copesul)
– Ruling1/2000isnotapplicablesincethesepaymentsfallwithinArt.7oftheapplicabletreaties
• LowerFederalCourt– Rejectedtheappeal
• FederalRegionalCourt(4thregion)– Thisshouldbeframedunderart.7– TheTAanddomesticlawdistinctionbetween“revenues”and“profits”is
irrelevant:i)revenuesarecomponentsofprofits;ii)toacceptthisdistinctionwouldbeequivalenttorenderArt.7inapplicable
• FederalRegionalCourt(4thregion):again!– AppealfromtheBrazilianTaxAuthoritiestothesamecourt– Samedecision(andargumentation)asinthefirstdecision
4– CopesulvsFederalUnion• SuperiorCourtofJustice
– Feesshouldbeframedunder art.7– The treaty term “businessprofits” is not limited tothe domestic
definition of “realprofit” (difference between grossreceipts anddeductible expenses,plus adjustments).It should be understood as“operational profit” (that includes the income at stake)