The case concerns a transfer pricing adjustment made by the Portuguese tax authorities for fiscal year 2008.
The tax authorities found that the arm's length principle had not been applied under a cash pooling agreement involving a Portuguese taxpayer and its foreign parent company and a foreign bank.
The tax authorities selected the comparable uncontrolled price (CUP) method as the most appropriate transfer pricing method, and identified certain uncontrolled transactions with which to benchmark the interest rates used in creditor balances and under guarantee / warranty agreements.
The taxpayer did not agree with the transfer pricing adjustment, and filed a tax claim (Reclamação Graciosa) in which it asserted that the CUP method was not the most appropriate method and that its application could only lead to incorrect conclusions and adjustments.
The taxpayer asserted that given the unusual nature of the cash pooling agreement, it had to be analyzed on an aggregate basis—with the profit split method being the most appropriate method because that method would allow for a determination of the proper distribution of the cash pooling benefits among the participants.
The court concluded that the tax adjustments infringed on the rules underlying the use of the CUP method for transfer pricing purposes.
In particular, the court found that the comparable uncontrolled transactions used by the tax authorities (either to benchmark the interest rate for creditor balances or the alleged warranty) were not “reliable” because the selected transactions did not provide for the highest degree of comparability that is required for the application of the CUP method. The court, thus, concluded in the taxpayer’s favor.
Tax professionals in Portugal look to the recent decision of the court and the current difficulties in obtaining bank credit in Portugal (which have caused several companies that are part of a group to use cash pooling systems as an alternative of financing) as support for the premise that taxpayers must prepare robust transfer pricing analyses and select the most appropriate methodologies to support the arm’s length nature of their complex financial transactions.
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services Group in Portugal:
+ 351 210 110 087
+ 351 220 102 353