This is to let you know of a recent private tax ruling dated 28 March 2024 by Director of National Revenue Information (“Authority”) (ref. 0111-KDIB1-1.4010.34.2024.2.SG), where he upheld the applicant’s argument that an annual profit/loss true-up done as part of intra-group margin adjustments in accordance with the profit split method can qualify as a transfer pricing adjustment under Article 11e of the CIT Act.

The applicant is a Polish automotive company whose business includes, among other things, the production and sale of after-market car parts. The company has a foreign affiliate that operates as the central entrepreneur (“Principal”) with full-flung functions at the head of the Group’s business division of which the Polish company is a part (operating as a contract manufacturer).

The contemplated transaction model (and the related adjustments) was based on the profit split method applied as follows:

  • The model includes a two-stage accounting process:
    • Goods are invoiced as and when sold at prices calculated on the basis of projected manufacturing costs, including quarterly true-ups to match actual costs.
    • Following each reference period:
      • the Principal determines the total profit as net margin (profit or loss as the difference between total revenue and total expenses);
      • then the net margin (profit/loss) generated by the Group is split proportionally in accordance with the Group’s contribution analysis (contribution to generation of value added within the Group’s profit).

The Authority acknowledged that the end-of-year adjustments done to Polish company’s net margin to reflect the Group’s result are transfer pricing adjustments for the purposes of Article 11e of the CIT Act.

Rather than the commonly applied TNMM, this model uses a different approach to determine the transfer prices in a contract manufacturing transaction. Where consolidated expenses exceed the related consolidated total revenues, the contract (routine) manufacturer’s result is adjusted to the market (loss) in accordance with its contribution to the transaction.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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