Page 10 - EY-VG_Kasim_2021_v2

Vergide Gündem
English Translation

Applying the profit split method
Orange Business Norway A/S case

Orange S.A. is a multinational telecommunications company headquartered in
France. Orange Business Service division is an infrastructure operator, technology
integrator and supplier of value-added services. A centralized business model had
created large losses at the entrepreneur level up to 2003, while the operating
entities worked on a cost-plus basis. Orange Business Service launched a new
business plan in January 2004 to become a "globally integrated, seamless provider
of telecommunications solutions and services."

Orange Business Norway was subjected to a tax audit by the Norwegian tax
authorities for the years 2004 to 2009. The tax administration found in its final
conclusion that Orange Business Norway's taxable revenue had been decreased due
to the Orange Business Services network's community of interest. In brief, the tax
administration determined that the Profit Split Method (PSM) was not acceptable
and used the Transactional Net Margin Method (TNMM) to review Orange Business
Norway's taxable revenue.

In January 2020, the Court ruled in favor of Orange Business Norway. The Court
of Appeal made a comprehensive assessment of the company's business and
related party transactions and, in line with Orange Business Norway's arguments,
concluded that the PSM was the most appropriate method for obtaining arm's
length prices for Orange Business Services' "highly integrated operations". The
Court of Appeal states that the PSM is typically suitable on “complex and highly
integrated businesses”.

During the tax review, the Tax Administration prepared a benchmark study to
support the reassessment of income. The Company has strongly argued that the
companies accepted as a comparable by the Administration are not sufficiently
comparable. In the final rule, it was stated that all selected companies should be
rejected and emphasis was placed on comparability factors such as ownership,
functions performed and characteristics of the business. A striking feature of
the benchmark study was that the Tax Administration had rejected loss-making
companies by default. Given market conditions and the revision of the transfer
pricing methodology, the decision clearly emphasizes that the analysis at the
operating margin level should include companies with operating losses. Therefore, it
can be concluded that loss-making entities cannot be directly rejected.

The Orange Business Norway case is a clear example of proper implementation
of the PSM. The Court's decision clarifies many aspects of how a transfer pricing
method should be implemented. This case re-emphasizes the importance of
preparing complete and comprehensive transfer pricing documentation and
functional and risk analysis.

Being able to correctly determine the best transfer pricing method and a transfer
price that is in accordance with the arm's length principle, is highly linked to
taxpayers’ ability to analyze the structure of its Group and the nature of the intra
group transactions that are performed. The functions performed, the risks borne
and the assets used/contributed should be evaluated comprehensively. As in the
case of Orange Business Norway, the internal pricing determined by the company
was sufficiently substantiated by the functional analyzes.
10 November 2021