Avago Technologies Trading Ltd v/s Director General, MRA Judgment

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Case Information

• Court: Assessment Review Committee (ARC), Mauritius
• Case No: ARC/IT/602/15
• Applicant: Avago Technologies Trading Ltd (ATTL)
• Defendant: Director General of the Mauritius Revenue Authority (MRA)
• Judgment Date: July 4, 2024

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Judgment Summary

The Assessment Review Committee (ARC) ruled in favour of the Mauritius Revenue Authority (MRA) in the case of Avago Technologies Trading Ltd (ATTL) v/s Director General of the MRA. The ARC determined that the royalty fees paid by ATTL to its related entity, GEN IP (Singapore), were excessive, not at arm’s length, and constituted a tax avoidance arrangement. The ARC upheld the MRA’s decision to limit the royalty expense deduction to 5% of net sales, deeming the arrangement primarily aimed at shifting profits to a low-tax jurisdiction, thus minimizing the tax burden in Mauritius.

Key Points of the Judgment

Background

Avago Technologies Trading Ltd (ATTL) is a subsidiary of GEN IP (Singapore) and is the principal manufacturer of Avago Group products. ATTL licenses intellectual property (IP) from GEN IP and pays royalty fees for this IP. The royalty fees were claimed as deductible expenses under Section 18 of the Income Tax Act (ITA) 1995. The MRA challenged the deductibility of these fees, arguing that they were excessive and constituted a tax avoidance scheme.

Core Dispute

The core dispute centered on whether ATTL’s royalty payments to GEN IP were at arm’s length and whether ATTL was entitled to claim the full amount as deductible expenses for tax purposes.

Court Findings

1. Profit Shifting Arrangement: The ARC agreed with the MRA that the royalty payments were part of a profit-shifting arrangement designed to avoid tax liability in Mauritius.
2. Inappropriate Transfer Pricing Method: The ARC found that ATTL’s Transactional Net Margin Method (TNMM) was inappropriate for valuing the royalty payments. The Comparable Uncontrolled Price (CUP) method was deemed more suitable.
3. Excessive Royalty Payments: The ARC determined that the royalty payments, which constituted 93% of operating profits, were excessive and inconsistent with industry practices.
4. Violation of Arm’s Length Principle: The ARC ruled that the royalty payments did not reflect an arm’s length transaction, as they were significantly higher than what would be agreed upon between unrelated parties.
5. Tax Avoidance Scheme: The ARC upheld the MRA’s assessment that the arrangement was primarily for tax avoidance, shifting profits to Singapore, where they were tax-exempt.

Outcome

The ARC ruled in favour of the MRA, maintaining the adjusted assessment and limiting the royalty expense deduction to 5% of net sales.

Transfer Pricing Method Used

ATTL’s primary transfer pricing method was the Transactional Net Margin Method (TNMM). However, the MRA and ARC found this method inappropriate for valuing royalty payments and preferred the Comparable Uncontrolled Price (CUP) method.

Major Issues or Areas of Contention

1. Excessive Royalty Payments: The proportion of royalty payments (93% of operating profits) was deemed excessive and inconsistent with industry standards.
2. Inappropriate Transfer Pricing Method: The use of TNMM was contested, with the MRA and ARC favouring the CUP method.
3. Tax Avoidance: The arrangement was seen as a scheme to shift profits to a low-tax jurisdiction, thereby minimizing tax liability in Mauritius.
4. Arm’s Length Principle: The royalty payments were not considered at arm’s length, as they did not reflect what would be agreed upon between unrelated parties.

Was the Decision Expected or Controversial?

The decision was somewhat controversial due to Mauritius’s lack of specific transfer pricing legislation. However, it was expected, given the MRA’s focus on preventing profit shifting and tax avoidance. The ruling emphasized the importance of adhering to the arm’s length principle and provided a precedent for future cases involving transfer pricing disputes.

Significance for Multinationals and Revenue Services

The ruling has significant implications for multinational enterprises (MNEs) operating in Mauritius and other regions:

• Adherence to Arm’s Length Principle: MNEs must ensure that intercompany transactions reflect genuine economic activities and risks.
• Transfer Pricing Documentation: Robust transfer pricing documentation and commercial justifications are essential to support intercompany pricing.
• Regulatory Compliance: The case highlights the need for clear transfer pricing regulations to provide guidance and ensure compliance.

Value of Transfer Pricing Expertise

Transfer pricing expertise is invaluable in ensuring compliance with tax laws and avoiding disputes. Experts can provide:

• Accurate Valuation: Proper valuation of intercompany transactions to reflect arm’s length pricing.
• Documentation: Comprehensive documentation to support transfer pricing positions.
• Dispute Resolution: Assistance in resolving disputes with tax authorities.

Preventative Measures

To avoid or better manage cases like this, companies can implement the following preventative measures:

1. Tax Risk Management Process: Establish a robust tax risk management process to identify and mitigate potential risks.
2. Tax Steering Committee: Form a Tax Steering Committee (TSC) to oversee and direct tax strategies, ensuring compliance and alignment with business objectives. Click here to download our exclusive (FREE) eBook: “The Essential Role of a Tax Steering Committee.”
3. Regular Reviews: Conduct regular reviews of transfer pricing policies and documentation to ensure they reflect current economic activities and risks.
4. Training and Education: Provide training for key stakeholders on transfer pricing regulations and best practices.

SUMMARY

The Avago Technologies Trading Ltd vs. Director General, MRA case highlights the complexities and challenges in transfer pricing and tax avoidance disputes. It underscores the need for robust transfer pricing policies, thorough documentation, and proactive tax risk management to avoid similar issues. This ruling is a crucial reminder for multinationals to ensure that their intercompany transactions are transparent, justifiable, and compliant with local and international tax regulations.