Czech Republic vs Inventec s.r.o.
Inventec CZE s.r.o. (“Inventec CZ”) is a wholly owned Czech subsidiary of Inventec Corp., Taiwan (“Inventec TW”). In 2013, Inventec CZ purchased materials worth EUR 680 million from Inventec TW. Inventec CZ used the materials to manufacture server cabinets for Hewlett Packard (“HP”), an unrelated party. The terms and conditions of the sales contracts with HP were negotiated and agreed upon by Inventec TW.
Inventec CZ claimed that acquiring the high-value materials from Inventec TW was a formal requirement with no substantive impact on the economic characterization of its activities. It maintained that it operated as a contract manufacturer, performing narrowly defined production tasks, which ought to be considered routine. Despite being carried out on high-value materials, Inventec CZ claimed that its activities did not involve substantial value creation. Inventec CZ contended that all risks related to the materials were borne by Inventec TW, which retained control over material flows and key decisions.
Accordingly, Inventec CZ argued that it should be remunerated at a cost-plus on operating expenses, excluding material costs. In its transfer pricing, Inventec CZ applied the transactional net margin method (“TNMM”), using operating expenses (9% of total costs) as the profit level indicator (“PLI”). Under this approach, Inventec CZ excluded EUR 680 million of material costs from its value-adding base.
