Rotary Drilling Tools Colombia (RTD Colombia) applied the transactional net margin method (TNMM) to assess whether its income complied with the arm’s length principle. As part of this analysis, the company made a comparability adjustment by excluding a bad debt expense of COP 918,088,000 from its administrative costs. This exclusion of costs increased its operating margin, bringing it within the interquartile range of the selected comparables.
The Colombian tax authorities rejected this adjustment, arguing that the comparable companies used in the benchmark analysis also included bad debt expenses in their accounts. They recalculated RTD Colombia’s operating margin by including the bad debt expense and concluded that the margin fell outside the interquartile range. As a result, they made an adjustment to align the company’s margin with the median of the comparables.
RTD Colombia appealed the adjustment before the Administrative Court, which largely upheld the position of the tax authorities. The company subsequently appealed to the Supreme Administrative Court.
Judgment
The Supreme Administrative Court overturned the decision of the Administrative Court and annulled the assessment issued by the tax authorities. It held that RTD Colombia’s comparability adjustment was reasonable, given the extraordinary and atypical nature of the bad debt expence, which significantly distorted the company’s profitability compared to that of the comparables.
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