Transejes Transmisiones Homocinéticas de Colombia S.A. had transactions with foreign related companies within the GKN group, including purchases of inventories for production. These transactions were analysed in the taxpayer’s transfer pricing study and supporting documentation. During 2015 Colombia introduced International Financial Reporting Standards for accounting purposes, and the taxpayer made a comparability adjustment in its transfer pricing analysis to account for the first year of IFRS implementation.
Following a transfer pricing audit, the tax authority concluded that the transaction involving purchases of inventories from related parties did not comply with the arm’s length principle. Based on its benchmarking analysis, the administration determined that the taxpayer’s profitability was outside the interquartile range of comparable companies and therefore adjusted the result to the median of the range. This adjustment led to the rejection of certain costs of sales and deductions and an increase in taxable income.
The company challenged the assessment, arguing that the transfer pricing adjustment was incorrect and that the comparability adjustment made in its transfer pricing documentation was necessary because 2015 was the first year of IFRS implementation. According to the company, Colombian tax law provided for a transition period during which IFRS should not produce tax effects. The company also raised procedural objections, including alleged defects in notification, lack of jurisdiction of certain officials, and the operation of positive administrative silence.
Judgment
The Supreme Administrative Court annulled the tax assessment. The court held that the administrative acts issued by the tax authority were invalid. As a consequence, the transfer pricing adjustment, the disallowance of costs and deductions, and the penalty for inaccuracy were cancelled.
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