PriceSmart Inc (PSMT) operates a retail chain including approximately 25 department stores in the Caribbean and Central America. PSMT’s local branch had recognised losses in their profit tax returns for the years 2001 to 2006. In 2009, the tax authorities audited the tax returns for the years 2002 to 2006. At issue was the definition and interpretation of the various functions of the interested party and the risks incurred. In particular, the dispute concerned transfer pricing typologies, and whether the local branch could be characterised as a ‘Limited Risk Distributor’ or as a ‘Buy-Sell Distributor’ with a ‘proprietary’ risk in respect of, inter alia, accounts receivable, stock and currency. The tax authorities characterised the local branch as a ‘Limited Distributor’ as it was not the local branch but PSMT Inc. that determined the marketing strategy, mix of products. The branch hasd virtually no decision-making influence in this, because its tasks and activities are determined by functions and employees of PSMT outside Aruba and the decision-making power of branch was limited to simple operational activities. In view of these observations an assesment was issued where a ‘cost-plus’ method of 3% of the costs was applied to calculate the arm’s length profit. After receiving The Council’s preliminary assessment a settlement was reached between the parties according to which losses for 2000 and 2001 were accepted and for the following years a net operating margin of 1.5% (return on sales) were to be applied. Click here for translation ...