Empresa Minera Los Quenuales S.A. had used the transactional net margin method to determine the arm’s length price for its controlled transactions consisting of sales of zinc concentrates to a related party, Glencore International AG, domiciled in Switzerland. The tax authorities disagreed with the choice of method and instead applied a CUP method, on the basis of which an assessment of additional taxable income was issued. Not satisfied with the assessment, Empresa Minera Los Quenuales S.A. appealed to the Tax Court. The Tax Court ruled mostly in favour of Empresa Minera Los Quenuales S.A. According to the Tax Court, the tax authorities had not taken into account various comparability factors in determining the arm’s length price of the zinc concentrate under the chosen method – such as weight, percentage of humidity, loss, ore grade, recovery factor, etc. The tax authorities then appealed. Judgment The Supreme Court overturned the Tax Court’s decision and decided in favour of the tax authorities. According to the Supreme Court, the tax authorities had analysed the relevant components of the zinc concentrate price and not only a single component consisting of the “international zinc quotation”, as the Tax Court erroneously stated. The Tax Court had also failed to analyse Article 32-A of the Income Tax Law, which states that in export transactions with a known quotation on the international market, or with prices that are fixed by reference to the quotations of the specified markets, the market value shall be determined on the basis of such quotations. Although the Tax Court assessed the evidence in the case, it did not rule on the merits of the case by determining the appropriate method for calculating market value under the transfer pricing rules. For these reasons, the judgment of the Tax Court was declared null and void. Click here for English Translation Click here for other translation ...

Banana S.A. sold bananas to related parties abroad. These transactions were priced using the TNMM method and the result of the benchmark analysis was an interquartile range of ROTC from 0.71% to 11.09%. However, Banana S.A. had continuous losses and for 2016 its return on total costs (ROTC) was -1.83%. To this end, an “adjustment” was made by adding “unearned income” related to storm damage to the actual results, which increased the company’s ROTC from -1.83% to 3.57%. The tax authorities disagreed with both the transfer pricing method used and the “adjustment” made to the results. An assessment of additional taxable income in an amount of B/.20,646,930,51. was issued, where the CUP method (based on quoted commodity prices for bananas) had been applied. Judgement of the Court The Court agreed with the tax authorities that the “adjustment” for “unearned income” was not allowed. “….In this sense, we agree with the Tax Administration when questioning the adjustment made by the taxpayer, attending to the reality exposed by the itself in the appeal , explaining that —————– produces different types of bananas according to their characteristics which are direct consequence of the position of the banana in the bunch, so that in the scenario of having lost an approximate of 700,000 boxes due to climatic events, it is impossible to claim that the total of boxes lost would have had a cost of USD 8.30, already that this would represent that the lost bunches, only had bananas extra quality, so that of according to the taxpayer’s own explanations is impossible. …. Based on the above, we can conclude that the taxpayer did not disclose the weather event that affected its plantations in the audited income statement for the period 2016, nor in its audited financial statements, since at the information financial that is uses to make the adjustments of comparability,such events were not reported since there is no financial information that validates their existence and therefore they are rejected.” However, as regards the transfer pricing method, the Court agreed with the taxpayer that although the product was the same, other comparability factors were not. On this basis, the assessment of the additional taxable income was changed by the court to the result previously determined by the tax authorities using the TNMM, without taking into account the adjustment for unearned profits. “….Tax Administration undermined the conclusions and results presented in the Transfer Pricing Study of ———————- for the year 2016, which were established using the Transactional Net Margin Method (TNMM), by not accepting that the taxpayer’s income and margin, which would have been higher had the weather events that caused losses not occurred, notwithstanding, the taxpayer emphasises that the Tax Administration accepted all the comparables used in the Transfer Pricing Study. In this regard, the taxpayer adds that had the weather events that caused the loss of 719,531 boxes of bananas not occurred, the company’s margins would have been within the inter-quartile ranges of the comparables selected for the Transfer Pricing Study, and secondly, being weather events of an exceptional nature. In this regard, the appellant adds that by using the Transactional Net Margin Method (TNMM), it is possible to adjust the company’s revenues and costs in order to show what the margin would have been………………………. .The operating margin of —————— was -1.83% in 2016, due to the damages caused by the weather events, which, had they not occurred, the adjusted margin would have been 3.57%. Since the Directorate General Revenue did not accept this argument, it concluded that since the appellant’s margin is not within the inter-quartile range, which is 0.71%, up to 11.09%, it then proceeded to adjust the operating profit margin of ——————, to the value of the —————- of the operating margins of the comparable companies selected for the Transfer Pricing Study, which is 4.83% and in order to achieve this profit margin, it proceeded to increase the appellant’s revenues in the amount of B/.6,747,901.75.” Click here for English Translation Click here for other translation ...

SA Saint Louis Sucre, whose main activity is the production of beet-based sugar and which is a member of the Südzucker group, was the subject of an accounting audit covering the period from 1 March 2010 to 28 February 2013, at the end of which the tax authorities notified it of, on the one hand, additional corporation tax and social security contributions, as well as default interest, in respect of the financial year ended 28 February 2011 in the amount of EUR 1,801,398, resulting from a transfer pricing reassessment and, secondly, additional corporate income tax, social security contributions and exceptional contributions, as well as penalties for deliberate non-compliance, in respect of the financial year ended 28 February 2013 in the amount of 4,908,559 euros, arising from the reconsideration of an extra-accounting deduction of an indemnity from the Belgian intervention and restitution office received following a court decision. In a judgment of 17 July 2020, the Montreuil Administrative Court ruled that there was no need to adjudicate in respect of the disgorgement that had occurred in the course of the proceedings, corresponding to late payment interest in respect of that allowance, that the additional corporation tax, social security contribution and exceptional contribution should be discharged, and that the penalty for wilful misconduct in respect of that allowance should be waived, and dismissed the remainder of the claim. SA Saint Louis Sucre asked the Court to set aside that judgment insofar as it dismissed the remainder of its claim. In its application, the authorities appealed against the same judgment and asked the Court to reinstate the taxes at issue, the discharge for which was wrongly granted by the first judges. Judgement of the Court of Appeal In regards of the transfer pricing adjustment, the Court of Appeal dismissed the appeal of Saint Louis Sucre. Excerpt “10. In order to contest the existence of a tariff advantage granted to its parent company Südzucker AG, and therefore of an indirect transfer of profits within the meaning of the aforementioned provisions of Article 57 of the General Tax Code, Saint Louis Sucre maintains that the price of EUR 427.20 per tonne, determined using the alternative method, corresponds to the arm’s length price. To justify the use of this method, it produced a methodology sheet provided for in the transfer pricing documentation, entitled “Swap SZAG-) SLS: Derivation transfer price 2009/10”. This sheet mentions a resale price of EUR 495 per tonne, to which the applicant company deducted an amount of EUR 70 corresponding to logistical costs, on the grounds that the transfer prices did not take them into account, and then added an amount of EUR 2.70 per tonne, corresponding to the profit margin granted to it by Südzucker AG. To justify the resale price of EUR 495 per tonne, however, it merely took into account the sole reference sales contract between Südzucker AG and its Italian customer Maxi, i.e. EUR 510 per tonne, after deducting Maxi’s profit margin of EUR 15 per tonne. Although Südzucker AG also produced a table to justify the amount of the logistical costs, it does not make it possible to establish the reality of the figures put forward by the company. Moreover, as the Minister maintains in his defence, Annex 5 to the applicant company’s application states that average sugar prices on the European market are determined ‘ex works’, i.e. at the factory gate, without taking logistics costs into account. From 2010 to 2011, the average price of sugar varied between €476 and €654 per tonne. Accordingly, the applicant company does not substantiate, on the basis of the documents produced, the sales price of EUR 427.70 per tonne to its parent company resulting from its application of the alternative method. 11. Saint Louis Sucre also points to the lack of outlets following the fall in the price of quota sugar in 2009/2010. It maintains that its parent company could not have purchased it at the UPC price of EUR 472.80 per tonne, given the transport costs generated by deliveries to southern Europe. Without this sale at the price of 427.20 euros per tonne, it would have had to either store its goods with a view to selling them in the following marketing year, incurring significant storage costs, or sell them in the European Union on loss-making markets, in particular the Spanish market, at a lower price than that negotiated with its parent company. However, it does not provide any evidence in support of its allegations, merely producing two invoices with the Spanish company Südzucker Iberica SLU, showing a selling price of EUR 446 on 15 July 2010 and EUR 471 on 23 August 2010, even though prices fluctuated widely over those few weeks. Furthermore, the applicant company did not demonstrate that its “quota sugar” could only be sold in Spain. 12. Consequently, in light of all of these elements, the alternative method relied on by Saint Louis Sucre was insufficiently documented, and the tax authorities could dismiss it as irrelevant for determining the transfer price in light of the arm’s length principle and rely on the comparable price method. Although the applicant company maintains that the tax authorities did not provide any comparables for determining the transfer price using this method, it is clear from the investigation that they used the price of €472.84 defined by the Südzucker group itself and based on the prices charged to customers Barry Callebaut, Ferrero, Kraft Foods, Coca-Cola and Maxi in October 2009. This price corresponds to the estimated market price at the beginning of the period on the basis of contracts currently being signed. By simply maintaining that the price of EUR 427.20 per tonne, determined using the alternative method, corresponds to the arm’s length price, Saint Louis Sucre is not contesting that the UPC method used by the department could be applied to establish the arm’s length price. The tax authorities could therefore consider that the price of EUR 427.20, which was lower than the average for comparable contracts using the UPC ...

The Revenue Service had audited Severstal Distribution for FY 2008-2009 and found that the company had purchased metal products from related companies at prices above market prices. An assessment was issued where reported losses for 2009 were reduced. During the audit, Severstal Distribution indicated to the tax authorities that it had used the transactional net margin method to determine the price of its controlled transactions. However, later the company also stated that it had used the CUP method (quated steel prices from the SBB database). Severstal Distribution Ltd filed an appeal with the Administrative Regional Court. In a decision of 2019 the appeal was dismissed and the assessment of additional income upheld. An appeal was then filed by Severstal Distribution Ltd with the Administrative Court of Appeal. The issue to be examined by the Administrative Court of Appeal was whether the Revenue Service correctly determined Severstal Distribution’s income subject to corporate income tax by applying the arm’s length provisions in Section 12(2)(3) of the Law on Corporate Income Tax – i.e. whether Severstal Distribution purchased goods from related companies at above-market prices. Judgement of the Administrative Court of Appeal The Court dismissed the appeal of Severstal Distribution and upheld the decision from the Regional Court. Excerpts “Tax collection is based on the taxpayer’s cooperation with the tax administration. The tax administration can only determine the correct tax liability if it is aware of all the factual circumstances on which such liability is based. Such facts are best available and known to the taxpayer himself and it is therefore in the taxpayer’s own interest not to delay the examination of the tax liability and to provide the tax administration with the relevant information and explanations. The taxpayer’s duty to cooperate is laid down in the form of a legal obligation in paragraphs 5, 6, 10, 11 and 32.2 of the first part of Article 15 of the Law on Taxes and Duties.” “In summary, the Senate considers that there is no particular order in the choice of methods, but that the most appropriate method should be applied in each case on the basis of the circumstances of the individual case. Moreover, the choice of method is primarily the taxpayer’s responsibility, whereas the tax authorities must respect that choice as far as possible during the tax examination.” “In the light of the above, the Court was wrong to conclude that aggregated data could not be used in the application of the comparable uncontrolled price method. At the same time, as already pointed out, they must also be sufficiently comparable and meet the criteria laid down by law, bearing in mind in particular that such aggregates are not, for the most part, produced for transfer pricing purposes.” “The comparable uncontrolled price method compares a controlled transaction with a similar uncontrolled transaction to provide a direct estimate of the price that the parties could have agreed if they had used a market alternative to the controlled transaction. However, the method becomes a less reliable proxy for arm’s length transactions if all the characteristics of the uncontrolled transaction that significantly affect the prices charged between arm’s length parties are not comparable. The application of the method is limited because it is practically difficult to find an uncontrolled transaction whose differences from a related party transaction would not affect the price. Any minor inaccuracy may lead to a mispricing…” Click here for English translation Click here for other translation ...

The tax authorities had adjusted the agreed prices of agricultural commodities transferred by ADM Argentina to a foreign related party. Following receipt of the additional income assessment, ADM Argentina appealed to the Federal Tax Court. The Federal Tax Court overturned the assessment. The court concluded that the adjustments made by the tax authorities were arbitrary because they were made only in respect of certain export transactions where the quoted price at the time of the transaction was lower than the quoted price at the time the goods were loaded. Furthermore, the transactions used by the tax authorities as external comparables were not valid for transfer pricing purposes because they suffered from significant comparability flaws and deficiencies. The Court of Appeal later upheld the Federal Tax Court’s decision and the Supreme Court dismissed a final appeal by the tax authorities. Excerpts “On the basis of these premises, I consider that the extraordinary appeal is inadmissible and has been properly denied since, in order to validate the decision of the Tax Court, the a quo provided grounds of fact and evidence which, in my opinion, provide sufficient support for the decision, without the appellant’s discrepancies being effective to enable the exceptional remedy sought. Indeed, the Chamber concluded that the products marketed by Nidera S.A. and O.M.H.H.S.A. differ from those exported by the plaintiff, both in their type and in their quantities and markets (countries) of destination and, therefore, they are not suitable to support the adjustment claimed by the tax authorities. In this regard, it explained that, while Nidera S.A. exported to Cuba, Canada, United Kingdom, the Netherlands, Costa Rica, France, Chile and the United States of America, ADM Argentina S.A. exported to the United States of America. In terms of products, it was established that both Nidera S.A. and O.M.H.S.A. traded refined soybean oil in bulk; soybean meal in bulk; refined sunflower oil; sunflower pellets in bulk; crude soybean oil and bread wheat, while in the same fiscal period, ADM Argentina S.A. sold Argentine corn in bulk; Argentine wheat in bulk; bran pellets, soybeans in bulk and sorghum in bulk. Regarding prices, the Chamber stated that it was established that in 76.67% of the transactions concluded by O.M.H.S.A. with independent third parties, the agreed price was closer to the price published by SAGPyA at the date of the agreement than at the date of shipment. It added that, measured in tonnes, 93.56% of O.M.H.H.S.A.’s exports to independent third parties corresponded to transactions concluded on dates on which the quotation price published by SAGPyA on the date of the contract was higher than the price published by the same body on the date of shipment. In these circumstances, it is clear to me that the Treasury’s complaints, aimed at defending its adjustment made on the basis of comparable prices whose use was rejected by both the Tax Court and the Chamber, merely reflect a mere disagreement with the assessment of the evidential material used by the judges in the case, which is not covered by the charge of arbitrariness that the federal remedy alleges (Judgments: 280:320; 295:165; 297:333), whose exceptional nature does not tend to replace the judges when they decide issues that are their own (Judgments: 394:394: 295:356; 297:173), even when an error in the solution of the case is invoked (Judgments: 296:82, 445; 302:1030), reasons for which I think that the extraordinary appeal filed has been rightly denied.” Click here for English Translation Click here for other translation ...

At issue is the selection of the most appropriate transfer pricing method for sale of coal mined by Carbones El Tesoro S.A. in Colombia to its related party abroad, Glencore International AG. Carbones El Tesoro S.A. had determined the transfer price by application of the TNMM method. The tax authorities found that the most appropriate method for pricing the transactions was the CUP method. To that end, the tax authorities applied a database (McCloskey price list) in which the price, was determined by referring to a good similar to that traded (thermal coal) and to the Btus (British Thermal Unit) thereof. On 29 April 2011, the Settlement Management Division of the Barranquilla Regional Tax Directorate issued an assessment by which it modified the income tax return for the taxable year 2007, in the sense of disregarding as a net loss for the year the amount of $30. 509.961.000 and imposed a penalty for inaccuracy of $16.597.418.784, based on the questioning of the method that the taxpayer chose to establish the profit margin in the coal supply operation with its economic partner abroad. Carbones El Tesoro S.A. filed an appeal with the Administrative Court Judgement of the Administrative Court The Court decided in favour of Carbones El Tesoro S.A. and set aside the assessment of the tax authorities. Excerpts “4.4 In accordance with the above, and in accordance with the information provided by the plaintiff in the supporting documentation, the Chamber finds that the plaintiff set out in detail the economic reality of its operation of exploitation, production and sale of coal to its related party abroad, including the business and commercial structure, and the activities that each of the parties involved carried out. From this, it can be seen that the plaintiff operated as a producer with limited risks insofar as the risks assumed were limited to those related to its functions of exploitation, production and transport from the mine to delivery at the port, so that all those risks related to the functions of negotiating the price with the final customer, invoicing, collection, commercialisation, marketing, marketing, sales and distribution of the coal to the final customer were limited to those related to its functions of exploitation, production and transport from the mine to delivery at the port, collection, commercialisation, marketing, logistics and transport – including the contracting of vessels and the respective insurances – from the port of the vessel in Santa Marta to the delivery to the final client, were assumed by the foreign affiliate, since it was the one with the necessary infrastructure and expertise for such work, as indicated in the supporting documentation. 4.5. Considering the supporting documentation submitted by the applicant, the Board notes that the applicant presented the criteria used to eliminate possible comparables on the basis of the functions performed. To this end, it eliminated companies whose function in addition to coal mining was to carry out other activities such as electricity generation and/or distribution, or gas exploration and/or production, companies whose mining activity corresponded to products other than coal, companies that leased coal mines, or that were active in the oil industry without segmenting their financial statements by activity, companies that were in Chapter 11, and companies that did not have sufficient descriptive information on the business (…). This demonstrates that the plaintiff undertook a functional level analysis to support that, under the TNMM method, the information available and used presented a high level of comparability that was more suited to its particular situation. In the same vein, in its functional analysis, the complainant presented aspects related to the company’s management, production planning, mine contracting services, coal mining operations and the way it transported coal. He further stated that his responsibility was to plan the production of the El Tesoro mine, coordinate the receipt of coal purchased from local suppliers and transport it to Santa Marta, where it was loaded onto vessels contracted by his company. In addition, it included information about the market and sales, where it stated that it had not carried out any marketing, sales or distribution activities in relation to the exported products, given that 100% of the sales were made to its related party abroad, the latter being the one who decided the sales strategy. It added that the distribution and logistics of the delivery from the port in Santa Marta was the responsibility of its related party and the risks related to the coal were transferred to it once the coal was loaded onto the vessels (…). 4.6. On the other hand, as stated in legal basis 3, the CUP method compares the price of goods or services agreed between independent parties in comparable transactions. Its use implies that the economic characteristics of the transactions being compared must be analysed to determine a high degree of comparability. Thus, the CUP method is not the most appropriate when the conditions of the good are not sufficiently similar, or when the functions, including the risks assumed by the parties, cannot be adjusted in the particular case. When using commodity price lists (in a recognised and transparent commodity market), relevant circumstances such as the nature of the commodity, volume discounts, timing of transactions, terms of insurance, terms of delivery, and currency, among others, must be considered. In this case, the agreements and contracts that fix the terms of these factors are contrasted with those of third parties, in order to verify whether they coincide with those that would have been agreed in comparable circumstances. Under these premises, the Court finds that the defendant, through the use of the CUP method, applied a database in which the price, even though it referred to a good similar to the one traded – thermal coal – and to the Btus of this, was not sufficient to prove that the prices set in said database were for transactions in which the parties assumed similar functions, risks and negotiation terms as those of the transaction analysed. Nor is there any analysis of the appropriateness ...

Lesprom Forestry Company had sold sand and construction services to a related party, Road Company LLC. The tax authority concluded that the Company had created a tax avoidance scheme aimed at artificially underestimating the income on transactions with Road Company LLC. The price for sand and construction work was revised and tax liabilities on income tax and VAT recalculated. Determining the arm’s length price of sandAn official website of the Federal State Statistics Service posted information on the average prices of manufacturers of industrial goods… [however] this statistical information does not contain the physical characteristics of the product and the terms for its sale. Therefore this information could not be used.The minimum and maximum gross margin amounted to: 14.25 and 27.04 in 2012, 2.39 and 6.57 in 2013, and 3.04 and 25.58 in 2014. The gross profitability received by Road Company LLC in 2013-2014, was significantly above the arm’s length range of gross margins, 51.87% and 73.55%, respectively.” Determining the arm’s length price for construction workGiven that the Company’s accounting of income and expenses in the audited period was conducted on the basis of the cash method, the amount of costs required and incurred by the taxpayer in connection with the performance of contract works could not be reliably determine. To determine the price of the work performed , the tax authorities had analysed the cost of comparable work (preparatory work on the development of exploration wells, construction of bridges on the road entrance to exploratory wells, preparatory work for drilling wells in public sources of information. According to the information and price agencies Platts, Argus etc. do not contain detailed information on the terms of the transactions. Thus, publicly available information could not be used ….The only comparable transactions available to Lesprom LLC, were transactions concluded between Road Company LLC and a sub contractor, Trans-Stroy LLC. According to these agreements cost of the general construction services amounted to 5% of the total cost of the work. On that basis, the market price for construction services delivered by Lesprom was set to 5% of the total cost of the work. The courts of three instances found the tax assessment legal. Click here for translation ...

JFC Ecuador is active in coordination and logistic operations for the transfer of Ecuadorian fruit to related parties in the Russian JFC Group. Following an audit the tax authorities issued an assessment where the prices of these transactions had been determined based on quoted prices issued by the authorities in the SOPISCO NEWS database. However, according to JFC Ecuador, SOPISCO NEWS does not correspond to a publicly available international trade exchange or price database. On the contrary, it is a bulletin that lists quotations that involve price estimates, established through unidentified sources. The price quotations listed by SOPISCO NEWS correspond to prices that the bulletin presumes were agreed upon by companies that have carried out the management and marketing and sales for the placement of the product, while JFC Ecuador did not carry out such activities. Judgment of the Court The Court concludes that the use of the SOPISCO NEWS database by the Tax Administration, as it is an internationally recognized source of price information used by international organizations as a source of information, is appropriate depending on the method applied. In conclusion, this Chamber considers that the Tax Administration acted in accordance with its determining power as set forth in Article 68 of the Tax Code and Article 23 of the Internal Tax Regime Law, and that its acts are subject to the presumption of legitimacy and enforceability as set forth in Article 82 of the same law…”. Click here for English Translation Click here for other translation ...