The Transfer Pricing Department of the General Directorate of Revenue of the Ministry of Economy and Finance, through Resolution 201-1429 of 24 October 2014, decided to sanction the taxpayer Chevron Products Antilles, LTD, now Chevron Panama Fuels Limited, with a fine of one million balboas (B/. 1,000,000.00), for failure to file the Transfer Pricing Report-Form 930 for the 2012 tax period. As a result of the issuance of the resolution mentioned in the previous paragraph, Chevron’s legal representative filed an appeal for reconsideration with the tax authority, which was resolved by Resolution 201-1321 of 1 March 2016, through which the accused act was maintained in all its parts. This resolution was notified to the taxpayer on 8 April 2016. Chevron then filed an appeal before the Administrative Tax Court, which by Resolution TAT-RF-057 of 22 May 2019, confirmed the provisions of the main administrative act and its confirmatory act, being notified of this appeal ruling on 18 June 2019, thus exhausting the governmental channels. Chevron then appealed to the Third Chamber, on 30 July 2019, in order to declare null and void, as illegal, the administrative resolution through which the General Directorate of Revenue of the Ministry of Economy and Finance, decided to sanction Chevron Products Antilles, LTD, now Chevron Panama Fuels Limited, with a fine of one million balboas (B/. 1,000,000.00), and that as a consequence of such declaration, it be resolved that Chevron has not failed to comply with the obligation to file the transfer pricing report-form 930 for the fiscal period 2012; that it should not pay any fine or sanction; and that, in the event that its principal had paid the fine, the amount of money should be returned to it. In support of its claim, Chevron points out that the contested administrative act does not recognise the right of its principal to be exempt from paying income tax, due to its location in an oil-free zone and for carrying out foreign operations, whose costs and expenses come from foreign sources; in other words, it is excluded from taxable income. In addition to the above, Chevron alleges that by not reporting transactions with related parties abroad, which have the effect of income, costs or deductions in the determination of the taxable base for the calculation of income tax, is under no obligation to file the transfer pricing report (form 930); for which reason, the sanction imposed violates the principles of due process and strict legality. The Judgement of the Court The court dismissed the appeal of Chevron and upheld the fine issued for not filing tranfer pricing documentation. Excerpt: “From the foregoing, it follows that the plaintiff, Chevron Panama Fuels Limited, was obliged to include in the income tax return filed, the data relating to operations with related countries tax residents of other jurisdictions together with the submission of the transfer price report-form 930, within six (6) months after the date of the close of the tax period, a requirement stipulated in article 762-I of the Tax Code, which states the following: “Article 762-1. Transfer pricing report. Taxpayers must submit, on an annual basis, a report of the operations carried out with related parties, within six (6) months following the closing date of the corresponding tax period, under the terms established in the regulations to be drawn up for this purpose. Failure to submit the report shall be punishable by a fine equivalent to 1% of the total amount of the related party transactions. For the purpose of calculating the fine, the gross amount of t he transactions shall be considered, regardless of whether they represent income, costs or deductions. The fine referred to in this paragraph shall not exceed one million balboas (B/.1,000,000.00). The sworn income tax return shall include the data related to related operations, as well as their nature or other relevant information, under the terms provided therein. The Directorate General of Revenue shall adapt the internal administrative procedures in order to comply with this regulation”. (Emphasis added). It is for the above reasons that the Directorate General of Revenue imposed the corresponding fine on the plaintiff taxpayer, Chevron Panama Fuels Limited, since it failed to file the transfer pricing report form 930, within six (6) months after the closing date of the tax period, as required by article 762-I of the aforementioned Tax Code.” Click here for English translation Click here for other translation ...

The question in this case was whether or not year-end-adjustments/profit adjustments should be considered part of the market price for acquisition of raw materials used in the production of non-wovens products in the Polish company operating partially under a tax exempt zone. The Court of First Instance had come to the conclusion, that the payment of year end adjustments were part of the price for acquisition of raw materials and thus not tax deductible as related to tax exempt activities. This decision was appealed by the company. The Supreme Administrative Court considered the following : The appeal should be upheld. It should be noted that one of the assumptions of transfer prices is respect for the so-called market price rules. It consists in the fact that when transactions are concluded by related entities , the agreed conditions should be consistent with the conditions applied in comparable transactions by independent entities. The means of implementing this principle are the so-called profitability adjustments. In accordance with the OECD Guidelines (OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017), the compensating adjustment is a correction made by the taxpayer in which the taxpayer himself determines the transfer price for tax purposes , i.e. one that in his opinion corresponds to the arm’s length principle in relation to the transaction concluded with a related entity. The so-called profitability adjustments are therefore an issue closely related to transfer prices . It should be noted that in the legal status in force until the end of 2018, the Corporate Income Tax Act did not contain provisions directly referring to the possibility of applying the transfer price adjustments described above. It was not until January 1, 2019 that the legislator regulated in art. 11e. rules for making periodic adjustments that bring the result or transfer price to market level. This means that at the date of issuing the individual interpretation being the subject of the assessment in these proceedings , it should be considered unacceptable to interpret the tax law in a manner that would lead to the application of the indicated institution despite its non-regulation by the national legislator. In the opinion of the Supreme Administrative Court, in the panel hearing the present case, in the legal status in force on the day of issuing the contested individual interpretation, the profitability adjustment described in the application for its issue, which aimed to guarantee the Seller an adequate level of profitability, had to be qualified as a separate economic event, with all the resulting of this circumstance with tax consequences. Therefore, the position presented in the justification of the judgment of the Court of First Instance, according to which profitability adjustment is not an independent economic event and should be considered in connection with the original purchase or sale of goods or services should be considered incorrect. The case was sent back to the Administrative Court for re-examination under the considerations contained in the ruling. Click here for translation ...

A Turkish company located in a tax free zone had obtained interest income based on the interest rate applied to foreign currency loans, although the company had lent money to its partner in Turkish Lira. Normally interest income is considered taxable, but within the tax free zone, income from listed activities is exempt. Click here for translation ...

Headquarter Corp had transaction with it’s branch in the Turkish Mersin Free Zone. The branch imported the goods subject to the transaction from abroad for $ 2,298,137.79 and these goods were then transferred from the branch to the Headquarter Corps for US $ 3,214,135.00 without any special processing, production process or added value by the branch. The tax office issued an assessment where the price of the controlled transactions were adjusted based on the import price (internal CUP). Headquarter Corp brought the assessment to court. The tax court stated, that because the branch does not have a separate legal entity from the company, profits were not transferred out of the company as a result of the high-priced transaction. Therefor there was no hidden distribution of income. However, it was also concluded that the reason behind the sale of the goods sold to the Headquarter from the branch in the free zone of Mersin, at a price that was above market prices for comparable transactions, was an attempt to transfer profits to the tax free zone and excluding those profits from the tax declaration of the headquarter Corp. Headquarter Corp argued that the value of the goods purchased from the importer is evaluated according to the Free on Board (FOB) in the claims in the tax inspection report. Hence, an evaluation was made based on the method in which the seller, who sells the goods to the branch in the free zone, is liable for costs and damages until the goods in question are loaded on the ship, and it was emphasized that the insurance, freight and other costs incurred afterwards were not taken into account by the examiners. On that basis, Headquarter Corp filed an appeal to the Administrative Court. The Administrative concluded that the price difference of $ 915.997.21 between the seller in the free zone importing the said good and selling the goods to the Headquarter Corp did not reflect the economic and commercial realities without adding any added value to the product. The appeal request was overturned for a new decision. Click here for translation ...