The tax authorities had started investigating a sales contract that British Tobacco Centroamérica S.A. had with a related company abroad for the import of goods. The historical price of the imported goods was compared to the price contained in the later sales contract. In the customs forms, the company declared one value, but in its invoices it recorded another value for the same products. The tax auditor discovered that the sales contract had a clause extending its scope to the provision of consultancy services. The company reported during the audit that the supplying company played a central role in the marketing of products that the local company made by assisting it in the elaboration of marketing studies, sales campaigns and quality studies. On this background an adjustment was issued for additional withholding tax for source income in the form of consultancy services provided by the ... Read more

GlaxoSmithKline Costa Rica S.A. manufactures pharma products which is sold to both independent customers in the region and to group companies abroad. For FY 2004 and 2005 pricing of the controlled transactions had been determined based on the TNMM method using return on total costs (ROTC) as PLI. GSK said the range of return on total costs “for the comparable independent companies ranges from 4.7 per cent to 14.5 per cent, with a median of 9.6 per cent. GSK CR obtained an average ROTC of 50.6 percent during fiscal years 2004 and 2005, which was not below the range identified for comparable independent companies. Accordingly, the transfer prices used by GSK CR in its controlled transactions did not distort GSK CR’s profitability and satisfied the arm’s length principle set out in the OECD Guidelines. In 2009 the tax authorities issued an assessment for FY 2004 ... Read more

Corrugados del Guarco S.A. had declared losses on controlled transactions for FY 2003, 2004 and 2005 as export prices for these transactions had been set below cost and without profit margin, and also different from the price charged for that product to other independent or unrelated companies, in favour of its related company Envases Nicaragüenses S.A. According to the Corrugados del Guarco S.A. the reason why the prices of these controlled transactions had been set low was that unfair competition had made it necessary to use a commercial strategy of selling at preferential prices to the group company in Nicaragua. The tax authorities issued an assessment whereby the prices of the controlled transactions were adjusted in accordance with the arm’s length principle. Furthermore a fine was issued to the company for gross negligence. Judgement of the Supreme Court The Court dismissed the appeal of Corrugados del Guarco ... Read more

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company of the group and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the ... Read more

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question ... Read more

Nestlé de Costa Rica S.A. had been issued a tax assessment in which the taxable income for FY 2005 and 2006 was adjusted with an additional amount of ¢60,609,096.00 and ¢75,663,084.00. According to the tax authorities, the sales made by Nestlé to its related companies located in Chile, Switzerland and Puerto Rico had a profit margin different from those made to third parties. The margin on the unrelated transactions was 88% whereas the margins on comparable related party transactions was only 7%. The adjustments was determined based on internal CUPs. Judgement of the Court The Court dismissed the appeal of Nestlé. Excerpts “This Chamber agrees with the Tribunal, in the sense that the expert witness Luna Ramírez, during her testimony, does not manage to disprove the system applied by the Tax Administration, since she rejects the method used, however, she also states that it is ... Read more

Polymer S.A. had been issued an assessment of taxable income based on the arm’s length principle. In the assessment the tax authorities had based the adjustment on the guidance provided in the OECD TPG. Polymer S.A. was of the opinion that this was unconstitutional since the OECD TPG had not been implemented by law and Costa Rica was not an OECD member country. Judgement of the Supreme Court The Court dismissed the appeal of Polymer S.A. Excerpts from the Judgement “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility that other – better – techniques ... Read more

In an appeal to the Supreme Court in Costa Rica, Nestlé claimed that the basis for an arm’s length adjustment was unconstitutional, since the arms length principle as described in the OECD transfer pricing guidelines had not been incorporated into the laws of Costa Rica. Judgement of the Supreme Court The Court dismissed the appeal of Nestlé. “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility of admitting “other -better- techniques”. What is important is that the contested Interpretative Guideline does not aim to eliminate other multiple scenarios arising from different forms of company organisation, ... Read more