CINTAC Chile S.A. had reported an operating loss for FY2018, but later received an assessment of additional taxable income from the tax authorities. In the assessment, a royalty rate of 2% determined by CINTAC Chile for the provision of know-how to a related party was instead set at 5% by the tax authorities. The royalty in question was received by CINTAC Chile S.A. from a related party under a know-how agreement.
CINTAC Chile S.A. appealed, arguing that the tax authorities had not explained how they had determined the 5% royalty rate or why they had rejected the 2% rate determined by the parties to the transaction, and that the tax authorities had confused the provision of services with a know-how contract.
Judgment of the Court of Appeal
The court rejected CINTAC Chile S.A.’s claim regarding the arm’s length royalty rate under the know-how contract.
“10°) That the sentence in its twenty-sixth to thirty-ninth recitals analyses this Item 1, examining in particular the know-how contract with TUPEMESA (Peru) accompanied by the claimant, which shows that 2% of the annual net sales were agreed; and also the transfer pricing report carried out by Hill Consultores Ltda, which used information from 10 comparable contracts selected with qualitative and quantitative filters, i.e., type of industry and markets in which it is developed, object of the contract, royalty calculation basis, functions, assets and risks, concluding that some of them (5) did not meet the sufficient conditions of independence and comparability, with the Service correctly establishing a new market rate, according to the mathematical calculation that has not been objected to.
11°) That, in particular, regarding the associated cost structure, which given its non-existence would imply the lower percentage of 2% and which would make the most important difference, the truth is that the taxpayer does not explain how it would have accredited this aspect to be considered, especially because the accompanying contract -and its addendum- clearly state in clause one, point 1.3 that ‘[…] the LICENSEE has implemented the contract with the LICENSEE and the LICENSEE, in the first clause, point 1.2. the LICENSEE has successfully implemented various manufacturing processes for the production of cold-rolled, hot-rolled and galvanised pipes, as well as different types of profiles used in the most varied sectors of the economy […] that the LICENSEE is interested in using and applying in its production process in order to obtain greater efficiency and quality in its products. In the second stipulation, point 3.1 that ‘[t]he LICENSEE undertakes to provide the LICENSEE with the KNOW HOW and all information on the above mentioned processes and to communicate to the LICENSEE its experiences, as well as the methods it applies, including manufacturing secrets’. It is specified in points 3.2, 3.3, 3.4 and 3.5 that these obligations of the licensor include the delivery of manuals, catalogues and internal standards, timely communication of all complementary information, supervising the correct application and use of know-how until the manufacturing processes are implemented, instructing and training the licensee’s workers in its own facilities or from its offices, which is carried out by employees or other natural persons for up to 183 days in a period of twelve months.
12°) That from this description it follows that it is not only a question of the delivery of manuals or documents relating to the processes, but that, in effect, there is a direct supervision and through specialised personnel at the place of manufacture, with which the claimant’s thesis that minimises the execution of this contract must be refuted. Therefore, the appeal lodged by the complainant must be dismissed.
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