Following an audit, the tax authorities determined that Maderas Anchile Limitada had sold wood chips to a related party at prices below the level charged by independent entities. On that basis a transfer pricing adjustment was made to its taxable income. Moreover, the tax authorities concluded that the difference in price should be treated as a hidden distribution of profits, an approach grounded in Article 21 of the Income Tax Act and leading to further tax liability for Daio Paper Corporation.
The assessment issued by the tax authorities was later upheld by the Court of Appeal.
An appeal was then filed by Maderas Anchile Limitada and Daio Paper Corporation with the Supreme Court
In the appeal they challenged the legality of the assessment, claiming there was no explicit statutory authority to recalculate Maderas Anchile Limitada’s taxable income by applying Article 38. They argued that although Article 38 empowers the tax authority to challenge prices between related parties, the statute does not provide a basis for adding the assessed amounts to a company’s taxable income. They also contended that the tax authorities use of secret comparables deprived them of the opportunity to mount an effective defense, shifting the burden of proof in a manner contrary to the laws regulating evidence.
Judgment
The Supreme Court dismissed the appeal and ruled in favour of the tax authorities.
The Supreme Court held that the appellants had presented contradictory legal positions by first accepting the facts found by the lower courts (in arguing the misapplication of certain tax provisions) and then attacking those same findings in alleging violations of evidentiary rules. Such inconsistencies, coupled with alternative and exclusive arguments, prevented the Court from examining the case on its merits.
Excerpt in English
“EIGHTH: That, as we have seen, the case law in this respect is numerous and sustained, with very recent decisions, which provide solid support for what is decided in these cases, which is the rejection of the appeals for reasons which, although they are formal, cannot be ignored by this Court, given the function entrusted to it as a court of cassation to determine the correct interpretation of a legal provision.
It is well known that this court is not an appeal instance, in which it is appropriate to review all the established facts one by one, even if their assessment leads to contradictory conclusions. In this respect, it is not necessary to add anything more, other than the opinion of procedural doctrine.
NINTH: That such a way of basing the grounds deduced, using incompatible facts, reasons and legal consequences, is not acceptable in the case of an extraordinary appeal and one of strict law such as cassation on the merits, in which it is possible to demand, so that this Court can enter into the study and decision of the same, that the errors of law that are noticed in the ruling be pointed out and explained with precision and foundation, as well as its substantial influence on its operative part, all in accordance with the requests made in its petition, characteristics that are lacking in an arbitration that, like the one reviewed, presents alternative and exclusive grounds and petitions, defects that constitute an insurmountable obstacle even for its study.
For this reason, the appeal cannot be upheld.”
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