Chile vs “MMM Limitada”, July 2015, Tax Court, Case N° RIT GR-12-00069-2013

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The Tax Court accepted a claim filed against an assessments resulting from the application of transfer pricing rules.

MMM Limitada indicated that the Internal Revenue Service was unable to exercise its powers to challenge the prices of exports made, since the companies participating in the disputed transactions were not related. It added that the Revenue Service had not used the system of reasonable profitability, nor that of reasonable margin on production costs, nor the comparison with international prices, lacking a logical analysis in the determination of prices, since these did not consider the factors that differentiate the quality of the chips, thus violating the rule of Article 38 of the Income Tax Law.

The Revenue Service based its analysis on a comparison of the terms of an intercompany transaction with the terms of a transaction between independent companies, using factors including the characteristics of the good being traded, the functions performed by the companies involved in the transaction, the contractual terms and the economic circumstances or market in which the transaction takes place.

The Court found in favor of MMM Limitada, concluding that the “relationship” required by Article 38 of the Income Tax Law between the claimant and the Japanese company was not established.

Furthermore the Court determined that the transfer pricing method used to measure the alleged tax differences by the tax authorities was not admissible, specifying that such lack of foundation left the plaintiff in a situation of defenselessness, thus violating Article 38 paragraph 3 of the Income Tax Law, which requires that the challenge be founded. The Court added that, although the Revenue Service did not make it explicit, it sought the application of some elements of the Comparable Unrelated Price Method, and some elements of the Net Operating Margin Method, which would have been a good idea, since this is precisely one of the two methods that measure profitability proposed by the OECD, which would be, in accordance with the legal limitation of the provision in question, which uses the expression “Reasonable Profitability”. However, insufficient details were provided to establish how this method was applied.

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Chile vs MMM 2015

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