Nissan Chile SpA, a wholly-owned subsidiary of Nissan Motor Co. Ltd. (Japan), was incorporated in Chile in August 2014 to take over the direct distribution of Nissan-branded vehicles and spare parts previously handled by an independent distributor, Distribuidora Automotriz Marubeni Limitada. Operating as a full-risk distributor, Nissan Chile purchased finished goods from related Nissan Group entities in Mexico, Japan, Switzerland, the Netherlands and the United States for wholesale resale through a network of 20 independent dealerships.
During its first full financial year (2015), Nissan Chile implemented an aggressive commercial strategy involving price discounts, bonuses and incentives directed at its independent retail distributors. The strategy succeeded in increasing the brand’s market share from 6.1% to 7.8% despite a 16.4% contraction in the Chilean automotive market. However, the incentive costs — exceeding the original budget by approximately 70% — resulted in an operating margin of -6.23% and a gross margin on sales of only 0.36%, far below both the interquartile range (12.49%–21.02%) and the minimum (1.09%) identified in the taxpayer’s own EY transfer pricing study.
The Chilean Internal Revenue Service (SII) concluded that the economic burden of the incentive policy should have been shared between Nissan Chile and its foreign related parties, who benefited from increased purchase orders. Applying the Resale Price Method and using the gross margin on sales as the profitability indicator, the SII allocated 59.37% of the total incentive costs (approximately CLP 9,392 million) to the foreign affiliates. The resulting adjustment was assessed as a deemed profit distribution subject to the Single Tax under Article 21 of the Income Tax Law.
Nissan Chile challenged Assessment No. 477, arguing that the SII had misapplied the Resale Price Method by constructing hypothetical scenarios rather than analysing actual cross-border purchase prices, that the incentive policy constituted a legitimate temporary business strategy recognised under paragraph 1.60 of the 2010 OECD Transfer Pricing Guidelines, and that the transactions at issue were domestic dealings with independent parties falling outside the scope of Article 41 E of the Income Tax Law.
Judgment
The Tax Court ruled in favour of Nissan Chile and set aside the assessment in its entirety. The court held, first, that the SII had not properly applied the Resale Price Method as defined in Article 41 E(2)(b), because instead of adjusting the cost of goods purchased from related parties, it had introduced hypothetical with-and-without-incentive scenarios unsupported by reliable evidence or by the financial data of comparable companies, contrary to paragraphs 3.47–3.51 of the 2010 OECD Guidelines. Second, the court found that the transactions challenged by the SII — the incentive discounts granted to independent domestic distributors — were not cross-border transactions with related parties and therefore fell outside the scope of Article 41 E, which requires cumulatively the existence of cross-border related-party transactions not conducted at arm’s length. Third, the court concluded that the actual cross-border purchases from Nissan Group entities were conducted at arm’s length, as evidenced by comparisons with purchases from the independent supplier Marubeni under substantially identical conditions, and that the SII had not challenged the purchase prices themselves. Finally, the court accepted that the incentive strategy was a temporary market-penetration measure consistent with OECD guidance, noting that profitability recovered to 4.15% by 2017, and that as a full-risk distributor Nissan Chile bore business risks independently without any contractual obligation to share them with foreign affiliates.
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