The tax authority (DIAN) had issued an assessment of additional taxable income for FY2013 due to non-arm’s length pricing of transactions with related parties.
According to the assessment, the tax authority disagreed with method applied by C.I. Banacol and instead applied a TNMM where the transactions were priced in the aggregate.
C.I. Banacol appealed to the Administrative Court, which ruled in favour of the tax authories.
An appeal was then filed with the Supreme Administrative Court.
Judgment
The Supreme Administrative Court upheld the decision of the Administrative Court and ruled in favour of the tax authorities.
Excerpts in English
“The Chamber agrees with the DIAN and the Court in the sense that the four segmented transactions for the purposes of the transfer pricing regime are interrelated and are directed to the fulfilment of a single object: the international marketing of bananas and plantains and other fruits, products that are previously acquired from national economic partners or consigned by third parties.”
…
“As can be seen, the selected comparables are, like Banacol, active in the marketing of fruit. One of them sells bananas, plantains and other fruits. Since it has been established that Banacol is engaged in the marketing of bananas, plantains and other fruit, the Board considers the interquartile range set by the administration to be appropriate because it corresponds to that of the activity carried out by the party under analysis (Banacol) and the selected comparables.
Finally, the applicant submits that only transactions with related parties should have been assessed and revenues, costs and expenses not associated with such transactions, i.e. transactions with third parties, should have been excluded and that, by failing to do so, transactions not subject to the arm’s length principle were brought under the arm’s length principle.
As noted, the TNMM method allows for an overall or segmental assessment of the profit margins obtained by companies in transactions with related parties. When the comparability analysis is done on an aggregate basis it is not necessary to exclude non-transfer pricing transactions because, as stated in the OECD guidelines, “income and expenses not related to the related party transaction under review [should] only be excluded where they significantly affect comparability with unrelated transactions” (paragraph 284).
These same guidelines indicate that, when determining the net profit indicator or factor, in this case the ROTC, for the application of the net operating margin method, only those elements should be taken into account which: (a) are directly or indirectly related to the related operation under analysis, and (b) are related to the exploitation of the activity. In this case, it was sufficiently demonstrated that Banacol’s segmented operations, with related or unrelated parties, are interrelated to a larger operation: the marketing of bananas, plantains and other fruits, so it was not necessary to exclude the operations that the plaintiff claims should have been excluded.
Moreover, the plaintiff did not demonstrate how such transactions affected comparability or the adjustments that were required, since, it should be emphasised, it is precisely the rejection of segmentation and the proposal of adjustments to the taxpayer’s global information that involves both controlled transactions and those carried out with independent parties, with the correlative consideration of profit margins that are also global. The taxpayer was therefore required to specify the adjustments that were required, in the analysed part, in the comparable parts or in both, that is to say, to prove the technical impertinence of the adjustment made by the tax authority, which was not done. The appeal is unsuccessful.”
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