SONY Music Entertainment Colombia S.A. had filed transfer pricing information and documentation, on the basis of which the Colombian tax authorities concluded that payments for administrative services provided by a related party in the US had not been at arm’s length.
SONY Colombia then filed new transfer pricing information and documentation covering the same years, but where the tested party had been changed to the US company. Under this new approach, the remuneration of the US service provider was determined to be within the arm’s length range.
The tax authorities upheld the assessment issued based on the original documentation.
A complaint was filed by SONY and later an appeal.
Judgement of the Administrative Court
The court allowed the appeal and issued a decision in favor of SONY.
Excerpts
“The legal problem is to determine, for the tax return of the taxable period 2007 of the plaintiff:
(i) Whether it is appropriate to take into account the correction of the transfer pricing information return submitted by the plaintiff and its supporting documentation, and whether the information submitted is sufficient to determine compliance with the arm’s length principle.
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In the present case, the DIAN [tax authorities], by means of the contested acts, disregards operating expenses of $1,963,235,000 of the plaintiff’s income tax return for the taxable period 2007, because it considered that the administrative expenses that the plaintiff paid to its related party in the United States of America (United States) were not adjusted to market prices, which had been agreed with other suppliers.
In order to justify the disregard of the aforementioned expenses, the DIAN took as reference the individual informative declaration of transfer prices (DIIPT) and the supporting documentation initially submitted by the plaintiff, in which it was determined that it was outside the market range. Furthermore, it stated that if the corrections to the DIIPT and the supporting documentation are taken into account, there is no reason to justify that the analysis of administrative expenses should be carried out for the company located abroad.
For its part, the plaintiff considers that the DIIPT and the initial supporting documentation should not have been taken into account, due to the fact that the correction was made in which it is demonstrated that the expenditure operation was carried out at market values, since the related company in the United States should be analysed, and not the company in Colombia as was done in the original declaration.
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From the cited provisions it is clear that there is room to impose a sanction in the case of the correction of the individual informative declaration or of the supporting documentation, in the event of errors or inconsistencies in these documents.
On previous occasions, this Court has recognised that it is appropriate to correct the information return and supporting documentation.
However, regardless of whether the correction of the return or of the supporting documentation is punishable, such corrections should be examined by the Administration, in order to determine whether the transactions recorded by the taxpayer with his economic partners were in accordance with the arm’s length principle.
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In addition, the documentation clarifies that the reason for the study from the company abroad was an administrative services contract that had been in place since 2005, for which the company abroad was paid $3,569,194,000, a payment that was corroborated by the DIAN in the audit process by means of the withholdings made, transactions carried out and items paid. This contract was submitted to the file and shows that Sony Colombia and Sony United States agreed that “The Services provided by SBME will be invoiced to the Company at a rate calculated at cost plus an increase of 8%. The Services will be billed periodically, but in no case will they be billed for periods longer than one year”, a clarification together with the global situation of the music industry that justifies the Markup analysed, and the comparable companies in the supporting documentation.
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Consequently, it is reiterated that the change of the tested party was supported and it is clarified that such change only affects the information of the administrative services transaction, since the transfer pricing methods apply to individual transactions, as determined by article 260-2 of the Tax Statute.
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In this context, the plaintiff could correct its DIIPT and its supporting documentation, the information submitted in its corrections should have been taken into account, the plaintiff was free to choose to carry out its analysis of the foreign company, and it complied with the requirements of its supporting information together with the arm’s length principle. Consequently, the contested measures should be annulled, and the other pleas in law are dismissed as the main plea is well founded.”
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Colombia vs SONY Music Entertainment Colombia S.A., July 2021 ORG