GlaxoSmithKline Costa Rica S.A. manufactures pharma products which is sold to both independent customers in the region and to group companies abroad. For FY 2004 and 2005 pricing of the controlled transactions had been determined based on the TNMM method using return on total costs (ROTC) as PLI. GSK said the range of return on total costs “for the comparable independent companies ranges from 4.7 per cent to 14.5 per cent, with a median of 9.6 per cent. GSK CR obtained an average ROTC of 50.6 percent during fiscal years 2004 and 2005, which was not below the range identified for comparable independent companies. Accordingly, the transfer prices used by GSK CR in its controlled transactions did not distort GSK CR’s profitability and satisfied the arm’s length principle set out in the OECD Guidelines.
In 2009 the tax authorities issued an assessment for FY 2004 and 2005 based on the internal CUP method.
“…between the transactions under study, namely sales to related and unrelated customers, there is complete similarity in terms of the characteristics of the product that is addressed to both types of customers, it is the same product, i.e. with identical characteristics…”
“the taxpayer GSK sells at different prices with its related companies, taking into account the following branded products: Andrews, SB Analgesics, Oxy, Panadol Concept (RT) and Phillips Mom. It found that some products were sold at 34% of the price to an independent. Thus during the period 2004 it found that products such as Sal Andrews Cja X 50’s, code 200041010 was sold to independents at ¢1,366.57 and to affiliated companies at ¢468.68. The average profit margin over standard cost for products sold to independent customers was 285.33% and for affiliates it was 28.22%.”
Applying the internal CUP method resulted in an adjustment of taxable profits in an amount of ¢394,638,821.00.
Not content with the tax assessment an appeal was filed by GlaxoSmithKline with the tax court. The appeal was dismissed in 2013 and later in 2019 by the Court of appeal. An appeal was then filed with the Supreme Court.
Judgement of the Supreme Court
The Court dismissed the appeal of GlaxoSmithKline and upheld the assessment of the tax authorities.
Excerpts from the Judgement
“The principle of economic reality, provided for in precepts 8 and 12 of the CNPT, essentially allows the Tax Administration to depart from the forms adopted by the taxpayer to unravel the true tax scope of the contract, in order to avoid tax evasion and thus determine what the business between the parties really consisted of. In the case under study, several aspects can be extracted from the evidence in the case file and referred to above. Firstly, the application of the CUP method is not outside the scope of administrative discretion based on due technical discretion, in proper compliance with paragraphs 15 and 16 of the LGAP.
Discretion allows the Administration to determine the best technical criterion to be used. It is a detailed study in which the comparison of the same products is reflected. Secondly, the PwC reports show the possibility of using other methods to determine the actual transfer pricing situation. Indeed, PwC’s work is very comprehensive and justified on each of the points it raises. It is clear to this House that these documents were prepared by experts with extensive knowledge of the subject. Thirdly, the expert opinion is not a study that helps to solve the conflict, as it is basically dedicated to indicate whether the system used by the TA complies or not with the Guidelines, in order to deduce that the best work was that of PwC. However, as has been seen, as explained throughout this judgment, it is not in dispute whether the TA had to apply the Guidelines as they are established; with the obligation to follow each of the guidelines set out therein. The shortcomings that this Chamber detects in the evidence provided by GSK, lies in the fact that the study carried out by the expert PwC, takes into account variables, which do not appear in the file and which the TA did not have, specifically those private reports adduce preponderant factors that influence and directly affect the sale price and analyse elements such as: sales volumes, brands, economic conditions of each country, price controls established in some regions, names under which the products are sold, specifications of the respective packaging, geographic issues, development and market size; which from their point of view make the products incomparable. However, as the auditor indicates, when he carried out his study and asked GSK directly for information on the elements that could influence the prices of related companies with respect to independent companies, in which a clear difference was noted, the taxpayer’s response was that the only factor that affected prices was advertising. This response was given even though the taxpayer was aware that a transfer pricing study was being carried out on the company. PwC’s work goes beyond this statement made by the taxpayer during the audit process, and that is why, even if they are complete and technical studies, they are elaborated with completely different parameters than those available to the TA, as expressly indicated by the plaintiff.
None of the elements referred to were arguments made by the taxpayer when the study was carried out. Likewise, it is unacceptable the position used by the plaintiff that when GSK responded to the auditor that “other” elements were also part of the aspects that varied the transfer prices with the related parties, it was the TA’s obligation to find out what those “other” elements consisted of; it is up to the taxpayer to provide all the required information. Thus, it is not possible to affirm that the work carried out by the TA was deficient, unreliable or incomplete; since, all things being equal, it has not been possible to disprove that this study is erroneous or unreliable, in such a way that, in the present case, it is not evident that the allegedly violated ordinals have been violated. However, it is important to mention certain assertions made by the appellant, it is not evident to this Chamber that the Court has ruled in ignorance of the legal system, nor that the fact that they were not experts in transfer pricing makes them unsuitable to resolve the issue.
The assertion that there is complacency on the part of the judicial authorities with the Tax Administration is also untenable; the evidence presented in a judicial process must be limited to the case under study and be based on the parameters under discussion. This Chamber does not accept the appellant’s argument that the TA did not have the tools to apply another type of method because it does not have the corresponding computer or support systems, which makes it impossible, according to the appellant, to carry out any type of transfer pricing study. To accept such a position would be to cement impunity when there is an improper tax declaration. The first, second and third objections must therefore be rejected.”