Costa Rica vs Reca Química S.A., December 2017, Supreme Court, Case No 01586 – 2017

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Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States.

According to the “Transfer Pricing Policy” set by the parent company of the group and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%.

The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question.

In 2015 the Administrative Court of Appeal ruled in favor of Reca Quimica due to formal grounds. However, the assessment was allowed to be issued again in accordance with the guidelines set out in the ruling.

An appeal was then filed with the Supreme Court.

Judgement of the Supreme Court

The Supreme Court upheld the Judgement of the Administrative Court of Appeal, except for allowed claims in respect of the award of damages and interest, which was annulled.

The Courts considered that the the authorities had made an error in motivating the adjustment on a presumed basis determination, without complying with the legal requirements established for this type of tax determination. Furthermore, they said that if transfer prices had been determined, the authorities should have applied the adjustment according to one of the methods established by the OECD on a certain basis, and not on a presumed basis.

The judicial decision commits, in our opinion, a mistake. The five OECD methods are to determine whether or not there is transfer pricing. These methodologies are designed to examine whether prices between related parties are adjusted or not, to transactions in comparable circumstances between independent parties. But once it has been determined that there are transfer prices, what is appropriate is precisely to adjust them to prices under competitive conditions. The new price must then be set by the authorities, so that it is the basis for determining the corresponding tax obligations.”


“…this Chamber endorses the Court’s decision, insofar as it ruled that this discrepancy did not allow the use of the presumed basis method. Likewise, it considered, “…this allegation is fallacious, since using a margin in sales to related companies abroad different from that used in sales to other companies is not a true accounting irregularity or defect”. This is due to the fact that the accounting of the plaintiff could not be qualified as omissive, irregular and contradictory, since the taxpayer did not fail to provide information on its transactions, but rather, based on its reality, reported a different, -minor- profit in the transactions carried out with its related companies abroad (regardless of their normality), then the Administration should have applied the method of certain basis, via transfer prices.”

“Hence, there is no doubt that what the Administration should have done was to determine, -by using transfer prices- whether the price at which it sold to its related companies abroad was dissimilar to the market price, but never to use, as it did, the estimate based on a presumptive basis. For, as explained above, the plaintiff provided in her declaration information on the price at which she sold to her related companies abroad. According to the OECD (Organisation for Economic Co-operation and Development), there are five approved transfer pricing mechanisms, namely, first, the comparable free price method. Second, the resale price method. Third, the cost plus method. Fourth, the net transaction margin method; and fifth, the profit split method. With regard to this point, Executive Decree no. 37898-H of 5 June 1998 is currently in force in the legal system. 37898-H of 5 June 2013, and at the time of the facts that are of interest in the sub-lite, Interpretative Guideline no. 20-03 was in force, -with support in regulations 8 and 12 of the TC-. The legality of that Guideline was ratified by the Constitutional Chamber since its decision no. 2012-04940 of 15 hours 37 minutes on 18 April 2013. Consequently, the Court rightly stated: “…-based on what was indicated by the Chamber and taking into account the erga omnes binding effect of the constitutional jurisprudence (article 13 of Law 7135)- there is no contradiction between the transfer pricing methodology and the application of the economic reality principle of paragraphs 8 and 12 of the CNPT, nor is there any impediment to resort to the former even in the absence of an express legal rule that incorporates it into the Costa Rican legal system”. Thus, in this case, contrary to what was argued by the Administration, none of the assumptions established in canon 124 of the TC were met, so as to empower it to apply the presumptive basis methodology (article 125 ibid); on the contrary, according to the information provided by the plaintiff in its tax return, what was relevant was the application of the transfer pricing methodology, through any of its five mechanisms, so as to arrive at the correct determination of the tax liability. By not doing so, it is clear, as the judges ruled, that the Administration acted illegally, given that it should have applied the certain base method, which, since it was dealing with a transfer pricing case, should have been examined in accordance with the technical regulations of the OECD, which was feasible in accordance with the legal system in force at that time. Therefore, the complaint should be rejected.”

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