Costa Rica vs Reca Química, September 2015, Administrative Court, Case No 00147 – 2015 Case File 11-006793-1027-CA

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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 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.

Judgement of the Administrative Court

The court ruled in favour 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.


“In the view of the Court of First Instance, we are therefore faced with conduct which, contrary to what the applicant’s representatives allege in arguing that the plea does not exist, is vitiated by a partially inadequate statement of reasons, but which does not give rise to the defects of absolute invalidity pointed out by the applicant’s representatives.

“The Court considers that the plea does exist, since, as indicated above, the evidence adduced in the file, including the evidence admitted for the purpose of a better decision, which refers to the consolidated financial statements of the applicant company, provides the Court with the certainty that […] sold at prices below cost […], and that […] sold at prices below cost […]. …] sold at prices below the cost of sales to its related companies, in the fiscal periods two thousand three and two thousand four, incurring in a practice (sic) that derived in a self-determining action on the part of the plaintiff company in which it established as the amount of its tax obligation, an amount lower than the amount that would have corresponded in the case of applying the market value. This is the cause or reason for the contested conduct, and it is precisely the factual assumption that served as a background for the Administration to issue the contested acts. Thus, although it is wrong to state as part of the reasoning that the taxpayer’s accounts are irregular and contradictory, the fact is that it is also expressly stated, and implicitly found throughout the content of the various contested decisions, that the reason for the administration’s intervention, and its unofficial determination action, was precisely the fact that the taxpayer’s accounts were irregular and contradictory, and that the taxpayer’s accounts were irregular and contradictory, was precisely the fact that it was able to determine the existence of related operations that, by selling at prices below the cost of sales, caused damage to the Treasury by reducing the size of the tax obligation of the taxpayer, conduct that is due to tax planning, and for which the law offers a solution through sections 8 and 12 of the Tax Code, as we will see below.”

“Consequently, it was not possible in this hypothesis to resort to the determination by the presumptive basis method, and the partial annulment claimed in this respect had to be upheld. Indeed, in the opinion of the undersigned, the ATGC should have proceeded by the method of certain basis, which, since we are in a transfer pricing scenario, implied carrying out the corresponding analysis based on the technical rules of the OECD, mentioned above, which was perfectly possible based on the theoretical and legal framework set out in Interpretative Guideline number 20-03, already in force at the time. Although in the complaint the plaintiff claims that the content and justification of the aforementioned Guideline is erroneous and even illegal, the fact is that it does not challenge it, so that there is no impediment in this respect, particularly in light of the related constitutional ruling.”

“The legal situation of the plaintiff is restored to the date on which the first of the contested acts was issued, so that if it is legally appropriate, the Tax Administration may issue it again, in accordance with the guidelines set out in this ruling.”

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