El Salvador vs “E-S. Sales Corp”, December 2020, Tax Court, Case No R1705038.TM

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Following an audit the tax authorities issued an assessment regarding various intra group costs of sales deducted for tax purposes by “E-S. Sales Corp”.

An appeal was filed by the company.

Judgement of the Tax Court

The court partially upheld the assessment, but in regards of application of the OECD Transfer Pricing Guidelines, the assessment was set aside. For the years in question the OECD guidelines had not yet been implemented by El Salvador.

Excerpt

“In this regard, it should be noted that the seventh paragraph of the aforementioned article provides that “””If, for any reason, the market price cannot be determined, the Tax Administration shall establish it by adopting the price or the amount of the consideration that the taxpayer under audit has received from purchasers of goods or providers of unrelated services other than those to whom it transferred goods or provided services at a price lower or higher than the market price”””.

Therefore, if it had been proven that there was indeed an impediment to determine the market price, the Directorate General should have documented it and proceeded in accordance with the provisions of the aforementioned rule, which it did not do. In this sense, in no case was it appropriate to use the OECD transfer pricing guidelines and methodology, since for the fiscal year audited, the Tax Code did not contemplate such a possibility.

Article 62-A of the Tax Code empowers the Tax Administration to determine the market value of certain goods and services, under the mechanisms established in the same regulation, which -for the fiscal year audited- did not relate to the OECD methodology, therefore, the Directorate General did not have the power to review and determine the market value based on that methodology.

This Court finds that in the present case there has been a violation of the principle of legality and the principle of legal reserve, since the Directorate General did not follow the procedure established by the legal system in force for the audited period for the determination of market value, which was described in article 199-B of the Tax Code, It was not empowered to apply regulations that had not been established by the legislator, so it should have made its analysis in accordance with that provision, observing all the assumptions described therein, in order to establish whether or not it was possible to make the adjustment to the market price of the challenged transactions.

Hence, and as stated above, it is not the legality of the powers of the Directorate General to determine the market price that is being questioned, but rather the methodology it used to make such determination, by not applying the provisions of article 62- A, second paragraph of the Tax Code.

This Court has pointed out the full validity and importance of the principles of legality, reserve of law and legal certainty that with particular emphasis governs tax matters by constitutional mandate, whose respect is not only required in the creation of taxes and the establishment of their essential elements, but also in the regulation of the procedures that impose obligations aimed at determining the tax base on which the tax that must be declared and settled will fall, Among them, those referring to the Transfer Pricing Regime, which has a direct impact on the taxable base of the Income Tax, so that the actions of the Administration must be carried out in accordance with the positive order, since the competence of the Administration is limited exclusively to the normative authorisation, consequently, to determine the taxable base, it cannot stop using a procedure regulated in the law, to apply another that is not regulated therein and that requires the rank of law.

Consequently, the Directorate General could not validly apply, for the determination of the market price, the methodology contained in the OECD Guidelines, since this situation constitutes a choice of the company for the purpose of carrying out a transfer pricing analysis, but in no way implies that this mechanism is endorsed by law, especially when it was not contemplated in the regulations in force for the audited period, the Directorate General being obliged to lead the taxpayer to apply the regulations in force and adjust the operations within the same.

Therefore, it is concluded that there was not a correct application of the regulation by the Tax Administration, in accordance with the provisions of Article 62-A of the Tax Code, which clearly determines those taxpayers who, at the time of entering into operations or transactions with related parties, fail to comply with the obligation to determine the prices and amounts of the considerations, using market prices used in transfers of goods or provision of services of the same kind between independent parties, the Tax Administration shall determine the value of such operations or transactions, establishing the price or amount of the consideration, in accordance with the provisions of Articles 199-A, 199-B, 199-C and 199-D of the same Code.

Based on the foregoing, the Tax Administration, by issuing the challenged act, is outside the legally established procedures, in violation of the principles of legality, reserve of law and legal certainty, so that the resolution under appeal is vitiated as illegal.”

 

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TAIIA-R1705038TM

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