Banana S.A. sold bananas to related parties abroad. These transactions were priced using the TNMM method and the result of the benchmark analysis was an interquartile range of ROTC from 0.71% to 11.09%.
However, Banana S.A. had continuous losses and for 2016 its return on total costs (ROTC) was -1.83%. To this end, an “adjustment” was made by adding “unearned income” related to storm damage to the actual results, which increased the company’s ROTC from -1.83% to 3.57%.
The tax authorities disagreed with both the transfer pricing method used and the “adjustment” made to the results. An assessment of additional taxable income in an amount of B/.20,646,930,51. was issued, where the CUP method (based on quoted commodity prices for bananas) had been applied.
Judgment of the Court
The Court agreed with the tax authorities that the “adjustment” for “unearned income” was not allowed.
“….In this sense, we agree with the Tax Administration when questioning the adjustment made by the taxpayer, attending to the reality exposed by the itself in the appeal , explaining that —————– produces different types of bananas according to their characteristics which are direct consequence of the position of the banana in the bunch, so that in the scenario of having lost an approximate of 700,000 boxes due to climatic events, it is impossible to claim that the total of boxes lost would have had a cost of USD 8.30, already that this would represent that the lost bunches, only had bananas extra quality, so that of according to the taxpayer’s own explanations is impossible.
….
Based on the above, we can conclude that the taxpayer did not disclose the weather event that affected its plantations in the audited income statement for the period 2016, nor in its audited financial statements, since at the information financial that is uses to make the adjustments of comparability,such events were not reported since there is no financial information that validates their existence and therefore they are rejected.”
However, as regards the transfer pricing method, the Court agreed with the taxpayer that although the product was the same, other comparability factors were not. On this basis, the assessment of the additional taxable income was changed by the court to the result previously determined by the tax authorities using the TNMM, without taking into account the adjustment for unearned profits.
“….Tax Administration undermined the conclusions and results presented in the Transfer Pricing Study of ———————- for the year 2016, which were established using the Transactional Net Margin Method (TNMM), by not accepting that the taxpayer’s income and margin, which would have been higher had the weather events that caused losses not occurred, notwithstanding, the taxpayer emphasises that the Tax Administration accepted all the comparables used in the Transfer Pricing Study. In this regard, the taxpayer adds that had the weather events that caused the loss of 719,531 boxes of bananas not occurred, the company’s margins would have been within the inter-quartile ranges of the comparables selected for the Transfer Pricing Study, and secondly, being weather events of an exceptional nature. In this regard, the appellant adds that by using the Transactional Net Margin Method (TNMM), it is possible to adjust the company’s revenues and costs in order to show what the margin would have been………………………. .The operating margin of —————— was -1.83% in 2016, due to the damages caused by the weather events, which, had they not occurred, the adjusted margin would have been 3.57%. Since the Directorate General Revenue did not accept this argument, it concluded that since the appellant’s margin is not within the inter-quartile range, which is 0.71%, up to 11.09%, it then proceeded to adjust the operating profit margin of ——————, to the value of the —————- of the operating margins of the comparable companies selected for the Transfer Pricing Study, which is 4.83% and in order to achieve this profit margin, it proceeded to increase the appellant’s revenues in the amount of B/.6,747,901.75.”
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