“Spare Parts S.A. had transactions with related parties abroad for the purchase of inventory, administrative services, technical services, commissions, purchase of fixed assets, royalties and provision of administrative services. “Spare Parts S.A.” had used the Transaction Net Margin Method (TNMM) to determine the transfer prices for these transactions.
Following an audit, the tax authorities found inconsistencies between the income tax returns and the transfer pricing reports. The tax authorities found that “Spare Parts S.A.” had excluded USD 6 million 956 thousand 967 from its general and administrative expenses in the calculation of the profit margin, by classifying these ordinary costs as extraordinary expenses. When the costs were included in the calculation, the profit of “Spare Parts S.A.” was below the range established in its transfer pricing study. The tax authorities therefore adjusted its operating margin to the median of 4.39%.
Not satisfied with the adjustment, Spare Parts S.A. filed a complaint.
Decision of the Court
The Tax Court ruled in favour of the tax authorities, finding that the general and administrative expenses were ordinary costs that should have been included in the calculation.
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