The tax authorities disagreed with the comparables selected by Consorcio Minero Sociedad Anónima under the transactional net margin method and rejected some of the comparables and applied comparability adjustments (hedging losses and functional currency) to the remaining comparables.
Consorcio Minero Sociedad Anónima was not satisfied with the resulting assessment of additional taxable income and filed an appeal with the Tax Court, which was subsequently dismissed.
An appeal was then made to the Court of Appeal and later to the Supreme Court.
Judgment
The Supreme Court overturned the decision of the Tax Court and ruled largely in favour of Consorcio Minero Sociedad Anónima.
This discretionary power should not be arbitrary, so it is unreasonable and unconscionable for the tax authority to try to compare the operating profit of Consorcio Minero Sociedad Anónima, which includes losses from commodity derivative financial instruments, with the operating profit of those companies that do not record such losses from commodity derivative financial instruments (for hedging purposes) but from currency derivative financial instruments (through forward contracts), which is recorded after the operating profit.
In other words, the adjustments made by the tax administration cannot be such as to eliminate the adjustments made by the taxpayer to achieve comparability of comparables, where the administration should have maintained those comparability criteria, to make its adjustments or find transactions or companies that are truly comparable within the framework of its obligation to find the material truth, the arm’s length principle and respect for due process, as well as the search for balance in the asymmetry of information underlying the conduct of this type of study.
Since Consorcio Minero Sociedad Anónima has carried out all transactions with its related companies in US dollars, this is its functional currency, and it is reasonable that the financial statements used to develop the transfer pricing report have been expressed in the same currency, in order to determine the margins or ratios corresponding to the application of the transactional net margin method – TNMM.
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