Empresa Minera Los Quenuales S.A. had used the transactional net margin method to determine the arm’s length price for its controlled transactions consisting of sales of zinc concentrates to a related party, Glencore International AG, domiciled in Switzerland.
The tax authorities disagreed with the choice of method and instead applied a CUP method, on the basis of which an assessment of additional taxable income was issued.
Not satisfied with the assessment, Empresa Minera Los Quenuales S.A. appealed to the Tax Court.
The Tax Court ruled mostly in favour of Empresa Minera Los Quenuales S.A.
According to the Tax Court, the tax authorities had not taken into account various comparability factors in determining the arm’s length price of the zinc concentrate under the chosen method – such as weight, percentage of humidity, loss, ore grade, recovery factor, etc.
The tax authorities then appealed.
Judgment
The Supreme Court overturned the Tax Court’s decision and decided in favour of the tax authorities.
According to the Supreme Court, the tax authorities had analysed the relevant components of the zinc concentrate price and not only a single component consisting of the “international zinc quotation”, as the Tax Court erroneously stated.
The Tax Court had also failed to analyse Article 32-A of the Income Tax Law, which states that in export transactions with a known quotation on the international market, or with prices that are fixed by reference to the quotations of the specified markets, the market value shall be determined on the basis of such quotations.
Although the Tax Court assessed the evidence in the case, it did not rule on the merits of the case by determining the appropriate method for calculating market value under the transfer pricing rules.
For these reasons, the judgment of the Tax Court was declared null and void.
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