In 2008, “Peru Deposits SA” provided funds totaling USD 8.3 million to a group company in Luxembourg, characterizing the transactions as deposits and charging interest at rates between 2.3% and 4.6% per annum. The transfer pricing documentation supported these rates by referencing deposit rates typically offered by banks.
Following an audit, the tax authorities characterized the transactions as loans rather than deposits, asserting that the applicable interest should reflect lending rates, which are generally higher. The interest income was recalculated – based on Peruvian interest rates – and an assessment for additional taxable income issued.
“Peru Deposits SA” challenged the assessment before the Tax Court.
Decision of the Tax Court
The Tax Court upheld the tax authorities’ characterization of the transactions as loans and found that the interest rates applied by the company did not meet the arm’s length standard. However, the Court did not fully endorse the rates used by the authorities and instead set the appropriate arm’s length range between 5.14% and 6.46%. Based on these revised rates, the Court recalculated the additional taxable income, resulting in a reduced assessment.
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