A foreign group had transferred funds to one of its branches, Perupetro, in Peru and claimed that the transfer was a capital contribution – and not a loan.
Following an audit the tax authorities issued an assessment, where the funds transferred were considered a loan and withholding taxes on the interest payments had been lifted.
An appeal was filed by Perupetro.
Perupetro held that the transfers of funds made by its non-domiciled parent company in its favour in the financial year 2014 constitute assigned capital (capital contributions) and not loans as considered by the Administration. It pointed out that the tax authorities has not followed the procedure established by the Income Tax Law and the OECD Guidelines to delineate the operation observed, a situation that would have allowed it to note that it does not qualify as a loan.
Perupetro further claimed that the tax authorities had not carried out a correct comparability analysis for the transaction subject to assessment, i.e. a proper comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2014 financial year.
Judgement of the Tax Court
The Tax Court sets aside the assessment and decided in favour of Perupetro.
Excerpts
”
From the evaluation carried out, it can be seen that the Administration carried out the analysis of some of the characteristics applicable to the case in question, as considered in article 110 of the Income Tax Law Regulations; However, it is noted that it has not taken into account some other elements of the operation that are relevant in order to establish a comparable financial transaction and that may have an impact on the setting of the interest rate to be charged, such as the solvency of the debtor and the risk rating, elements considered by paragraph d) of article 32-A of the Income Tax Law and paragraph a) of numeral 1 of article 110 of the regulations of the aforementioned law.
In this regard, it has not been proven that the Administration had carried out a correct comparability analysis for the transaction subject to assessment, i.e. a proper comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2014 financial year.
That in accordance with the foregoing, the objection of the Administration is not duly substantiated, and it is therefore appropriate to lift it and, consequently, revoke the appealed ruling and annul the contested determination ruling.”
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2021_1_05562