As a result of a tax audit initiated against “Pharma-Distributor”, the Peruvian tax authority, SUNAT, issued an assessment where an adjustment of transfer prices in the amount of S/. 5,720,692.00 was added to the taxable income for FY 2009. SUNAT had applied the transactional net margin method, instead of the resale price method, used by “Pharma-Distributor”.
SUNAT found that the resale price method used by “Pharma-Distributor” was not the most appropriate method, since it does not include other functions directly related to its business activity such as sales force, advertising, marketing, reflected in the expenses assumed in medical visitors, promotions, medical samples, merchandising, promoters, events and conferences for doctors, among others, which are accounted for at the operating profit level.
Comparability adjustments were made by the tax authorities considering certain exceptional events that affected the normal operations of “Pharma-Distributor”, such as: i) issuance of credit notes in excess for extraordinary discounts, ii) problems with inventory management and iii) payment of liberalities. After these adjustments had been made it was determined that “Pharma-Distributor” had an operating profit below the arm’s length operating profit established by the benchmark analysis.
Not satisfied with the assessment, “Pharma-Distributor” appealed to the Tax Court.
Decision of the Tax Court
The Court upheld the assessment issued by the tax authorities and dismissed the appeal of “Pharma-Distributor”.
“As explained above, in order to calculate the comparability adjustment in question, the Administration verified the levels of sales and discounts that the appellant had had in the last two years (2008 and 2009), observing that the amount of discounts applied via credit notes had been increasing as 2008 went by and during the first eight months of 2009, but that the real boom in the issuance of the aforementioned credit notes occurred between the months of September and December 2009, for which reason it took that period as the “exceptional period”, and considered the other months of 2009 as the “normal period”, which turns out to be a reliable criterion, given that in effect, during the first eight months of 2009, the level of issuance of credit notes ranged between 13% and 29%, that during 2008 said level reached a peak of 21% and that during the months of September to December 2009, the aforementioned level ranged between 44% and 122%, It is clear that it is in these last months that the appellant reached a high level of credit note issuance in comparison with the previous months of 2009, thus showing that the Administration gave reasons and a due explanation on the calculation it made, contrary to the appellant’s arguments.
Although the appellant alleges that the “normal” period and the “exceptional” period should refer only to full years in application of Article 57 of the Income Tax Law and Article 110 of its regulations, it should be noted that the first of said articles refers to the taxable year considered by the Income Tax Law for the allocation of income and expenses, and the second is related to the authority of the Administration to consider information from the taxpayer and comparable operations corresponding to two or more previous years and to use information from the taxpayer is not required to use the information from previous years in order to determine the origin of the reported losses, when such losses are part of other losses generated in comparable transactions or are the result of specific conditions of previous years, within the framework of the comparability analysis; nevertheless, it is not apparent that any of such articles, obliges the Administration to make the calculation of a comparability adjustment considering only information of whole years or fiscal years, as alleged by the appellant, because as it is noted, it is feasible to consider different periods (longer or shorter), as long as its application has been duly explained and responds to the purpose of any comparability adjustment, that is, to improve the level of comparability, making the commercial characteristics of the appellant as similar as possible to that of the comparable companies. Furthermore, in the present case, the comparability adjustments were related to the “exceptional events” that occurred in 2009, being that in the case of the credit notes, it was verified that this occurred in the months of September to December 2009.
It should also be noted that according to the OECD Guidelines mentioned above, the objective is to arrive at a reasonable approximation of what would be an arm’s length result based on reliable information, stating that transfer pricing is not an exact science, but requires value judgments by both the Tax Administration and the taxpayers.
Likewise, there is no provision that establishes the use of the same methodology or a standard criterion for the calculation of all the comparability adjustments that are required to be made to make the information comparable in a given case, therefore, the fact that the Administration has made the calculation of the comparability adjustment for inventory devaluation, considering full years or fiscal years (January 1 to December 31), does not imply that the calculation of the adjustment for excess credit note issuance should also be determined under the same calculation criterion, and that the contrary would lead to its loss of reliability, does not imply that the calculation of the adjustment for excess issuance of credit notes should also be determined under the same calculation criterion, and that the contrary, leads to its loss of reliability, even more so when based on the documentation provided by the appellant corresponding to the previous fiscal year and the fiscal year audited, it does not appear that in the first months of fiscal year 2009 the specific special conditions that motivated the extraordinary issuance of credit notes for discounts had taken place.”
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