AT SANTIAGO, ON THE THIRTY-FIRST DAY OF MARCH, TWO THOUSAND AND TWENTY-ONE.

AVERY DENNISON CHILE RUT N°96.721.090-0 CUANTIA: 8.614,50 UTM

In view of the health contingency and the teleworking modality in which the Tribunal is operating, the present resolution contains the pages of the electronic file of the SACTA system.

IN VIEW OF:

The document dated December 19, 2016, on page 1 of the file, presented by Mr. GUILLERMO INFANTE CORTES, lawyer, RUT N° 12.584.927-K, representing the company AVERY DENNISON CHILE S.A., RUT N°96.721. 090-0, both domiciled for these purposes at El Golf N°40, 20th floor, commune of Las Condes, by means of which he files a claim in accordance with the General Claims Procedure established in the Tax Code, against Assessment N°210, dated 30 August 2016, issued by the Santiago Poniente Metropolitan Regional Directorate of the Internal Revenue Service (hereinafter SII), which determined a refund under the terms of Article 97 of the Income Tax Law (hereinafter LIR) in the amount of $397. 843.223.-, including adjustments, interest and fines; challenging the transfer prices of transactions between the plaintiff and related transnational companies, carried out during the 2012 business year.

The taxpayer argues, in summary, that at the administrative stage it provided all the information requested by the Service for the review of the transactions carried out with related parties for the business years 2011 and 2012.

By way of clarification, and without acknowledging in any way the effectiveness of the settled items, it states that on 21 November 2016 it requested the transfer - with reservation of the right to claim - of the settled amount, which was paid within 90 days of notification of the Settlement.

It relates that it is a company of the American conglomerate "Avery Dennison", which dates back to 1935, devising a new form of price labelling for "Avery Dennison" products. That, over time, has patented more than 18 self-adhesive labelling machines, always being at the forefront, allowing that, worldwide, has transformed the way in which brands and companies deliver information to their customers. He adds that it currently manufactures and distributes labelling and packaging materials in more than 50 countries around the world.

It indicates that the conglomerate is headquartered in Delaware, USA, a company listed on the New York Stock Exchange, whose corporate name is Avery Dennison Corporation.

In turn, it explains that its corporate structure is made up of Avery Dennison Corporation, with a 99% shareholding, and Avery Dennison Group Denmark ApS, with a 1% shareholding.

With regard to its lines of business, it states that it is possible to divide the development of its business into four main areas, namely: self-adhesive material for labels and packaging, the area which generates the most revenue and the highest production volumes; graphic and reflective solutions; Perfomance tapes; and office products.

As to the marketing of the products themselves, it describes that the company sells them to converters, directly or indirectly through resellers, who in turn convert them into labels that are used in all markets, such as supermarkets, manufacturers of mass consumer products, among others.

As a first allegation, it raises an erroneous application of former article 38 of the LIR, related to article 41 E of the aforementioned legal body in the determination of profitability in marketing operations for the 2012 business year. It points out that the transactions challenged by the SII fall within the transitional stage between the legal and administrative rules on transfer pricing.

It explains that transactions entered into between related parties under the terms regulated in article 41 E of the LIR, from 27 September 2012 onwards, are governed by the new legal rules in accordance with the provisions of Law No. 20.630, which is expressly recognised by Circular No. 29 of June 2013, and a contrario sensu, transactions entered into between related parties prior to that date are governed by the former article 38 of the LIR, which it transcribes in its submission.

It argues that most of the volume of the transactions reviewed by the Servicio de Impuestos Internos were carried out prior to 27 September 2012, and are therefore subject to the regulation established by the former article 38 of the LIR. This analysis is not included in the contested tax assessment, which is more than sufficient grounds for annulling it in its entirety.

It points out that some of the companies with which it carried out operations in the year under audit, although they formed part of the "Avery Dennison" conglomerate, were not related in the terms established by the former article 38 of the LIR, and to the provisions of Circular No. 3 of 1998, which interpreted the scope of the rules of relationship. In this regard, it states that Avery Dennison Argentina, the company that registers the largest commercial movements with the Claimant, is not a parent or subsidiary of the Claimant, nor are its owners, Avery LLC (90% participation) and Avery Netherlands lnvestment I.B.V (10% participation), part of the control or management of the Claimant. It adds that Avery Dennison Corporation, which owns 99% of the capital of Avery Dennison Chile S.A., has no percentage shareholding in Avery Dennison Argentina, i.e. there is no parent-subsidiary relationship, nor any direct or indirect relationship between the two companies or their owners.

It explains that this rule regulated price transfers charged between the parent company and its respective branches or agencies established in the country and, in general, of companies established in Chile in relation to companies established abroad that meet the relationship hypotheses, from 26 September 2012 onwards. In particular, paragraphs 6 and 7 of the Circular set out the elements to be taken into consideration when defining whether or not a relationship existed under the terms established by law. He adds that the aforementioned Circular No. 3 of 1998 issued instructions on amendments introduced to Article 38 of the Income Tax Law by Law No. 19.506, number 4 of which clearly refers to Articles 86 and 87 of Law No. 18.046, and Articles 97 and 98 of the same law, all of which contain objective situations of relationship.

He goes on to analyse the judgment dated 23 July 2015 of the Tax and Customs Court of the Los Lagos Region, case RIT GR-12-00069-2013; RUC 13-9-0001455-9.

It argues that the rules of relationship described above are not the only matter that presents differences between the old and the new transfer pricing rules, as there are also other distinctions in the field of auditing, such as the requirement under former Article 38 of the LIR to request, in the first instance, internal comparables from the audited companies, internal comparables from the audited companies before resorting to a comparison with international companies, or the obligation established by that provision for the relevant Regional Directorate to request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information, in the event of wishing to consider international values.

If the former Article 38 had been correctly applied, the first thing the Service should have done was to determine the prices of the transactions carried out and questioned, by using internal comparables, if any, information which was never requested, and this because, in its opinion, the entire period in question was audited as if the new transfer pricing rules provided for in Article 41 E of the Income Tax Law were applicable to the entire period in question.

It explains that the expression 'in a reasonable manner' contained in the fourth paragraph of the rule in question refers to the reports that it must request from the different institutions or bodies that have information on foreign trade by means of which the arm's length price could be determined for a certain operation in accordance with its special characteristics, which would be worded in mandatory terms.

It concludes that the challenged Settlement did not make any segmentation or separation between the applicable periods, using generic phrases with respect to the applicable "common" regulations, without considering the evident differences between the procedures, and the requirements that each regulation establishes, and should therefore be annulled.

The second allegation is that the Service determined the transactional method of net margins based on the fact that, at a meeting between representatives of the company and the tax authority, they allegedly stated that the commercial strategy implemented in the 2012 business year was interposed by the parent company and, therefore, should be compensated by the parent company in order to guarantee Avery Dennison Chile S.A. a positive operating profitability. The foregoing is the sole basis for maintaining that its profile is that of a limited-risk distributor, without any other corroborating evidence.

It explains that the commercial strategy consisted of reducing prices and costs associated with sales volumes, while maintaining the quality of the products, in order to increase potential consumers. It clarifies that what generated a depression in operating margins is not related to an increase in the acquisition costs of the products that are subsequently resold, but rather to the decrease in the selling prices of those products, and to the circumstances that led it to make that determination.

It adds that even in a meeting on 16 August with the SII, it was expressly stated that it was not effective that the decisions were taken by an entity other than the Chilean entity, which is the main basis for the tax administration to question the profitability method used, which corresponds to the resale price, applying the Gross Margin as a profitability indicator, given that the costs of its operations are assumed by the claimant.

In this regard, it considers that the Settlement omits that the examination of operating expenses was carried out only because it was the SII itself that requested that they be considered in Reference No. 1 of the Summons, since, in its internal analysis, reflected both in Affidavit No. 1907 and in the Transfer Pricing study, the company always based its analysis on gross margins, given the characteristics, functions and risks of the Chilean entity.

It concludes that the risk is not shared, but was assumed in its entirety by the plaintiff, and that the resale method was the one actually used, as it was the most direct method applicable to the margins observed at gross levels, in addition to concentrating the main inter-company transaction, i.e. the purchase of finished products for resale, at the cost of sales level.

It then refers to the third allegation where it claims a deficient analysis of the comparables for the determination of profitability in marketing operations for the business year 2012, given that the comparable companies used by the SII carry out different activities to that of the complainant.

It notes that the tax authority is not consistent with the arguments used to refute the comparability of the set of comparables proposed by the plaintiff, in relation to the fact that the products marketed by the distributor would be significantly different from those marketed by the companies selected as functionally comparable; however, in the liquidation, the common denominator of the 3 new entities considered as functionally comparable belong to the electronic equipment industry, which, in its opinion, could not even be considered as substitutes for the goods marketed by the latter. In addition to disregarding the commercial strategy adopted with a view to improving its market position, they were attempting to establish market profitability, thereby altering the economic reality of the company.

Another of the criteria used by the SII to exclude entities from the sample provided by the plaintiff is related to the significantly different functions performed by Avery with respect to the entities selected as comparable, which not only supply electronic products but also provide other services.

Finally, as regards the use of financial information, it considers that the analysis of comparability in the contested act is incomplete in that it does not distinguish the appropriateness of including financial variables which might not be applicable and which would therefore have required adjustments.

Next, as a fourth plea, the applicant alleges an arbitrary application of the interquartile range for the determination of the profitability of marketing operations for the 2012 business year.

It points out that the Service calculates a range composed of the profitability of the comparable companies and applies an interquartile range adjustment by removing the top 25% and bottom 25% of the sample, without explaining a specific reason to support the application of that statistical adjustment, which suggests that there could be some deficiency with regard to the comparability of companies chosen as comparables. Furthermore, the application of the interquartile range implies that half of the sample should be disregarded, rather than simply assuming that its application is more appropriate or that it tends to produce more reliable results.

He adds that the legislation in force and applicable in the period under review, both in former article 38 of the LIR and article 41 E of the aforementioned legal body, do not contemplate the obligation to apply any statistical adjustment, there being no legal basis for applying the interquartile range adjustment on the full range, which is an infringement of the principle of legality that governs the actions of the Tax Administration.

It concludes that only in cases where there are perceived shortcomings in comparability would it be appropriate to use measures of central tendency to determine the most appropriate point within the range in order to minimise the risk of error caused by shortcomings in comparability that persist but are not known or cannot be quantified.

Finally, as a last allegation, it claims an erroneous application of risk spreads in determining the interest rate for loans granted to Avery Management KGAA.

It explains that the cash surpluses generated by the entities of the Avery Dennison conglomerate are transferred to treasury centres in order to make efficient use of resources at a general level. The cash surpluses generated were made available to Avery Management KGAA, which contains one of Avery Dennison's treasury centres.

It indicates that the aforementioned operation was materialised through two transactions, one for US $3,200,000 dated 24 November 2010, and the other for US $1,100,000 dated June 2011, signed in two loan contracts.

He explains that the interest rate used for these transactions was 0.79%, which was established by management and corresponds to a fixed rate scheme in US dollars, with interest calculated on the basis of a 360-day year. He states that, during 2012, two advances were requested in respect of the sums sent to Avery Management KGAA, the first for the amount of US $1,100,000.- and the second for US $700,000.-, respectively.

She argues that the structure of the contracts entitles her to request the restitution of the money, establishing a maximum period of 6 months for restitution, warning that it may have some characteristics of an irregular deposit, especially because the destination of the money is subject to the creditor's will.

Regarding the method used, he points out that in the Transfer Pricing Report the Uncontrolled Comparable Price Method was used, given the particularity of the operation, and the possibility of finding comparable independent transactions.

He explains that the range is obtained by considering a 12-month Libor rate, according to which a minimum of 0.77% and a maximum of 1.19% and a median of 0.90% were obtained for 2010, while for 2011, a minimum of 0.73%, a maximum of 0.79% and a median of 0.77% were obtained, so that the range determined is in accordance with a standard of unrelated companies.

It clarifies that the respondent commits a serious error in the analysis on which the modification of the rate is based, since it is one thing for the loan to have certain characteristics of an irregular deposit, and quite another for it to correspond to a term deposit in the local market, let alone share its specific characteristics, supporting the contracts, which reflect that these transactions correspond to loans (loan), with certain special characteristics, which are adjusted to the comparables and rates determined by the company's corporate.

He concludes by requesting that the settlement be annulled, with an express order for costs.

On page 133 and following pages, Ms. TAMARA ULLOA EYZAGUIRRE, on behalf of the Santiago Poniente Metropolitan Regional Directorate of the Internal Revenue Service, duly authorized to do so, responded to the transfer granted by resolution on page 127 of the file, stating in summary, that the purpose of the selective tax audit process in question was to control the correct application of the rules on Transfer Pricing for cross-border transactions of the taxpayer with related entities, reported by the party, in order to verify the correct compliance with the declaration and payment of income taxes for TA 2012 and 2013.

It states that the Claimant was incorporated as a closed corporation on 15 December 1994, establishing as its corporate purpose the production, import, marketing and distribution of labels and office products. And, as its main source of business, the marketing of self-adhesive materials and products that serve as inputs for the visual communication market, all of which are purchased from its related parties abroad, specifically those domiciled in Argentina and the United States, and also marketed to independent third parties in our country.

It indicates that the plaintiff submitted the information requested at the inspection stage, which was also supplemented by a written submission. From its review, it was requested to clarify certain questions, which were answered by e-mail and at a meeting at the Service's offices.

It points out that, subsequently, on 29 April 2016, it served Summons No. 17, to which the plaintiff responded by means of an explanatory letter; however, it issued the Settlement complained of.

As regards the taxpayer's first defence: Erroneous application of former article 38 of the LIR, related to article 41 E of the aforementioned legal body in the determination of profitability in trading operations for the 2012 business year. In this regard, he clarifies that the OECD has issued guidelines on transfer pricing that contain guidelines and specialised opinions, which various countries have included in their tax legislation for the establishment of tax rules on the subject, criteria that Chile has included and incorporated into the spirit of the national tax legislation, which have been embodied in both former article 38 and the current article 41 E, both of the LIR.

He considers that the above can be reflected in the history of Law N° 19. 506 of 30 July 1997, a provision that introduced the regulation of transfer pricing, given that the purpose of the legislator, in enshrining the third and following paragraphs of former article 38, was to adapt Chilean tax legislation to the existing international reality, in particular that of the most developed nations according to the principles systematised at that time in the OECD's "Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations".

In this regard, it cites the former article 38 of the LIR, and points out that subsequently Law No. 20.630 was not intended to change the essence of the tax system, but rather to improve it in order to better meet the objectives, which is why the new article 41 E was established, which it also transcribes in its submission.

He notes that the claimant in his defence only seeks to confuse and distract the object of the liquidation, in addition to ignoring the relationship that exists with the companies that carried out operations.

He clarifies that he applied the regulations in force for operations carried out before 27 September 2012 under the former article 38, and also for operations carried out after 27 September 2012 in accordance with the provisions of Law No. 20.630, according to article 41 letter E. He adds that article 21, paragraph 2 of the LIR, in force at the date of the transactions, states that the presumed income determined under the rules of this law and those arising from the application of the provisions of articles 35, 36, second paragraph, 38, with the exception of its first paragraph, 70 and 71, as appropriate, shall also be considered to belong to the company at the end of the financial year.

In its opinion, these rules seek to avoid that through the agreement of conditions that do not conform to those that would be agreed upon by independent companies, the location of the profits of an operation can be managed in such a way that they are transferred to another tax jurisdiction by altering the components that form part of the taxable bases of Chilean taxes, also constituting rules that enshrine and protect the neutrality of the markets. Provisions that empower the Service, for tax purposes, to challenge the prices, values or returns set, or to establish them in case no prices, values or returns have been set, when cross-border transactions and those that account for corporate or business reorganisations or restructurings that taxpayers domiciled, or resident or established in Chile, are carried out with related parties abroad and have not been carried out at normal market prices, values or returns. The aim is for taxpayers to recognise the operations carried out according to the normal parameters used in similar operations, such as relationship, control, influence, agreements, among others.

It argues that although the parties may freely fix the price of the goods and services they trade, the tax rules include a series of provisions intended to ensure that the agreed values do not differ from those fixed by the market, causing distortions in the tax results of taxpayers.

It argues that the appellant itself, in its sworn declaration 1907, indicates the related companies, country, type of relationship, transaction carried out, currency, amount and transfer price method, information that it does not know. In addition, in responses to the SII, the complainant acknowledges that she has carried out transactions with related companies abroad.

For its part, it analyses the relationship hypotheses contemplated in article 38 of the LIR in force at the time, concluding that the appellant is related to Avery Dennison Argentina, clearly and precisely, since it appears in the Osiris database of the Bureau Van Dijk company, which compiles information on more than 80,000 companies around the world, and with which it made its comparability analysis, companies that are part of the Avery Dennison Corporation conglomerate.

With regard to the plaintiff's argument that Avery Dennison Argentina would not be related, according to Circular 3 of 1998, it states that the basic assumption of the rule is that the prices of the agency or parent or related company are not adjusted to the values charged between independent companies, so that having established that there is a relationship, the next step is to analyse whether the values charged by the agency or parent or related company are in line with the values charged between independent companies, what is necessary is to analyse whether the price values are in line with those charged in similar transactions, and it is unnecessary to search for an alleged influence of the controlling company in this respect, because what should be done is an objective examination consisting of comparing transactions between related parties and market transactions.

It is of the opinion that the complainant is mistaken in understanding that there must always be control of one company over another for the application of the transfer pricing rules, since paragraph 6 of article 38 of the LIR, in force at the date of the transactions, contemplates three types of relationship, control being a species within the genus relationship, and these are direct or indirect participation in the management, control or capital of a company established in Chile, or vice versa.

He goes on to quote article 9 of the Transfer Pricing Guidelines, in particular, on the title "associated companies" or "association" and concludes that it can be seen that the legislator has taken the same wording to bring it into its domestic legislation, since both rules indicate the possibility of direct and indirect relationships, based on control, management and capital participation, understanding these assumptions independently and without any requirement of maximum or minimum percentages for the qualification of related companies.

It adds that national doctrine and comparative law have understood the rules of relationship as a broad term that cannot be limited when interpreting them.

It explains that, following the procedures and methodologies established in Chilean law, and considering those set out in the OECD Guidelines, the possibility of using each of them was analysed based on the functions, assets and risks assumed by the complainant, recognising, on the one hand, the use of the transactional method of net margins as the most appropriate for its marketing operations; and on the other hand, the comparable uncontrolled price method as the most appropriate for financial operations.

It concludes that the transfer pricing rules in force at the date of the audited transactions and which gave rise to the contested settlement were the former Articles 38 and 41 E, in conjunction with Article 21(2), all of the LIR, so that Avery Dennison Chile S.A. and Avery Dennison Argentina are related entities, and that the procedure and methodology used to control the correct application of the transfer pricing rules for their cross-border transactions with related entities is correct.

On the other hand, it refers to the complainant's second defence: Business decisions are not taken outside the Chilean corporate structure. It explains that the transactional method of net margins used by the Service to analyse transactions involving the purchase of finished goods for distribution was not chosen because business decisions were made directly by the taxpayer or its related companies, as the complainant seeks to attribute to it, in order to challenge the method used, on the contrary, it was based primarily on the fact that the resale price method is very sensitive to the different volumes of costs and expenses incurred by the company compared to the levels of costs and expenses incurred by independent third parties used as comparables, where the complainant has relatively higher levels of operating expenses.

It considers that, although marketing expenses are below gross profit, it is reasonable to think that companies with high levels of operating expenses, as is the case of the complainant, will require higher profitability to cope with these higher levels of this type of expenditure, otherwise it would not be sustainable over time.

He clarifies that the presence of different volumes of costs and expenses is one of the advantages of using this method compared to Gross Margin methods, in accordance with the OECD Guidelines.

It notes that the existence of small differences in the functions performed between the taxpayer and the companies used as comparables will further affect the use of the resale price method and the Gross Margins indicator, but not the net margins used in applying this method.

He notes that the internal e-mails submitted by the appellant in which the business strategy is mentioned do not allow a conclusion to be drawn as to the real authorship of the business strategy, from which future revenues would justify the costs incurred within an acceptable timeframe of an arm's length transaction, as stated by the OECD.

It goes on to refer to the Complainant's third allegation: Deficient analysis of comparables for the determination of profitability in marketing operations for the business year 2012 - Comparable companies used by the SII develop different business lines to those of Avery Dennison Chile.

It clarifies that the criterion by which the comparables proposed by the taxpayer were discarded, even though they are companies whose main function is distribution, is because they present products significantly different from those marketed by the appellant, since they belong to the pharmaceutical sector which face totally different risks to those of the taxpayer, such as market risk. Hence, the criterion for the selection of comparables emphasises the functions performed by these companies over the product marketed, in addition to considering that the companies included in the comparables have products that are similar in terms of the risks assumed, such as distributors in the electronic sector.

It then analyses the reasons why it chose Arrow Electronics, Avnet Ink and Surge Components as comparables, and concludes that the selection was the most optimal, as it highlights the functions performed by the companies over the product marketed, as well as considering that the entities used as comparables have products that are similar in terms of the risk assumed.

With regard to the complainant's fourth defence: Arbitrary application of the interquartile range to determine profitability in marketing operations in the 2012 business year. It notes that, in order to determine the normal market range, Avery Dennison Chile uses the minimum and maximum value of comparables, instead of using the interquartile range.

It considers that, if the interquartile range were used, with the same comparables and results present in the Transfer Pricing Study, the complainant's results would be out of range, so that the use of a range using minimum and maximum values, or interquartile range, is not trivial. This is done in order to remedy certain shortcomings in comparability that cannot be quantified, and therefore to correct with adjustments, which is usually the case for companies with outliers.

It concludes that the adoption of the interquartile range would be justified, not violating the principle of legality, as it is in line with the nature of the complainant's operations, a range that is in turn expressly recognised in the OECD guidelines.

Finally, as regards the Claimant's fifth defence: Erroneous application of risk spread in determining the interest rate for loans granted by the party to Avery Management KGAA.

It relates that the appellant carried out financing operations with its related company domiciled in Luxembourg, that is, Avery Management KGAA, which contains one of the treasury centres of "Avery Dennison", where it granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.

In his opinion, from the response provided by the complainant to Subpoena No. 7, the analysis used to justify the rate of 0.79% agreed in these loan contracts is not correct, because the 12-month Libor rate is used as a comparable rate, which by definition is a reference rate based on the interest rates at which a group of banks in London offer funds to other banks in the interbank market, and in practice operates as a risk-free rate.

The Capital Asset Price Model (CAPM) indicates that the rate of return that any company, project or asset must provide must be a function of a risk-free rate, and a spread for the inherent risk of that company, project or asset. Thus, financial theory indicates that the expected return on an investment, or on a deposit in this case, should contain at least the return of a risk-free rate and a spread for the risk of default or non-payment by the counterparty.

Consequently, he concludes that in the analysis presented by Avery Dennison, only the return for the risk-free rate was considered, but that the spread to be paid for the risk of non-payment was not taken into account.

It concludes by requesting that the claim be rejected in all its parts, with costs.

PROCEEDINGS OF THE PROCESS:

On page 127, there is a resolution dated 22 December 2016, which considered the claim to have been lodged, conferring transfer to the respondent.

At page 131, there is a resolution dated 3 January 2017, which took into account the representation and power of attorney.

At page 153, there is a decision dated 24 January 2017, which considered the transfer of the claim to have been granted.

At page 155, there is a copy of the decision dated 11 April 2017, which ordered the case to be heard as evidence, establishing the substantial, relevant and disputed points.

At page 174, there is a copy of the decision dated 24 April 2017, which considered the list of witnesses to have been submitted.

At page 176, there is the decision dated 24 April 2017, which considered that the appeal for reconsideration had been lodged and granted notice to the claimant.

At page 178, there is the decision dated 24 April 2017, which considered the list of witnesses to have been filed.

At page 190, there is a copy of the decision dated 25 May 2017, which considered that the appeal had been disposed of and decided that the appeal was dismissed, granting the appeal.

On page 204, there is a decision dated 1 June 2017, which considered the list of witnesses to have been reiterated and set a hearing for the hearing of witnesses.

At page 206, there is a decision dated 1 June 2017, which ordered a hearing to be held.

At page 208, there is a ruling dated 1 June 2017, which considers the list of witnesses to be reiterated and sets a hearing for the hearing of witnesses.

At sheet 281, there is a decision dated 21 June 2017, which took receipt of Official Letter No. 398.

At page 283, there is a copy of the decision dated 21 June 2017, which took into account the delegated power of attorney.

At page 296, there is a copy of the decision dated 28 June 2017, which considered the documentation to be attached.

At page 298, there is a resolution dated 28 June 2017, which considered the documentation to be reiterated and accompanied.

At sheet 303, rola resolution dated 30 June 2017, which considered Ord. 0998 to have been received.

At sheet 306, copy of the resolution dated 3 July 2017, which acknowledged receipt of Official Letter DJU 14.00 No. 87.

At page 312, copy of the decision dated 4 July 2017, which acknowledged receipt of Official Letter No. 7003.

On page 317, there is a copy of the decision dated 4 September 2017 of the Court of Appeal of Santiago, which upheld the appealed decision.

At page 319, there is a copy of the decision dated 11 October 2017, which ordered compliance.

At page 321, there is the decision dated 16 October 2017, which ruled that the case be heard and dismissed.

On page 365, there is the decision dated 13 March 2018, which took into account the delegated power of attorney.

At page 378, there is a decision dated 15 May 2018, which ruled that the case be heard.

At page 381, there is the decision dated 26 October 2018, which took into account the waiver of power of attorney and dismissed it.

At page 384, rola resolution dated 30 August 2019, which resolved not to accept.

On page 389, there is a decision dated 24 August 2020, which dismissed the case.

At page 391, there is a ruling dated 22 February 2021, which ordered the case to be brought before the Court for judgment.

WITH THE RELATED AND CONSIDERING:

FIRST: That on page 1, Mr. GUILLERMO INFANTE CORTÉS appears on behalf of AVERY DENNISON CHILE S. A, both already named, filing a tax claim in accordance with the General Claims Procedure, against Assessment No. 210, dated 30 August 2016, issued by the Santiago Poniente Metropolitan Regional Directorate of the Internal Revenue Service, expressly requesting that the claim be accepted in all its parts and, by virtue of the aforementioned factual and legal grounds, that the aforementioned action be dismissed, with costs.

SECOND: That on page 133, Ms. TAMARA ULLOA EYZAGUIRRE, on behalf of the Santiago Poniente Metropolitan Regional Directorate of the Internal Revenue Service, already named, who, duly empowered to do so, has duly served the transfer conferred by resolution on page 127, requesting that the contested Assessment be confirmed and that the respective claim be dismissed in all its parts, with express condemnation in costs.

THIRD: That in view of what has been stated in the expository part of this judgement, it is concluded that the disputed issue relates to the effectiveness that the operations carried out by the claimant with related companies located or domiciled abroad were carried out in accordance with the transfer pricing regulations in force during the 2012 business year.

FOURTH: That on page 155 the interlocutory evidence was issued, which established the following substantial, relevant and disputed facts:

"1. Effectiveness that the marketing operations carried out between 1 January and 26 September 2012, were carried out with related parties without domicile or residence in Chile, in accordance with the provisions of article 38 of the Income Tax Law and which were objected to in point 7.1 letter E) of the Liquidation claimed in the proceedings. Background and factual circumstances that justify it.

2. The fact that the prices fixed in the marketing operations carried out between 1 January and 26 September 2012, with related parties not domiciled or resident in Chile, challenged in point 7.1(E) of the Settlement claimed in these proceedings, are not in line with the values charged for similar operations between independent companies in accordance with the provisions of Article 38 of the Income Tax Law. Background and factual circumstances justifying this.

3. Effectiveness of the transactions with related parties not domiciled or resident in Chile, carried out between 27 September and 31 December 2012, objected to by the Servicio de Impuestos Internos in point 7.1 letter E) of the liquidation claimed in the proceedings, have been carried out at market prices, values or returns. Background or factual circumstances justifying this.

4. Effectiveness that the interest fixed in financial transactions with related parties not domiciled or resident in Chile, between 27 September and 31 December 2012, and which were objected to in paragraph 7.2(A) of the Settlement claimed in these proceedings, have been made at market prices, values or yields. Background and factual circumstances justifying this.

5. Effectiveness that the Claimant's business decisions are made within the Chilean corporate structure. Factual background and circumstances to support this.

6. Facts, circumstances and comparability factors analysed to establish the comparables used in the method chosen by the parties to establish the profitability of the marketing operations for the 2012 business year.

7. Effectiveness of the Internal Revenue Service's proper application of the interquartile range for determining the profitability of trading operations for the 2012 business year. Background and factual circumstances that justify it.

8. Background facts and circumstances, considered by the Internal Revenue Service, to determine the prices, values or profitability in marketing operations and interest in financing operations for the 2012 business year, claimed in the proceedings.

Both parties provided evidence regarding these facts, which will be described, analysed and weighed in the following recitals. Without prejudice to the foregoing, documentation was attached to the claim that will also be described.

FIFTH: The claimant submitted documentary and testimonial evidence and requested official documents, which will be described below:

I. DOCUMENTARY:

i. Documents submitted in support of her claim:

1.- On page 37, copy of Settlement No. 210, dated 30 August 2016; and copy of Notification No. 233, of the same date.

2.- On page 90, copy of receipt of administrative petition, folio No. 7731616587 and copy of letter filed with the Santiago Poniente Regional Director.

4.- On page 96, copy of the Tax Draft and Tax Payment Voucher, Form 21, Folio 1028845.

5.- Page 97, copy of electronic payment voucher, issued by the General Treasury of the Republic, dated 12 December 2016.

6. Sheet 108, Balance Sheet of Eight Columns, as of 31 December 2012, folios 80301 to 80306.

7. Sheet 114, Taxable Profits Fund, as of 31 December 2012, folios 80299 to 80300.

8.- Sheet 116, Net Taxable Income, as of December 31, 2012,

folios 80297 to 80298.

9.- Sheet 118, Tax Equity, as of 1 January 2013, folio 80719.

10.- Sheet 119, Form 22, folio 242412183, corresponding to TA

2013.

ii. Documents submitted within the evidentiary period:

1.- In custody No. 733, there is documentation individualised in written document dated 21 June 2017.

II. TESTIMONIAL:

The claimant submitted testimonial evidence, record that appears on page 229 of the file, where it is recorded that the following witnesses testified:

1.- Carlos Horacio Martínez, RUT N°18.318.229, Accountant Auditor. 2.- Paola Delgado Moya, RUT N°13.256.890-1, Accountant Auditor.

3.- Tyriak Alberto Bruzual Barrios, RUT N°23.462.296-K, Economist.

Eduardo Eugenio Espinoza Espinoza, RUT N°12.963.544-4, Commercial Engineer.

III.- REQUEST FOR OFFICIAL DOCUMENTS:

That, the complainant on page 201 requests to officiate the following institutions: Santiago Poniente Metropolitan Regional Directorate of the Internal Revenue Service; National Customs Directorate; Metropolitan Customs Regional Directorate; and the Central Bank of Chile, in order to verify that the first mentioned entity has requested information from the other 3 institutions.

That, according to page 206, this Tribunal agreed to the request. Thus, on page 228 there is a response from the Chief Counsel of Legal Services of the Central Bank of Chile; on page 300 there is a response from the Metropolitan Customs Directorate; on page 305 there is a response from the Santiago Poniente Metropolitan Regional Directorate; and on page 308 there is a response from the National Customs Directorate. These documents were deemed to be duly incorporated into the file.

The Respondent submitted documentary and testimonial evidence, which will be described below:

I. DOCUMENTARY:

i.- Documents submitted within the evidentiary term:

1.- In custody N°732, there is documentation referring to the audit stage and background information provided in the same, individualised in writing dated 21 June 2017.

II. TESTIMONIAL:

The Respondent submitted testimonial evidence, record that appears on page 229 and following pages of the file, where it is recorded that the following witnesses testified:

1.- Felipe Flores Quiroz, RUT N°15.661.103-4, Commercial Engineer.

2.- Andrés Medina Medina, RUT N°19.935.719-0, Commercial Engineer.

SIXTH: That, as has been indicated, the evidence has been constituted by documentary, testimonial and request for official documents. That, in all cases, the evidence has been duly incorporated into the process.

SEVENTH: That, in view of what has been stated in the expository part of this judgement, it is concluded that the disputed issue relates to the effectiveness that the operations carried out by the claimant with related companies located or domiciled abroad were carried out in accordance with the transfer pricing regulations in force during the 2012 business year.

EIGHTH: That, in a more specific analysis of the evidence produced by the parties, this Tribunal has been able to find the following to be accredited:

1.- That AVERY DENNISON CHILE S.A. is taxed under the First Category of the Income Tax Law, based on its effective income with full accounting.

2.- That, its business corresponds to the wholesale of other products. 3.- That the taxpayer's main activity is as a distributor.

distributor.

4.- That, on 23 March 2015, the SII by means of Notification No. 14, for transfer pricing audit, requested information from the taxpayer for the review of transactions with related parties of TA 2012 and 2013.

That, on 29 April 2015, the taxpayer submitted the required information to the tax authority.

6.- That, on 29 April 2016, the SII served Summons No. 17 requesting the taxpayer to clarify and support the following:

a) Explain and substantiate with the background information deemed relevant, the existence of depressed margins at the operating level during the 2012 business year, considering that all costs and part of its income and expenses, are determined in its operations with related parties abroad.

b) Explain and substantiate with the background information deemed relevant, the conditions that determined that Avery Dennison Chile granted loans to its related companies abroad, together with the methodology to establish the interest rate agreed in each one of them.

That, on 30 June 2016, a date extended by the SII, the taxpayer submitted a response to Summons No. 17.

8.- That, on 30 August 2016, the SII issued Settlement No. 210, claimed in the proceedings, which determined a refund under the terms of article 97 of the Income Tax Law in the amount of $397,843,223.-, including legal surcharges; challenging the transfer prices of operations between the plaintiff and related transnational companies, carried out during the 2012 business year.

9.- That, on 21 September 2016, the taxpayer filed a RAV against the contested Assessment, which was resolved by Exempt Resolution No. 67.718, rejecting the appeal lodged.

NINTH: Firstly, in order to clarify the dispute, it is necessary to specify the applicable legal framework governing transfer pricing.

That, prior to the publication in the Official Gazette on 27 September 2012 of Law No. 20.630, which improves tax legislation and finances the educational reform, transfer pricing was regulated in article 38 of the Income Tax Law, a provision that was repealed and replaced from that date, by article 41 E of the same legal body.

Thus, article 1 N°16 letter e) of Law No. 20.630 incorporated article 41 E of the LIR, as of the date of its publication in the Official Gazette, so that the rules on transfer pricing contained in the previous text of article 38 of the LIR, should be understood as tacitly repealed as of 27 September 2012, as a result of the incorporation of new rules on the matter.

In turn, Circular No. 29 dated 14 June 2013, which instructs on the amendments made by Law No. 20,630 to the rules on transfer pricing contained in the Income Tax Law, provides in paragraph 4 of section III that transactions entered into between related parties prior to 27 September 2012, and which are therefore governed by the rules contained in the previous text of article 38 of the LIR, replaced by Law No. 20,630, may be reviewed by the taxpayer in accordance with the rules contained in the previous text of article 38 of the LIR. 630, may be examined, reviewed and challenged by the Service in accordance with that legal rule, and the respective instructions issued during its validity. In other words, it is the SII itself which indicates that the operations must be examined by the tax authority by virtue of the former article 38 of the Income Tax Law.

TENTH: That, the former article 38 of the LIR, in force for transactions carried out prior to the publication of Law No. 20.630, dated 27 September 2012, stated the following:

"Article 38. The Chilean source income of agencies, branches or other forms of permanent establishments of foreign companies operating in Chile shall be determined on the basis of the actual results obtained in their management in the country.

Without prejudice to the provisions of Article 35, when the accounting elements of these enterprises do not permit the establishment of such results, the Regional Directorate may determine the affected income by applying to the gross income of the agency the proportion that the total net income of the parent company and the gross income of the latter bear to each other, all these items being determined in accordance with the provisions of this Act. It may also set the affected income by applying to the assets of the agency the proportion existing between the total net income of the parent company and the total assets of the latter.

Where the prices charged by the agency or branch to its parent company or to another agency or related company of the parent company are not in line with the values charged for similar operations between independent companies, the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable return for the characteristics of the operation, or the production costs plus a reasonable margin of profit. The same rule shall apply with respect to prices paid or owed for goods or services provided by the parent company, its agencies or related companies, when such prices do not conform to normal market prices between unrelated parties, and may also be considered the prices of resale to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies.

In the event that the agency does not carry out the same type of transactions with independent enterprises, the Regional Directorate may challenge the prices on the basis of the international market values of the respective products or services. For this purpose, the Regional Directorate shall request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information.

Likewise, the Regional Directorate may justifiably reject as an expense necessary to produce the income, the excess that it determines for the amounts owed or paid for interest, commissions and any other payment arising from credit or financial operations entered into with the parent company or another agency of the same, or with a financial institution in which the parent company has a holding of at least 10% of the capital.

The provisions of the three preceding paragraphs shall also apply when a company incorporated abroad participates directly or indirectly in the management, control or capital of a company established in Chile, or vice versa. The same shall apply when the same persons participate directly or indirectly in the management, control or capital of a company established in Chile and a company established abroad.

Likewise, it shall be presumed that the relationship of the preceding paragraph exists with respect to companies that enter into exclusivity contracts, joint action agreements, preferential treatment, financial or economic dependence, or deposits of trust. The same presumption shall apply when transactions are made with companies incorporated in a country or territory included in the list referred to in Article 41 D, No. 2.

Taxpayers shall keep a register with the individualisation of the persons with whom they carry out any of the operations or have participation, in the terms indicated in the two preceding paragraphs, keeping both this register and the documentation that accounts for such operations at the disposal of the Internal Revenue Service whenever the latter so requires".

ELEVENTH: In turn, in relation to transactions occurring as from 27 September 2012, the date of publication of Law No. 20,630, the provisions of Article 41 E of the LIR are applicable, which, at that time and as relevant to the case stated the following:

"Article 41 E. For the purposes of this law, the Service may challenge the prices, values or returns set, or establish them in the event that none have been set, when cross-border transactions and those that account for corporate or business reorganisations or restructurings that taxpayers domiciled, or resident or established in Chile, are carried out with related parties abroad and have not been carried out at normal market prices, values or returns.

The provisions of this Article shall apply in respect of the aforementioned reorganisations or restructuring of companies or businesses when, in the opinion of the Service, by virtue of them, there has been a transfer from Chile to a country or territory included in the list referred to in number 2 of Article 41 D., in any capacity or without any capacity whatsoever, of assets or activities likely to generate income for the taxpayer, of goods or activities likely to generate taxable income in the country and it is estimated that if the goods had been transferred, the rights had been assigned, the contracts had been entered into or the activities had been carried out between independent parties, a normal market price, value or profitability would have been agreed, or those fixed would be different from those established by the parties, for which purpose the methods referred to in this Article shall be applied.

Normal market prices, values or returns shall be understood to be those which have been or would have been agreed or obtained by independent parties in comparable transactions and circumstances, taking into account, for example, the characteristics of the relevant markets, the functions assumed by the parties, the specific characteristics of the goods or services contracted for and any other reasonably relevant circumstances. Where such transactions have not been carried out at their normal market prices, values or returns, the Service may challenge them on reasonable grounds, in accordance with the provisions of this Article.

1.- Relationship rules.

For the purposes of this article, the intervening parties shall be considered related when:

(a) One of them participates directly or indirectly in the management, control, capital, profits or income of the other, or.

(b) the same person or persons participate directly or indirectly in the management, control, capital, profits or revenues of both parties, all of which are deemed to be related parties.

An agency, branch or any other form of permanent establishment shall be deemed to be related to its parent company; to other permanent establishments of the same parent company; to related parties of the latter; and to permanent establishments of the former.

A relationship shall also be deemed to exist when the operations are carried out with parties resident, domiciled, established or incorporated in a country or territory included in the list referred to in number 2 of Article 41 D, unless such country or territory subscribes with Chile an agreement that allows the exchange of relevant information for the purposes of applying the tax provisions, which is in force.

Natural persons shall be deemed to be related when they are spouses or related by blood or affinity up to the fourth degree inclusive.

Likewise, a relationship shall be deemed to exist between the intervening parties when one party carries out one or more transactions with a third party who, in turn, carries out, directly or indirectly, with a related party of that party, one or more transactions similar or identical to those carried out with the first party, regardless of the capacity in which the said third party and the parties intervene in such transactions.

2. Transfer pricing methods.

The Service, for the purposes of challenging under this article the respective prices, values or returns, shall summon the taxpayer in accordance with article 63 of the Tax Code, so that it may provide all the background information that serves to prove that its transactions with related parties have been carried out at prices, values or considering normal market returns, according to any of the following methods:

(a) Uncontrolled Comparable Price Method: that which consists of determining the normal market price or value of the goods or services, considering that which independent parties have or would have agreed to in comparable transactions and circumstances;

b) Resale Price Method: Consists of determining the normal market price or value of the goods or services, considering the price or value at which such goods or services are subsequently resold or provided by the acquirer to independent parties. For this purpose, the gross profit margin that has been or would have been obtained by a reseller or supplier in comparable transactions and circumstances between independent parties shall be deducted from the resale price or value or the gross profit margin that would have been obtained by a reseller or supplier in comparable transactions and circumstances between independent parties. The gross profit margin shall be determined by dividing the gross profit by the sales of goods or services in transactions between independent parties. Gross profit shall be determined by deducting the cost of sales of the good or service from the revenue from sales or services in arm's length transactions;

c) Cost plus Margin Method: This consists of determining the normal market price or value of goods and services that a supplier transfers to a related party by adding to the direct and indirect production costs, excluding overhead and other operating expenses, incurred by such supplier, a profit margin over such costs that has or would have been obtained between independent parties in comparable transactions and circumstances. The profit margin over costs shall be determined by dividing the gross profit of the arm's length transactions by their respective cost of sales or services. Gross profit shall be determined by deducting the direct and indirect costs of production, processing, manufacturing and the like, excluding overhead and other operating expenses, from the revenues from arm's length transactions;

d) Profit Splitting Method: This consists of determining the profit corresponding to each party in the respective operations, by distributing among them the total sum of the profits obtained in such operations. For these purposes, this total profit shall be distributed between the parties on the basis of the distribution of profits that independent parties have or would have agreed or obtained in comparable transactions and circumstances;

e) Transactional Net Margin Method: This consists of determining the net profit margin that corresponds to each of the parties in the transactions or operations in question, taking as a basis that which would have been obtained by independent parties in comparable operations and circumstances. For these purposes, operational indicators of profitability or margins based on return on assets, margins on costs or sales revenues, or other reasonable ones, shall be used, and Residual methods: When, given the characteristics and circumstances of the case, it is not possible to apply any of the methods mentioned above, the taxpayer may determine the prices or values of its transactions using other methods that reasonably allow determining or estimating the normal market prices or values that independent parties have or would have agreed to in comparable transactions and circumstances. In such qualifying cases, the taxpayer shall justify that the special characteristics and circumstances of the transactions do not permit the use of the preceding methods.

The taxpayer shall use the most appropriate method considering the characteristics and circumstances of the particular case. For these purposes, consideration should be given to the advantages and disadvantages of each method; the applicability of the methods in relation to the type of transactions and the circumstances of the case; the availability of relevant information; the existence of comparable transactions and comparability ranges and adjustments.

3. Transfer pricing studies or reports.

Taxpayers may attach a transfer pricing study that accounts for the determination of the prices, values or profitability of their related party transactions.

The application of the methods or presentation of the studies referred to in this article is without prejudice to the taxpayer's obligation to keep at the disposal of the Service all the background information on the basis of which such methods have been applied or such studies have been prepared, in accordance with the provisions of Articles 59 and following of the Tax Code. The Service may request information from foreign authorities with respect to transactions subject to transfer pricing audits.

4. Transfer pricing adjustments.

If the taxpayer, in the opinion of the Service, is unable to prove that the transaction or transactions with its related parties have been carried out at normal market prices, values or returns, the Service shall determine, for the purposes of this Act, such prices, values or returns, using the evidence provided by the taxpayer and any other information at its disposal, including that which has been obtained from abroad, and shall apply for such purposes the methods already mentioned.

Once the Service has determined the normal market prices, values or returns for the transaction or transactions in question, the tax assessment or the respective adjustments shall be made, and the corresponding interest and penalties shall be determined, with special consideration being given to the following: When by virtue of the adjustments of prices, values or returns referred to in this Article, a difference is determined, this amount shall be affected in the financial year to which it corresponds, only with the single tax of the first paragraph of Article 21.

In cases where the single tax of the first paragraph of article 21 is assessed, a fine equivalent to 5% of the amount of the difference shall also be applied, unless the taxpayer has duly and timely complied with the delivery of the information required by the Service during the audit. The Service shall determine by circular the minimum information that must be provided for the fine not to be applicable. [...]"

TWELFTH: That Avery Dennison Chile is a company of the US conglomerate "Avery Dennison", made up of Avery Dennison Corporation with a 99% shareholding and Avery Dennison Group Denmark Aps with a 1% shareholding.

The Claimant's core business is the marketing of self-adhesive label and packaging materials, graphic and reflective solutions, performance tapes and office products, which it purchases from companies located or domiciled abroad, in particular from operations with Avery Dennison Argentina, and which are subsequently sold to third parties in the country.

THIRTEENTH: First, the plaintiff notes that, although the companies with which the transactions were carried out during the year under audit were part of the "Avery Dennison" conglomerate, they were not related in the terms established in the former article 38 of the LIR and the provisions of Circular No. 3 of 1998.

For its part, the SII denies the plaintiff's assertions, arguing that from the application of both former article 38 and article 41 E, both of the LIR, Avery Dennison Chile S.A. and Avery Dennison Argentina are related entities, and that the procedure and methodology used to control the correct application of the transfer pricing rules for their cross-border operations with related entities is correct.

From the foregoing, this Tribunal established the following as point of evidence No. 1: "Effectiveness of the marketing operations carried out between 1 January and 26 September 2012, which were carried out with related parties without domicile or residence in Chile, in accordance with the provisions of Article 38 of the Income Tax Law and which were objected to in point 7.1 letter E) of the Settlement claimed in these proceedings. Background and factual circumstances that justify it".

FOURTEENTH: That, as stated above, there is no dispute that transfer pricing transactions carried out prior to Law No. 20.630 published in the Official Gazette on 27 September 2012, were regulated in Article 38 of the Income Tax Law, and that, after the aforementioned date, in Article 41 E of the same legal body.

Now, in order to continue with the analysis, it is necessary to clarify whether the relationship between the claimant and the companies with which it carried out trading operations between 1 January and 26 September 2012 existed in the terms established by law. Therefore, by virtue of the sixth and seventh paragraphs of article 38, cited in the tenth recital, the terms to be taken into account to determine the existence of a relationship are extended as follows:

(a) A company incorporated abroad participates directly or indirectly in the management, control or capital of a company established in Chile, or vice versa; (b) The same persons participate directly or indirectly in the management, control or capital of a company established in Chile and in a company established abroad;

c) Between companies, the following agreements are agreed: exclusivity contracts, joint action agreements, preferential treatment, financial or economic dependence or deposits of trust; d) The operations are carried out with companies incorporated in a country or territory included in the list referred to in Article 41 D, No. 2, this refers to tax havens established by the Ministry of Finance.

In this respect, the SII issued instructions in Circular No. 3 of 6 January 1998, on amendments introduced to the aforementioned provision by Law No. 19.506.

Thus, section III numeral 4° of the Circular entitled "Cases in which the powers to challenge prices and expenses necessary to produce the income discussed above also apply" states in this respect that:

"(a) Pursuant to the provisions of the final paragraph of Article 38 of the Law, the rules on challenging prices and expenses necessary to produce income, commented on in the previous numbers, shall also apply, in general, in the case of a company incorporated abroad that participates directly or indirectly in the management, control or capital of a company established in Chile or vice versa.

(b) The same rule shall apply when the same persons participate directly or indirectly in the management, control or capital of an enterprise established in Chile and an enterprise established abroad".

However, in numeral 5 of Title III of the Circular entitled "Companies that are not considered independent", the tax administration instructs that "Finally, it is hereby stated that, for the purposes of this Circular, companies shall not be considered independent companies; however, associated companies or companies in which one of them participates directly or indirectly in the management, control or capital of the other shall be understood as such, when the conditions referred to in Articles 86 and 87 of Law No. 18.046, and Articles 97 and 87 of Law No. 18.046 are met. 046, and articles 97 and 98 of Law No. 18.045, which were reproduced in Circular No. 61 of 15 October 1997". This obliges us to refer to articles 86 and 87 of the Companies Act, which are part of Title VIII "Subsidiaries and affiliated companies". Thus, the first paragraph of Article 86 of Law No. 18.046 states the following: "A subsidiary of a public limited company, which is called a parent company, is a company in which the latter controls directly or through another natural or legal person more than 50% of its voting capital or capital, if it is not a joint stock company, or can elect or appoint or have elected or appointed the majority of its directors or administrators [...]".

For its part, Article 87(1) of the aforementioned body of law establishes that "A company affiliated with a public limited company is one in which the latter, which is called an affiliated company, without controlling it, owns directly or through another natural or legal person 10% or more of its voting capital or capital, if it is not a joint stock company, or may elect or appoint or have elected or appointed at least one member of its board of directors or management [...]".

Articles 97 and 98 of the Securities Market Law, located in Title XV "On corporate groups, controllers and related persons", provide as follows:

"Article 97: - A controller of a company is any person or group of persons with a joint action agreement who, directly or through other natural or legal persons, participates in its ownership and has the power to carry out any of the following actions:

(a) to secure a majority of votes at shareholders' meetings and to elect a majority of the directors in the case of public limited companies, or to secure a majority of votes at meetings or assemblies of its members and to appoint the director or legal representative or a majority thereof, in other types of companies; or

(b) decisively influence the management of the company.

When a group of persons have agreed to act jointly to exercise any of the powers set out in the preceding letters, each of them shall be called a member of the controller".

Article 98, defining what a "joint action agreement" is, states that "[...] is the agreement between two or more persons who simultaneously participate in the ownership of a company, directly or through other controlled natural or legal persons, whereby they undertake to participate with identical interest in the management of the company or to obtain control of the same.

Such an agreement shall be presumed to exist between the following persons: between representatives and represented persons, between a person and his or her spouse or relatives up to the second degree of consanguinity or affinity, between entities belonging to the same business group, and between a company and its controller or each of its members.

The Superintendency may determine whether there is a joint action agreement between two or more persons, considering, among other circumstances, the number of companies in whose ownership they participate simultaneously, the frequency of coincident voting in the election of directors or appointment of administrators, and in the resolutions of extraordinary shareholders' meetings.

If a company has as partners or shareholders foreign legal entities whose ownership is not sufficiently disclosed, it shall be presumed that they have a joint action agreement with the other partner or shareholder, or group of them with a joint action agreement, which has the largest share in the ownership of the company".

In addition, mention can be made of Article 96 of Law No. 18.045 in force at the time, which determines what should be understood by "corporate group", "controllers" and "related persons", defining mainly "corporate group" as a "[...] group of entities that have links of such a nature in their ownership, administration or credit responsibility, that it is presumed that the economic and financial performance of its members is guided by common interests [...]. And, Article 100 of the same law in force at the time, which specifically defines what is to be understood as "related", namely: "The following persons are related to a company:

(a) Entities of the corporate group to which the company belongs;

b) Legal entities that have, with respect to the company, the status of parent company, collateral, subsidiary or affiliate, in accordance with the definitions contained in Law No. 18.046;

c) Those who are directors, managers, administrators, chief executives or liquidators of the company, and their spouses or relatives up to the second degree of consanguinity, as well as any entity controlled, directly or through other persons, by any of them, and

d) Any person who, alone or with others with whom he has a joint action agreement, may appoint at least one member of the management of the company or who controls 10% or more of the capital, or of the voting capital in the case of a joint stock company.

The Superintendency may establish, by means of a general rule, that any natural or legal person is related to a company who, by virtue of his property, management, kinship, liability or subordination relationships, may be presumed to:

1.- On its own, or with others with whom it has a joint action agreement, it has sufficient voting power to influence the management of the company;

2.- Its business dealings with the company give rise to conflicts of interest;

3.- Its management is influenced by the company, if it is a legal person; or

If, by virtue of his office or position, he is in a position to have information on the company and its business, which has not been publicly disclosed to the market, and which is capable of influencing the price of the company's securities.

A person shall not be deemed to be connected with the company merely because he holds up to 5% of the capital or 5% of the voting capital in the case of a joint stock company, or if he is only a non-managerial employee of that company".

Broadly speaking, the regulations described above deal mainly with subsidiaries, affiliated companies, controlling companies and corporate groups, emphasising the business nature of the relationship in question. In this sense, the rules of relationship for auditing purposes are extended to include cases of economic, financial or commercial dependence, as well as situations involving tax havens.

FIFTEENTH: Finally, this Court should not forget the OECD guidelines on the matter, in particular the Arm's Length Principle, which examines whether the price set in transactions between related entities should be equal to that which would have been set in comparable transactions between independent third parties, within the same market.

Although article 38 under analysis differs from the OECD guidelines on the matter, as the consolidation of this principle in local legislation is reflected in the subsequent incorporation of article 41 E. Notwithstanding the above, Chile was an integral part of the OECD since 2010, so it is also relevant to cite, in terms of the rules of relationship, article 9 of the Model Tax Convention on Income and on Wealth, which refers to the aforementioned principle, entitled "Associated enterprises", by which it is understood:

"1. Where

(a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or

(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of one Contracting State and of an enterprise of the other Contracting State, and, in either case, the two enterprises are bound together in their commercial or financial relations by conditions accepted or imposed which differ from those which would be agreed upon by independent enterprises, profits which would have been realised by one of the enterprises in the absence of such conditions, and which have not in fact been realised by reason of those conditions, may be included in the profits of that enterprise and taxed accordingly.

2. Where a Contracting State includes in the profits of an enterprise of that State, and accordingly taxes, the profits of an enterprise of the other State which have already been taxed by that second State, and these profits so included are those which would have been realised by the enterprise of the first-mentioned State if the terms agreed between the two enterprises had been those agreed between independent enterprises, that other State shall make a corresponding adjustment of the amount of tax which it has levied on those profits. In determining such adjustment, account shall be taken of the other provisions of this Convention and the competent authorities of the Contracting States shall consult with each other as necessary".

This is also reflected in section B.1 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of July 2010.

SIXTEENTH: That, from the background information available to it, this Court was able to verify that the taxpayer filed the Annual Sworn Statement on Transfer Pricing No. 1907, corresponding to the 2012 business year. This document, without prejudice to the fact that it was not attached to the case file, was reproduced by the SII both in the contested act and in its presentation of the transfer, which has not been contested by the plaintiff. Furthermore, the foregoing was confirmed by the Transfer Pricing Study carried out by EY, which, on page 22, includes a table showing the intercompany transactions carried out; the related parties abroad; the respective tax domiciles; the values in Chilean pesos of the operations carried out during 2012; and the currency agreed, information that the taxpayer itself would have provided according to the document.

It is important to note that this Affidavit is regulated in N°6 of article 41 E of the LIR, which is why the tax authority issued Exempt Resolution N°14 dated 31 January 2013 (repealed), which established the obligation to file an annual transfer pricing information affidavit for taxpayers domiciled, resident or established in the country with respect to their transactions with related parties abroad, which complements the annual income tax return of taxpayers classified as medium-sized or large companies, as well as those taxpayers who, despite not being classified in such segments, have transactions with persons domiciled or resident in a country or territory included in the list referred to in No. 2 of Article 41 D of the LIR, i.e. tax havens, or have carried out transactions with related parties without domicile or residence in Chile for amounts exceeding $500. 000.000.- , or its equivalent, depending on the foreign currency in which the operation was carried out.

However, Resolution No. 14 of 31 January 2013 indicates that the first submission of this sworn statement must be made for TA 2013, in respect of transactions carried out in 2012. However, it considers the division of periods, in which, as explained above, different legislation applies to the matters to be declared: for international transactions carried out between related parties before 27 September 2012, paragraph 3 and following of article 38 of the LIR applies, and for international transactions carried out since 27 September 2012, article 41 E of the LIR applies.

Thus, in the particular case of Avery Dennison Argentina, the same taxpayer reported in the "type of relationship" box of the Sworn Statement on Transfer Pricing, code 17, which describes "Both parties are directly under the management, control or capital of the same person or entity", so that from the principles of logic this court can infer that a relationship qualified as management, control or capital of the same entity was declared with the aforementioned company domiciled in Argentina.

The above is consistent with the information provided by the taxpayer in response to Notice No. 14, issued on 23 March 2015, contained in custody No. 733, whereby it clarifies that, with respect to the main lines of business during the period under review, all the products indicated therein are purchased from related entities abroad and sold in the local market. In turn, in the section where it explains the corporate structure of the business group to which the company belongs (page 7), it is the actor itself that indicates that the type of relationship with Avery Dennison Argentina is that of "Both parties are directly under the management, control or capital of the same person or entity". Thus, it is striking that the same claimant in the audit stage has not invoked the arguments and rules of relationship, which, in his opinion, would not apply to the operations carried out between 1 January and 26 September 2012.

SEVENTEENTH: From what has been set out above, it is clear that in the audit process the tax authority only had before it the information provided by the taxpayer, in relation to Affidavit No. 1907, by which it declared with Avery Dennison Argentina a type of relationship in which both are under the management, control or capital of the same person or entity, which was corroborated in response to Notice No. 14 dated 23 March 2015 offered by the plaintiff. For the above, as was indicated, Resolution N°14 dated 31 January 2013 was issued which considers the division of periods in terms of the application of the former article 38 or 41 E of the LIR. Being necessary to advance that, at the time in question, the burden of proof was on the Internal Revenue Service, which will be developed in the following points of evidence.

Notwithstanding the foregoing, it should be noted that the file also had before it the deed of incorporation of Avery Dennison Chile dated 15 December 1994 and the Minutes of the Extraordinary General Shareholders' Meeting of the same held during the years 1996 to 2005, in relation to the articles of incorporation of Avery Dennison Argentina dated 26 May 2010 and other deeds of the same, all notarised and apostilled, contained in custody No. 733; which, it should be noted, do not demonstrate any type of relationship between the two companies in the terms established in article 38, third paragraph, of the LIR. Furthermore, it is necessary to clarify that the fact that the financial management of the plaintiff is located in Argentina alone cannot be decisive to define the existence of a relationship, as the claimant explains in its libel. However, this Court considers that the documentation described above is not sufficient to prove the taxpayer's allegation, since the plaintiff should have explained to the tax authority or, failing that, to this Court that the relationship did not conform to the assumptions of relationship contained in the old text of article 38 of the LIR, i.e. that it did not conform to the assumptions of management, control or capital of the same entity with Avery Dennison Argentina.

The State did not have any background information on the corporate structure of the Avery Dennison conglomerate to be able to verify its structural conformation, nor did it provide objective data in this regard, such as that it does not indirectly own 10% or more of its voting capital, that it does not decisively influence the management of the company, or that it does not have joint action agreements, among others.

This is reinforced by the Financial Statements as at 31 December 2012 and 2011, prepared by Crowe Horwath, contained in custody No. 733, which, on page 8, note 6, entitled "balances and transactions with related parties" include boxes from which it was possible to verify that the type of relationship with Avery Dennison Argentina is recognised as "common parent company". Hence, the only thing missing is the percentage of participation, information that should have been provided by the plaintiff.

In other words, it is not known how the Avery Dennison Chile group is related and the percentages of participation, information that would allow to know the corporate links, especially, having a common parent company with Avery Dennison Argentina. All of this, with the aim of verifying that both entities are not related in the terms established in article 38 of the LIR, in force at the time of the challenged operations.

Finally, it is important to take into account that the plaintiff only expresses in his complaint that under the rules of article 38 of the LIR in force before 27 September 2012 there would be no relationship between the companies, taking into consideration that the testimonial evidence presented refers only to the other disputed points, and that he should provide more founding arguments or evidence in order to prove his allegations.

EIGHTEENTH: From what has been set out above, with the background information before us and in accordance with the sound criticism by which this adjudicator must rule, the relationship between the Claimant and the companies with which it carried out international commercial operations between 1 January 2012 and 26 September of the same year, which were also recognised in the Transfer Pricing Study carried out by EY, and, in particular, with Avery Dennison Argentina, under the terms in which both parties are directly under the management, control or capital of the same person or entity, must be deemed to be established.

Consequently, this point of evidence must be accepted in favour of the SII. It should be noted that in no case does this imply that the tax authorities' position regarding the violation of the transfer pricing rules alleged by the Respondent is accepted, which will be developed in the following recitals.

Finally, it is important to note that it has not been disputed in the proceedings that the taxpayer has carried out transactions with related entities located abroad, under the regulations in force since 27 September 2012, that is, since the publication of Law No. 20.630, and therefore the relationship will be considered to be proven.

NINETEENTH: Having determined that the taxpayer carried out international commercial transactions with related companies during the 2012 business year, and especially with Avery Dennison Argentina, it is now necessary to address the other points of evidence.

In the following, this Tribunal will refer to Exhibits 2 and 3 together:

"Effectiveness that the prices fixed in the marketing operations carried out between 1 January and 26 September 2012, with related parties without domicile or residence in Chile, objected to in point 7.1 letter E) of the Settlement claimed in the proceedings, are not in accordance with the values that for similar operations are charged between independent companies in accordance with the provisions of Article 38 of the Income Tax Law". Background and factual circumstances that justify it."

"Effectiveness that the transactions with related parties without domicile or residence in Chile, carried out between 27 September and 31 December 2012, objected to by the Internal Revenue Service in point 7.1 letter E) of the Settlement claimed in the proceedings, have been carried out at market prices, values or returns. Background or factual circumstances that justify it".

VIGESIMO: First of all, it is necessary to mention that since the commercial operations of the claimant with related entities located or domiciled abroad are contested, it is necessary to recall the rules governing transfer pricing, which, prior to Law No. 20.630, published in the Official Gazette on 27 September 2012, was provided for in Article 38, and since the aforementioned date, in Article 41 E, both of the Income Tax Law.

According to the article 38 in question, cited in the tenth recital applicable to transactions that occurred between 1 and 26 September 2012, two situations must be distinguished: the first, regarding the prices charged by the agency or branch to its parent company or to another agency or related company of the parent company; and the other, regarding the prices paid or owed for goods or services provided by the parent company, its agencies or related companies, the second circumstance being the one at issue here, in particular with respect to its related company Avery Dennison Argentina.

Thus, the following conditions must be met for the Service's power to challenge transfer pricing transactions on a well-founded basis:

1.- There must be prices paid or owed for goods or services provided by its parent company, its agencies or related companies;

2.- These prices must not be in line with normal market prices between unrelated parties; and;

3.- The SII must consider as a reference base the following options: a) a reasonable profitability for the characteristics of the operation; b) production costs plus a profit margin; c) resale prices to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies.

Likewise, in the event that the agency does not carry out the same type of operations with independent companies, the tax authority may also challenge the prices on the basis of the international market values of the products or services in question, for which purpose it should request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information.

It should be noted that this court understands that when the aforementioned article 38 refers to "independent companies" it should be understood as those that are not in the circumstance of a relationship. TWENTY-FIRST: On the other hand, with regard to operations carried out as from 27 September 2012, the date on which Law No. 20.630 was published, Article 41 E of the Income Tax Law at the time, cited in the eleventh recital, was applicable for the regulation of transfer prices. This provides that the tax administration may challenge the prices, values or returns set, or establish them in cases where none have been set, subject to the following requirements:

1.- There must be in the presence of cross-border operations and those that account for corporate or business reorganisations or restructurings with taxpayers domiciled, or resident or established in Chile.

These operations must be carried out with related parties abroad.

These operations must not have been carried out at normal market prices, values or returns.

It should be recalled that the third paragraph of the aforementioned rule states that "normal market prices, values or returns shall be understood to be those that have been or would have been agreed or obtained by independent parties in comparable transactions and circumstances, considering for example, the characteristics of the relevant markets, the functions assumed by the parties, the specific characteristics of the goods or services contracted and any other reasonably relevant circumstance. When such transactions have not been carried out at their normal market prices, values or returns, the Service may challenge them, in accordance with the provisions of this article.

That, as in the previous case, article 41 E, when referring to "independent companies", should be understood as those that are not in a relationship.

TWENTY-SECOND: That, having resolved the controversy in the first point of evidence regarding the existence of a relationship between the Claimant and the foreign entities with which it carried out the challenged transactions during the 2012 business year, in particular, with its related company Avery Dennison Argentina; it is incumbent upon this court in what follows to determine whether, under the legal regulations in force at the time of the transactions (before or after Law No. 20. 630), these were carried out at prices that conform to normal market prices between unrelated parties, or, between independent companies; or, at normal market prices, values or returns that independent parties have or would have agreed or obtained in comparable transactions and circumstances, as the case may be.

From this, it is important to highlight that the SII challenged the transactions carried out by the taxpayer with foreign related companies during the 2012 business year under article 41 E of the Income Tax Law. However, this magistracy detected that the tax entity in the claimed Settlement incurs in a significant inadvertence by not making any distinction between the regulations applicable to the challenged transactions by way of transfer pricing, in relation to the publication of Law N°20.630. On the contrary, the auditing body examines the transactions carried out by the plaintiff with its related parties abroad, as mentioned above, only by virtue of article 41 E of the Income Tax Law, which leads to an erroneous substantiation of the contested administrative act, and, above all, to an infringement of the legal rules in force at the time these transactions were carried out.

This differentiation omitted by the tax authority in the Assessment is relevant for several reasons, among them, in the relevant part of the case, the burden of proof, the methods and comparables to be applied, the transfer pricing studies and the supporting documentation in general, which will be developed in due course.

TWENTY-THIRD: That, on page 305, there is a response from the SII to Official Letter No. 118-2017, in which it explains that in the liquidation it carried out the annual analysis of the operations carried out by the claimant with its related parties abroad, taking as a basis article 41 E of the LIR. In this regard, it points out that it did not require reports to the National Customs Service and/or the Central Bank, in order to determine the international market values of the products or services in question, in accordance with article 38 of the LIR, because the taxpayer, in response to Notice No. 14 of 23 March 2015 and Summons No. 17 of 27 April 2016, did not distinguish the dates of its transactions with related parties abroad, so this is not something that was considered for the claimant's transfer pricing analysis.

From this, it should be noted that the comparability method chosen by the taxpayer is the resale price method, which is established in both former article 38 and article 41 E of the LIR - which will be examined below - so that, in the opinion of this court, it was not appropriate for it to distinguish between the dates of the challenged transactions. Likewise, the fact that the claimant in response to Notice No. 14 and Summons No. 17, as well as in the Transfer Pricing Report issued by EY, did not make a distinction between the dates of the transactions, does not mean that the Service was not responsible for examining all the accounting and financial information submitted by the taxpayer during the audit stage, which it was possible to verify that it was effectively submitted to the SII. In this sense, the auditing body could have verified the date of the transactions in question, so that the arguments of the respondent in the proceedings do not prevent the tax administration from not making the corresponding regulatory distinction and applying it appropriately to each operation.

Article 7 of the Constitutional Organic Law of General Bases of the State Administration (Law No. 18.575) clearly establishes that the civil servants of the State Administration shall be subject to a hierarchical and disciplined regime, and must faithfully and conscientiously fulfil their obligations to the service and obey the orders given to them by their hierarchical superior. Hence, in addition to the law, it is the SII's own instructions, in particular, those contained in Circular No. 29 dated 14 June 2013, which instructs on the amendments made by Law No. 20. 630, which provide in paragraph 4 of section III that transactions entered into between related parties prior to 27 September 2012 are governed by the rules contained in the former text of article 38 of the LIR, replaced by Law No. 20.630, which may be examined, reviewed and challenged by the Service in accordance with that legal provision, and the respective instructions issued during its validity.

In conclusion, if the taxpayer did not make the corresponding normative distinction during the administrative stage, the SII in any case had in its possession the financial information with the transactions carried out and their dates, considering, moreover, that the burden of proof before the amendments made to the transfer pricing rules under Law No. 20.630, fell on the tax administration - to which this court will refer in the following recital - so that, consequently, the Service should have settled in accordance with the legal rules and as its own instructions indicate.

TWENTY-FOURTH: Having said the above, in relation to the burden of proof in transfer pricing matters, prior to the publication of Law No. 20. 630, this was the responsibility of the SII, and then, it was transferred to the taxpayer who has the obligation to apply "the most appropriate method" to the specific case, as stated in paragraph 2 of Article 41 E "[...] to provide all the information that serves to prove that its operations with related parties have been carried out at prices, values or considering normal market returns (...)". This means that in addition to the obligation established in former Article 38 to have supporting documentation for transactions with related companies, according to Article 41 E, different technical studies and the necessary grounds to support the prices set, such as Transfer Pricing Studies, may be submitted, so that the burden of proof under Law No. 20.630 will be the obligation of the taxpayer, who must use the most appropriate method according to the nature of the transaction carried out and support it before the tax entity.

On the other hand, Article 38 itself indicated in its fourth paragraph that in cases where there are no internal comparables, the respective Regional Directorate could challenge the prices based on the international market values of the respective products or services, for which the SII should request information from the National Customs Service, the Central Bank of Chile or the corresponding agencies.

Consequently, at the burden of proof level, there are essential differences between applying to the taxpayer's operations with its related parties under article 38 of the LIR, and in relation to article 41 of the same legal body. In the case of the former, the SII is the one that must argue the reasons why it rejects the method used by the taxpayer, and must carry out a complete analysis of the transactions, which implies developing the methodology used to determine that the transfer prices paid or owed do not conform to the normal market prices between unrelated parties. Instead, the burden of proof since 27 September 2012 was on the taxpayer, which implied that the taxpayer had to substantiate the choice of methodology used, including the expressly recognised option to submit transfer pricing studies.

Consequently, the SII failed to comply with the legal mandate, auditing and settling under a rule that was not relevant at the time, in breach of the duty to comply with the administrative instructions contained in Circular No. 29 dated 14 June 2013, a document that is clear in stating that the operations carried out between 1 January and 26 September 2012 must be examined, reviewed and challenged by the Service under the former Article 38 of the LIR, and those after 27 September of the same year based on Article 41 of the LIR.

VIGESIMO QUINTO: In summary, the allegations invoked by the claimant are accepted in relation to the fact that the SII in the contested liquidation should have distinguished between the operations of purchase of products carried out by the taxpayer with related companies abroad carried out between 1 and 26 September 2012, under the former article 38 of the LIR, and those carried out from 27 September 2012 onwards, under article 41 of the same legal body. This did not occur, since the tax authority examined the contested transactions solely under article 41 E of the Income Tax Act, which leads to an erroneous basis for the contested administrative act, and, above all, infringes the legal rules in force at the time the transactions were carried out.

Furthermore, there was a failure to comply with its own administrative instructions contained in Circular No. 29 of 14 June 2013, as required by law.

This differentiation omitted by the tax entity in the contested act is relevant mainly with regard to the burden of proof, the methods determined and the comparables to be applied. As well as with respect to transfer pricing studies and supporting documentation in general.

Hence, the Respondent failed to prove its assertions that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market conditions between unrelated parties, or, between independent companies; or, to normal market prices, values or returns that independent parties have or would have agreed or obtained in comparable transactions and circumstances, as applicable.

TWENTY SIXTH: Without prejudice to what has been resolved in the preceding recitals, grounds that this magistracy considers sufficient to annul the challenged act, the remaining points of evidence will likewise be examined in what follows in this opinion, in order to clear all the respective doubts to that effect.

Thus, it is necessary to address the transfer pricing methodology used by the parties, for which evidence points N° 5, 6 and 7 must be resolved, namely:

"Effectiveness that the Claimant's business decisions are taken within the Chilean corporate structure. Factual background and circumstances that justify this."

"Facts, circumstances and comparability factors analysed to establish the comparables used in the method chosen by the parties, to establish the profitability of the marketing operations for the 2012 business year."

"Effectiveness of the Internal Revenue Service's proper application of the interquartile range for determining the profitability of trading operations for the 2012 business year". Background and factual circumstances that justify it".

It should be noted that the first two points of evidence will be analysed as a whole, by virtue of the allegations contained in the complaint.

TWENTY SEVENTH: In this regard, the complainant argues that the resale method is appropriate, as it is the most direct method applicable to the margins observed at gross levels, in addition to concentrating the main inter-company transaction, i.e., the purchase of finished products for resale, at the cost of sale level.

It therefore concludes that the Service erred in determining the transactional method of net margins, since what generated a depression in operating margins is not related to an increase in the acquisition costs of the products that are subsequently resold, but rather to the decrease in the selling prices of those products and the circumstances that led it to make that determination.

For its part, with regard to the comparables used by the tax entity, it notes that the liquidation makes a deficient analysis of the comparables for the determination of profitability in marketing operations for the commercial year 2012, given that the comparable companies used by the SII develop different business lines to that of the claimant.

TWENTY-EIGHTH: In turn, the SII explains in its evacuation that the choice of the transactional method of net margins used to analyse the operations of purchase of finished goods for distribution, was not due to the fact indicated by the taxpayer, but that the presence of different volumes of costs and expenses, is one of the advantages of using this method with respect to others based on gross margins, since the existence of small differences in the functions performed between the taxpayer and the companies used as comparables has a greater impact on the use of the resale price method and the Gross Margins indicator, but not on the Net Margins used when applying the method determined by the tax authority.

Furthermore, it clarifies that the criterion by which the comparables proposed by the taxpayer were discarded is due to the fact that they present products that are significantly different from those marketed by the taxpayer, since they belong to the pharmaceutical sector and face totally different risks. Hence, the criterion for the selection of comparables emphasises the functions performed by these companies over the product marketed, in addition to considering that the companies included in the comparables have products that are similar in terms of risks assumed, such as the distribution companies in the electronic sector.

TWENTY-NINTH: That, in order to prove the points of evidence under examination, the complainant submitted the following documentation: 1) Transfer Pricing Study of Avery Dennison Chile S.A., corresponding to the business year 2012, conducted by EY; 2) Transfer Pricing Study Analysis, issued by HB Servicios y Asesorías, of SFAI Chile, dated 14 June 2017; 3) Audited Financial Statements as of 31 December 2012 and 2011, issued by Crowe Horwath; 4) emails sent during the business years 2011 and 2012 by Eduardo Espinoza, Business Unit Manager, addressed to different branches of the Avery Dennison conglomerate and; email dated 8 September 2011, sent by Joao Adao, General Manager, addressed to the Sales Managers of the different subsidiaries of Avery Dennison in South America.

Finally, he presented testimonial evidence, where the following witnesses testified: Mr. Carlos Horacio Martínez, Auditor Accountant; Ms. Paola Delgado Moya, Auditor Accountant; Mr. Tyriak Alberto Bruzual Barríos, Economist; and Mr. Eduardo Eugenio Espinoza Espinoza, Commercial Engineer.

In turn, the Internal Revenue Service presented the following witnesses: Mr. Felipe Flores Quiroz, RUT N°15.661.103-4, Commercial Engineer and Mr. Cristian Andrés Medina Medina, RUT N°19.935.719-0, Commercial Engineer, both officials of the SII.

THIRTEENTH: That, from the Transfer Pricing Study carried out by EY for the claimant for the business year 2012, contained in custody 733, it was noted that on page 32 it states that, in relation to the selection of the most appropriate method, the advantages and disadvantages of the application of each one must be considered, as expressly stated in the standard. It adds that the OECD Guidelines also mention that the method to be selected should be in general terms the most appropriate given the different factors that maintain each of the methods, which it describes in its point 2.2.

It then refers to the methodology used in the search for comparables, explaining mainly how the search for and analysis of internal and external comparables is carried out.

Section 8.2.1 of the economic analysis, entitled "Selection of the best method", states that, although the transfer pricing rules contained in the LIR are based on the principle of the best method, which implies selecting the method that best matches the economic reality of the transactions examined, it is also important to indicate the reasons for rejecting the methods not selected, in cases where they are different from the uncontrolled comparable price method. It states that:

"For the case of the transactions carried out by Avery, in its capacity as a company distributing adhesive products, the application of the PC method will not be feasible, because there are no internal comparable transactions, with similar characteristics that allow them to be used directly with prices (or other type of consideration).

Nor was it feasible to apply the PC method using public information databases, given that there is no public information base for this type of product; and the potential bases, although they could imply a reference, do not expose basic aspects for the determination that a price can be comparable, for example; the information in the databases does not expose whether the parties involved are effectively independent parties.

Many of the contracts that exist between independent parties in the databases relate to industries that are significantly different from the industry in which Avery operates, such as pharmaceuticals or natural resource exploitation.

In this regard, it is important to note that the analysis cannot be carried out on the basis of private or privileged information that the taxpayer may have, but must instead be based on contracts or transactions entered into between independent parties that are freely available and publicly accessible, as mentioned in point 7.3 above.

Now, identifying that the analysis should be based on the margins observed by Avery, it is necessary to identify whether the analysis will be performed at gross levels or at operating levels. However, as external comparables would be used for either of the two options, the first step was to search for entities that could be selected as comparables and then review their accounts in order to determine whether it is possible to compare at the gross level or, alternatively, to use an analysis at the operating level. Indeed, if the entities selected as comparable have the same or a similar accounting system to that used by Avery, one of the gross margin methods would be applied, otherwise the TNM method would be applied.

For all the reasons explained in the preceding paragraph, the use of the PC method is ruled out. Likewise, the DU method is ruled out because there is no evidence of a unique contribution of the parties involved in the transaction, which would make it a highly integrated operation, nor is it feasible to obtain available information on the transactions of the related parties, as mentioned in point 7.2".

THIRTY-FIRST: Continuing with the analysis of the EY Transfer Pricing Study, it was observed that it considers the company participating in the transactions, that is, Avery Dennison Chile, as the entity to be analysed.

That, in relation to the search for comparables, it states that it was oriented towards the search for independent companies whose functions, assets and risks were similar to those carried out by the company in question in its activity as a distributor and whose financial information was publicly available.

It explains that, with regard to national companies, it did not identify any company that could be functionally comparable to Avery in its distribution activity. In this regard, a search and selection process was carried out in the database of the web page of the Superintendency of Securities and Insurance, discarding companies that:

a) Perform activities substantially different from those carried out by Avery in its distribution activity;

b) Carry out activities in addition to distribution; or

c) Were subsidiaries and did not consolidate their financial statements.

For its part, in relation to the search for international companies, it argues that it carried out a search using the application developed by Ernst & Young 'Global Fusion', which it explains 'integrates databases that bring together information from business descriptions and public financial information of companies in different world markets'. It therefore uses the following databases with their latest information update date: Compustat (15 March 2012); One Source (27 March 2012) and; Mergent (5 March 2012).

It goes on to state that for comparables, 4 financial years were considered, from 2009 to 2012. Likewise, the SIC (Standard Industrial Classification) codes were chosen from which the different companies are classified in the database and which represent the company's activities. Also, in order to consider as many companies as possible, it includes companies classified under the NAIC (North American Industry Classification System) and NACE (Statistical Classification of Economic Activities of the European Community) codes. Forty-five comparable companies were identified. Then, applying the company status and financial criteria, in relation to companies with at least three years of operating income or net sales information and average operating profit greater than zero, 21 potentially comparable companies were obtained, of which three companies were eliminated on the basis of different services; four companies were eliminated due to significantly different functions; and six companies were eliminated for other reasons (market differences or insufficient available information).

This leaves the following 8 entities as comparables, which are described in Annex III of the Study and will be briefly explained below:

ACETO CORP: "Engages in the sourcing, monitoring assistance, marketing and distribution of intermediates and active pharmaceutical ingredients, generic finished products, nutraceuticals, agricultural protection products and specialty chemicals worldwide". It adds that the company operates in three segments: Health sciences, specialty chemicals and agricultural protection products, which it describes in detail in the report, page 51.

ASHLAND INC: states that it manufactures speciality chemicals, operating in the United States and other countries around the world. It specifies that it operates in four segments: Speciality ingredients, water technologies, performance material and consumers market, which are described in detail in the report, pages 51 and 52.

BUNZ PLC -ADR: states that it distributes a range of non-food consumer products in America, Europe and Australia. In particular, it offers food packaging, films, labels, among others; as well as non-food items such as food packaging, napkins, disposable tableware, among others. In addition, cleaning and hygiene materials, personal protective equipment, non-food retail products, disposable health care supplies, miscellaneous products for the government and education sector, and outsourcing services.

HAWKINS INC: describes that together with its subsidiaries it manufactures, blends and distributes bulk and specialty chemicals. It operates through two segments: industrial and water treatment. These are detailed extensively on pages 53 and 54 of the report.

OFFICE DEPOT INC: reports that it offers a variety of office products and services. These are described on page 54 of the report.

OFFICEMAX INC: Explains that together with its related companies it distributes retail and business-to-business office products. It has the following segments: Contract and Retail, which are described on pages 54 and 55 of the report.

STAPLES INC: Indicates that together with its subsidiaries it operates as an office supplies, business machines and related products, among others, as detailed on page 55 of the report.

UNITED STATIONERS INC: states that through its subsidiary it engages in the wholesale distribution of office, technological, cleaning and industrial products. It also offers transport and advertising services, among others. All of this is detailed on page 56 of the report.

THIRTY SECOND: Finally, from the financial analysis carried out in the Transfer Pricing Study under review, it is concluded that the method chosen is the Resale Price method because it is the most direct method applicable to the observed margins, arguing the following: "Having identified the analysis based on the observed margins and with the background that the entities selected as comparable have a similar accounting system, in this case US GAAP, the Resale Price method was chosen because it is the most direct method applicable to the observed margins at gross levels. Indeed, an analysis at gross level, when it is certain that there is homogeneity in terms of the accounting standards applied, is preferable to an operational analysis".

He points out that, in relation to the comparable companies, the Gross Margin range was determined from the public and available financial information corresponding to the period 2009-2012.

THIRTY THIRD: For its part, the complainant also encloses a Transfer Pricing Study prepared by HB Servicios y Asesorías, for the business year 2012, contained in custody N°733, which examines the report made by EY, just developed.

Thus, the aforementioned document explains that the legal aspects of method selection are an issue to be considered, since the study carried out by EY was prepared in a year in which there were two transfer pricing regulations. Consequently, when examining both regulations, it is determined that only the cost plus margin method and the resale price method are explicitly mentioned, both in article 38 and 41, both of the LIR, while the others are only found in article 41E. It highlights the fact that, while article 38 was in force, there were no instructions on the development of transfer pricing methods, so that, in its opinion, the existence of other methods could not be inferred without resorting to the OECD Guidelines.

Furthermore, the report, after a thorough examination of the Study issued by EY, concludes that the selection of the resale price method is compatible with both standards, and that its application on an integrated transaction can support Arm's Length compliance of the transactions analysed. It also argues that this methodology is appropriate, as it is based on seeking information from comparable companies depending on the characteristics of the analysed party and the functional analysis of the same, in addition to quantitative filters and qualitative filters, so that the filters mentioned are the most used in the search for companies in the application of the resale price method, which is why the set of companies resulting from the application of the filters should provide consistent results to perform an Arm's Length analysis.

He points out that the development of the selected method refers to determining the normal market price or value at which goods or services are resold, focusing the analysis on the gross profit margin on sales (GBV) achieved by a reseller or distributor. In addition, it indicates that the selected comparable companies use US GAAP to prepare their financial statements, so that it can be assumed that there are few distortions in the way costs and expenses are allocated that significantly alter gross margins.

THIRTY-FOURTH: Now, in relation to the methodology used by the Service, the Settlement complained of states that the risks associated with the commercial strategy carried out by the taxpayer translate into revenue foregone and cost savings, so that the risk of this strategy was assumed for the most part by Avery Dennison Chile.

It considers that the application of the resale price method is incorrect, because the plaintiff has a significant level of expenses and one of the weaknesses of this method is that it is very sensitive to the different activities carried out by the companies and the level of expenses incurred by them, since although the marketing expenses are below the gross profit, it is reasonable to think that companies with higher levels of expenses will require a higher profitability to meet this type of expenditure. He further adds that in relation to an analysis based on gross margins, the application of this method is not appropriate for analysing transactions involving the purchase and sale of data processing and software development services.

It sets out the arguments for which it dismisses the other applicable methods, concluding that from the procedures and methodologies established in Chilean law, and considering the transfer pricing methods established in the OECD Guidelines, it recognises the transactional method of net margins as the most appropriate.

It explains that for this method it was not possible to identify internal operations, having to apply its external version, which would imply finding independent companies that assume similar functions, assets and risks, in order to be able to compare the operating result of the analysed party with the results of independent companies. Adding that "When analysing the operating result of the taxpayer, all activities carried out by the taxpayer and the intensity with which they are carried out, including management and marketing efforts, are taken into account. In addition, and taking into consideration that operations with related companies affect both the gross and operating results, and given that it was possible to access financial information from comparable companies, the TMN has been selected to analyse Avery Dennison's marketing operations with its related companies abroad, since, given the background and information available to this Service, it is the most appropriate method for these operations".

THIRTY-FIFTH: With respect to the determination of the companies used as comparable by the Service, the contested settlement indicates that, since no comparable local companies were found from the point of view of assets, functions and risks assumed, it proceeded to search for possible comparable companies in international databases.

It describes the process of identifying possible comparable companies. First, it indicates that, since it could not find local companies that were comparable from the point of view of functions and risks assumed, as well as assets used in its business activity, it proceeded to search for them in international databases, which would make it possible to compare their profitability with that obtained by the complainant.

In the present action, it is indicated that the database "Osiris de Bureau Van Dijk" was used, in addition to stating, among other background information, the SIC codes used to search for comparable entities, according to the type of business, line of business or economic activity and years of available information: 2010, 2011 and 2012. This indicates that the database yielded 25 companies for review, on which quantitative and qualitative filters were applied to increase comparability such as the registration of losses, research and development expenses exceeding 5% of sales, non-routine intangibles exceeding 5% of total assets, financial information or insufficient performance for the business years 2010 to 2012. Thus, applying quantitative filters 16 companies were eliminated, then from the remaining 9 companies, in consideration of the business descriptions provided, 4 of them were eliminated for carrying out activities considerably different from the taxpayer, in relation to the distribution function, 5 companies remained as final comparables, of which 2 were considered as comparables in the analysis made by the taxpayer: United Stationers Inc (Essendant Inc) and Staples Inc.

To the above, it adds two comparable companies using the additive method according to paragraphs 3.41 to 3.45 of the OECD, Bunzl Plc and Officemax Inc, noting that they would have been presented by the taxpayer in its Transfer Pricing Study.

The 7 companies chosen as comparable by the Respondent, according to the Settlements, are the following:

BUNZL PLC: The company distributes a variety of consumer products such as food packaging, labels, packaging, disposable products, take-out food packaging, etc.

OFFICE MAX INC: Distributes retail office products, such as paper and printing supplies, among others.

STAPLES INC: Operates as a company that distributes office supplies and supplies, including those related to printing.

UNITED STATIONERS INC (ESSENDANT INC): Essendant Inci, formerly United Stationers Inc. is a wholesale distributor of traditional office products.

AVNET INC: The company distributes electronic components and computer products to manufacturing companies that use such products in their production processes.

ARROW ELECTRONICS INC: is a supplier of products to industrial and commercial users of electronic components and business computing solutions.

SURGE COMPONENTS INC: The company is a supplier of electronic products and components, which are used in electronic circuits of products such as automobiles, audio, mobile phones, etc., which are marketed to manufacturing companies.

Finally, the tax authority indicates that it proceeded to determine a profitability indicator, through which it could calculate the profitability obtained by the plaintiff in its activity as a distributor, as well as the profitability of the companies selected as comparable, and therefore selected the Operating Margin, which indicates that it "measures the value added by an economic activity, i.e. the profit or operating result obtained from that activity, in relation to the level of income from that activity".

THIRTY SIXTH: Having explained the transfer pricing methodologies used by both parties, it should be noted, first, that transfer pricing methods are intended to determine whether the price charged between related parties complies with the arm's length principle, already mentioned above. In general terms, the former text of article 38 of the LIR granted the SII the power to challenge the prices paid or owed in this case for goods or services provided by related companies, when such prices do not conform to normal market prices between unrelated parties, for which the use of the following methodologies is recognised:

1.- A reasonable profitability to the characteristics of the operation:

2.- Production costs plus a reasonable profit margin:

3.- Resale prices to third parties of goods acquired from an associated company, less the profit margin observed in similar operations.

4.- Residual: Values that the products or services in question have on the international market.

Article 41 E of the LIR, subsequent to the publication of Law No. 20.630, defines a series of transfer pricing methods, in accordance with OECD standards on the matter, and the taxpayer must choose the most appropriate method considering the characteristics and circumstances of the particular case. The rule adds that "For these purposes, the advantages and disadvantages of each method should be taken into consideration; the applicability of the methods in relation to the type of transactions and the circumstances of the case; the availability of relevant information; the existence of comparable transactions and comparability ranges and adjustments". Furthermore, it clarifies that these methods are not exhaustive and that they do not have a specific order of priority, and the application of a different method may be justified.

The legal provision in question establishes the following transfer pricing methods:

1.- Uncontrolled Comparable Price Method.

2.- Resale Price Method.

3.- Cost plus Margin Method.

4.- Profit Splitting Method.

5.- Transactional Net Margin Method.

THIRTY SEVENTH: Now, given that only the resale price method and the transactional method of net margins are in dispute, these will be briefly developed below:

With regard to the resale price method, it can be seen that both regulations in force at the time of the transactions -articles 38 and 41 of the LIR- recognise this method. Although article 38 does not define this method, article 41 E N°2 in its letter b, describes its scope, in general terms, in accordance with OECD standards, as follows: "It consists of determining the normal market price or value of the goods or services, considering the price or value at which such goods or services are subsequently resold or rendered by the acquirer to independent parties. For this purpose, the gross profit margin that has been or would have been obtained by a reseller or supplier in comparable transactions and circumstances between independent parties shall be deducted from the resale price or value or the gross profit margin that would have been obtained by a reseller or supplier in comparable transactions and circumstances between independent parties. The gross profit margin shall be determined by dividing the gross profit by the sales of goods or services in transactions between independent parties. Gross profit shall be determined by deducting the cost of sales of the good or service from the revenue from sales or services in transactions between independent parties [...]'.

In other words, this method makes it possible to compare comparable transactions based primarily on the resale functions rather than on the characteristics of the product or service itself.

In turn, with respect to the transactional net margin method, it is Article 41 E No. 2(e) itself that describes its scope, in accordance with OECD standards, as follows: "It consists of determining the net profit margin that corresponds to each of the parties in the transactions or operations in question, taking as a basis that which would have been obtained by independent parties in comparable operations and circumstances. For these purposes, operational profitability indicators or margins based on return on assets, margins on costs or sales revenues, or other reasonable indicators shall be used [...]'.

This method is normally used when companies have an accounting system that allows them to segment at the operating level their sales, operating costs and operating expenses both for sales to their related party as well as to third parties, thus allowing for an examination at the operating level, which is much more accurate in cases where there is uncertainty as to the classification of accounting items of foreign companies. Consequently, the existence of small differences in asset functions and risks between the company purchasing goods for distribution, in this case, and the foreign companies with which it enters into transactions may affect its gross margins to a greater extent, which implies applying fewer adjustments to the transaction, this method being more flexible for certain situations. THIRTY-EIGHTH: That, as has been pointed out, the SII in the claimed liquidation uses the transactional method of net margins as the transfer pricing method, discarding the resale price method, determined by the taxpayer.

In this regard, before verifying the correct methodology used, it should be recalled that the Service does not distinguish the legal rules applicable to transactions carried out before 27 September 2012, so that, as has been explained, the burden of proof and the way to support the method chosen by the taxpayer differs completely from one period to another, which even increases the level of enforceability in the grounds that the tax entity must have when rejecting the method chosen by the plaintiff. Likewise, without prejudice to the fact that the transfer pricing rules are inspired by the OECD Guidelines since the integration of Chile in 2010, the current legal text of article 38 of the LIR between 1 January 2012 and 26 September 2012 did not consider the transactional method of net margins, chosen by the tax entity, which was only incorporated with Law No. 20. 630 by means of Article 41 E, so that, in the first place, it seems logical to conclude that the claimant chose within the legal options it had at that date the most appropriate for the activity of distribution of goods, which was the resale price method.

THIRTY-NINTH: As for the grounds for the Settlement, the Service bases a large part of its decision on the fact that the commercial strategy carried out by the claimant was taken from its parent company, and therefore deduces that the risks were mainly assumed by Avery, when, in its opinion, they should be attributable to the corporate body. The aforementioned, according to his statements, would have been expressed in meetings between the taxpayer and the auditors in charge, which has also been pointed out in the testimonies given by Mr. Felipe Flores, Head of the Transfer Pricing Department of the SII, and Mr. Cristian Andrés Medina Medina, the auditor in charge of the operations, however, these statements have not been proven by the tax entity in the proceedings, taking into consideration that the claimant categorically denies them.

In order to prove the contrary, the taxpayer submitted several e-mails sent during the business years 2011 and 2012 by Eduardo Espinoza, Business Manager of Avery Dennison Chile, to different branches of the Avery Dennison conglomerate, showing that they refer to a project called "Aquiles", as a bet on the volume of customers in the local market.

Likewise, an e-mail dated 8 September 2011 was sent by Joao Adao, General Manager, to the Sales Managers of the different subsidiaries of Avery Dennison in South America, in which he proposes to review more aggressive sales plans, and in particular, refers to the "Aquiles" project for "Col/Export/Chile", indicating that target customers should be considered to take volume from the Arclad/Ritrama companies without margin or even negative margin if strategically justified.

This is related to the taxpayer's statement that the commercial strategies carried out during 2012 were mainly due to the competition that the company Ritrama represented in the national trade who purchased products of Asian origin.

FOURTH: In the case of business strategies, it should be borne in mind that the OECD Transfer Pricing Guidelines themselves have understood that "business strategies" are relevant for the so-called "Comparability Analysis", and that in such a case different conditions would be accepted as long as the aforementioned strategies are present and the economic support is maintained.

That, the SII points out in its evacuation that, although the marketing expenses are below the gross profit, it is reasonable to think that, those companies that present important levels of operating expenses, as would be the case of the complainant, will require a higher profitability to face these higher levels of this type of expenses, since otherwise it would not be sustainable over time.

Regarding the sales strategies questioned by the tax authority, after verifying the profit and loss statements audited by the auditing company, Crowe Horwath, kept under number 733, which were not observed by the other party, as the claimant points out, it is possible to observe that sales increased from M$9. 626,976.- in 2011 to ThCh$10,426,684.- in 2012, i.e., as a result of the decrease in the sales price in Chile, sales increased by $799,708,000.-, which indicates that the objective of covering a larger market was indeed achieved with this strategy.

As noted above, the OECD Guidelines recommend that these strategies should be considered in the determination of transfer prices, to the extent that they are not sustained over time. This was not proven by the SII, as it does not refer to whether such strategies were maintained in the following period, nor does it submit documents that would establish that this occurred. Therefore, the allegation in question alone is not sufficient to challenge the pricing method selected by the taxpayer, especially if it is based on two pricing studies carried out by independent auditing firms, experts in the field.

FOURTEENTH ONE: In relation to the Respondent's argument that the Litigant had a positive gross margin, however, it had important operational expenses, which is why it was more advisable to use the net margin transaction method. It should be noted, first of all, that it does not substantiate and make any analysis to conclude that the comparables used have the same functions and risks as the complainant, nor does it analyse whether they use similar accounting systems that do not lead to distortions in the operating results. Furthermore, no analysis of operating expenses is made.

In this regard, it should be clarified that from the exhaustive examination of the 2011-2012 Comprehensive Income Statements, it could be verified that, within the operating expenses, the main variation between the previous period and the one in question is the loss due to the exchange difference, amounting to the sum of $187,059,000, since in the previous period a profit of $227,115,000 was recorded. 115,000.- That this loss affects the result for the period, generating an operating margin lower than the previous year by $387,448,000.-, which can be verified in the Financial Statements Report issued by the independent external auditors, Crowe Horwath, dated 12 July 2013, which was not observed by the opposing party.

In this regard, it is necessary to point out that, from the maxims of experience, this court has been able to conclude that this type of commercial strategies are carried out for specific times, with the aim of building customer loyalty, lowering prices, in order to have a greater share in the local market. This is why the operating margins were not depressed by the increase in operating expenses, but the reason was the decrease in the sales price which generated a decrease in the operating margins, which could be corroborated from the financial statements on display.

At the same time, this court sees no reason why it would be convenient for the company to decrease sales prices in order to increase sales in local markets, in relation to the commercial decisions taken by Chile. Nor can it be seen what the logic of the Service is in relation to challenging this commercial strategy, because if it considers that the purpose is to leave profitability out, it has been confirmed that it is a local commercial strategy.

Finally, the respondent has not presented any evidence in the file that would lead this court to believe that the commercial strategic decisions come from the parent company or another related entity abroad, and therefore this assertion cannot be approved.

FOURTY-SECOND: On the other hand, the Service, in its transfer, notes that the complainant, during the audit process, would have indicated that after acquiring the products from its foreign related party, it carries out a small process on them before selling them to independent third parties given the nature and specificity of the operation and products it markets, so that the analysis was based mainly on functional terms rather than on the product, and that the method most sensitive to these product differences is the transactional method of net margins.

First of all, it should be noted that the argument used by the Respondent in the proceedings was not set out anywhere in the Settlement, so that if this was one of the reasons why the auditing body used the method based on operating margins, it should at least have been an integral part of the contested act.

Likewise, without prejudice to the fact that the tax authority does not specify what it means when it says that the complainant carries out "a small process" on the products before selling them, this court verified in the Transfer Pricing Study prepared by EY, that in some cases adhesive cuts are made in the company's distribution centre.

That, from the maxims of experience, this judge considers that cutting adhesives is not a relevant operation for one method or another to be applied, notwithstanding the specificity of the product, and even less to base its transfer pricing analysis on functional terms. That, in turn, it could be verified that the actor does not carry out any other production activity.

FOURTY-THIRD: Now, with regard to the determination of the companies used as comparable to Avery Dennison Chile by the Service in the liquidation, described in the thirty-fifth recital, it is noted that 3 companies (Avent Inc, Arrow Electronics Inc, Surge Components Inc) of the 7 chosen, belong to the electronics sector, and there is no dispute that the main business line of the plaintiff is self-adhesive materials for labels and packaging; graphic and reflective solutions; performance tapes and office products. In this regard, the electronic products distributed by the comparable companies are in no way similar to the products distributed by the complainant. For example, Arrow Electronics Inc. distributes electronic components and computer products to manufacturing companies that use these products in their production processes, which are totally different from the self-adhesive label and packaging materials distributed by Avery Dennison Chile. In the same situation are the companies Avent Inc and Surge Components Inc, the former being a supplier of products for industrial and commercial users of electronic components and computer solutions for businesses; and the latter providing electronic products and components that are used in electronic circuits of products such as cars, audio, telephones, etc., which are marketed to manufacturing companies.

Thus, this court considers that the electronics business operates in a completely different way from the adhesives and packaging businesses, in terms of products, functions and risks.

It is striking that the SII, both in the claimed liquidation and in the transfer evacuation, maintains that the criterion by which the comparables proposed by the taxpayer were discarded is due to the fact that they present products significantly different from those marketed by the taxpayer, since they belong to the pharmaceutical sector, which face totally different risks; and that, on the other hand, the same Service has considered comparable companies as dissimilar as those dedicated to the electronic sector, generating a contradiction in its arguments.

It should be added that the tax authority argues that these comparable companies were chosen because the selection criterion was made with emphasis on the functions performed by these companies rather than the product marketed, in addition to considering that the companies included in the comparability have products that are similar in terms of risks assumed, such as the distribution companies in the electronic sector. However, in the contested act there is no explanation of the functional treatment of these entities, nor what it refers to when it states that the products are similar in terms of risks assumed between companies that supply adhesives and packaging with suppliers of electronic products; However, as stated above, it does not elaborate on the functional terms to which it refers, so that the settlement is not supported in this respect either.

Regarding the companies Staples Inc; United Stationers Inc and Office Max, the Respondent only claims that they are entities of general distribution of office supplies, specifying in some cases that they are related to printing; the same companies used in EY's Transfer Pricing Study as comparables, which are much more detailed in this one.

Finally, it should be noted that the comparable Blinz PLC is the only company that this court considers to be detailed in the Settlement, an entity also used in EY's Transfer Pricing Study.

FOURTH: That, although the SII states that the comparability indicator is based on operating margins and not gross, it does not explain at the level of results in relation to the level of income, at what point it can be compared with the claimant in this aspect, reiterating the fact that the tax body did not substantiate the reasons why it used comparable companies that differ greatly from the economic activities carried out by the plaintiff.

It can be concluded from this that most of the companies deal with products different from those distributed by the claimant, and it is not conceivable to this Court that there are no other independent or unrelated companies that carry out similar activities to that of the plaintiff abroad, so that the choice of comparable companies for the determination of profitability, in respect of which the SII contested the transfer prices paid or owed to its related companies, in particular to Avery Dennison Argentina, is not justified. The mere fact that the functions performed by unrelated entities are distribution functions is not sufficient.

It is also worth considering that under EY's Transfer Pricing Study it was verified that the entities selected as comparables of the complainant have a similar accounting system, US GAAP, which prevents differences in accounting records, which otherwise could affect the comparability between companies. In this respect, the OECD Guidelines in paragraph 2.27 state: "Where the resale margin used as a benchmark is that of an independent company in a comparable transaction, the reliability of the resale price method may be affected if there are significant differences in the way related companies or independent companies conduct their business. Such differences could include those that affect the level of costs taken into account (for example, differences may include the effect of managerial efficiency on inventory holding levels and ranges), which may well have an impact on a company's profit [...]".

There is no analysis of the accounting systems of the comparables used, which implies that the transactional method of net margins is not well argued, because if this aspect had been analysed, the resale price method should have been used, and not one based on operating margins.

The foregoing is reaffirmed by the testimonial evidence presented by the complainant, in particular, by Mr. Tiriak Alberto Bruzual Barrios, manager of transfer pricing at EY, who explains in detail the methodology used to arrive at the resale price method.

FOURTH FIFTH: From all that has been analysed, it has been corroborated that the taxpayer buys from its foreign related companies mainly labels and packaging to resell in the local market to unrelated companies. Likewise, the Transfer Pricing Study prepared by EY shows that it is indeed possible to analyse the comparable companies at a gross level, so that the resale price method is the most direct method applicable to these operations. This is corroborated by the analysis of the Transfer Pricing Study carried out by the audit firm HB Servicios y Asesorías.

That, both in the old text of article 38 of the LIR and in article 41 E of the same legal body, the resale method is specifically recognised.

On the other hand, in relation to transactions carried out prior to the publication of Law No. 20. 630, in respect of which, as stated above, the former article 38 of the LIR applies, it is concluded that the tax authority did not base itself on a reasonable return on the characteristics of the transactions, since this court rejects the companies used as comparables in the liquidation, since the criterion that allows the SII to challenge transfer prices in the case of goods paid or owed, is that they do not conform to normal market prices between unrelated parties, which has not been verified in the present case.

The same result is observed in relation to those operations carried out while article 41 E of the LIR was in force, given that the prices of the independent companies considered in the liquidation do not originate from transactions and situations comparable to those carried out by the plaintiff.

FOURTH SIXTH: In another aspect, with regard to the basis of the Settlement, this court has been able to corroborate that the contested act is not well-founded, firstly, it does not distinguish between the product purchase transactions carried out with related companies abroad between 1 and 26 September 2012, and those carried out from 27 September 2012 onwards. This is mainly relevant by virtue of the applicable transfer pricing methodology, since for transactions carried out under former article 38 of the LIR, the net margin transaction method, used by the tax entity, was not recognised in Chilean law.

Furthermore, from the reading of the contested act, it could be seen that the Service does not indicate in detail how it reached the conclusion that the result of the analysis carried out does not show a reasonable profitability for the characteristics of the transactions carried out. First of all, it refers in broad terms to the reasons why the appropriate method is the transactional method of net margins, concluding that the taxpayer's results should be analysed at the operational level, but it does not carry out any examination at the functional level of the company or of the foreign companies chosen as comparables.

In this sense, it is important to note that although the declarations presented by Mr. Felipe Flores, Head of the Transfer Pricing Department of the SII, and Mr. Cristian Andrés Medina Medina, the auditor in charge of the operations, describe in a more optimal and complete manner the economic and comparability analysis carried out by the Service, these arguments are not found in the contested act, a circumstance that causes a lack of defence to the taxpayer. The same fate is suffered by the evacua traslado adding new grounds to the application of the method used by the tax administration.

Also, it could be recognised that the respondent in the Assessment assures that there are no internal comparables, without explaining the process by which it reached this conclusion, that is to say, if studies were carried out, or if it was the case if the National Customs Service, etc., was contacted.

Finally, in relation to the basis of the contested act referring to the taxpayer's commercial sales strategies and their risks, it should be recalled that the OECD Guidelines recommend that these strategies should be considered in the determination of transfer prices, to the extent that they are not sustained over time, a circumstance not accredited by the SII, since it does not refer to whether these strategies were maintained in the following period, nor does it present documents that allow establishing that this occurred.

Therefore, this Tribunal considers that the Settlement lacks grounds.

FOURTY SEVENTH: Without prejudice to the foregoing, this Tribunal will develop the point of evidence No. 7, namely: "Effectiveness of the proper application, by the Internal Revenue Service, of the inter-quartile range for the determination of profitability in trading operations for the 2012 business year. Background and factual circumstances that justify it".

In this regard, the applicant alleges an arbitrary application of the interquartile range for the determination of the profitability of trading operations for the 2012 business year.

It adds that the legislation in force and applicable in the period under review, both the former article 38 of the LIR and article 41 E of the aforementioned legal body, do not provide for the obligation to apply any statistical adjustment, there being no legal basis for applying the interquartile adjustment on the full range, which is an infringement of the principle of legality governing the actions of the tax administration.

In turn, the SII considers that, in order to determine the normal market range, the plaintiff uses the minimum and maximum value of comparables, instead of using the interquartile range, so that its results would be out of range.

It concludes that the adoption of the inter-quartile range would be justified, not violating the principle of legality, as it is in line with the nature of the Complainant's operations, a range that is in turn expressly recognised in the OECD guidelines.

EIGHTEENTH: That, in the Transfer Pricing Study carried out by EY for the 2012 business year, in section 8.2.3.1. denominated "Economic comparability adjustments" it could be observed that with respect to the companies that were comparable to the complainant, already described above, in order to eliminate fundamental differences in the levels of working capital between the companies, in accordance with the provisions of the OECD Guidelines, adjustments were made to the profitability of the comparable companies considering the levels of the following accounts: accounts receivable, accounts payable and inventories; measuring them against net sales, cost of sales or total costs, details of which can be found in Annex VI of the report in question. That, the following table shows the detail of the adjusted range of normal market values made up of the weighted average returns of the taxpayer's comparables, considering as weighting weight the total sales of the companies:

Minimum observed value 7.25%.

Median 22.48%.

Maximum observed value 29.85% Avery 16.35% Avery 16.35% Avery 16.35% Avery 16.35% Avery

Avery 16.35%.

Thus, it is explained in the report that the adjusted range of the Gross Sales Margin profitability indicators obtained by the independent companies selected as comparable are between a minimum value of 7.25% and a maximum value of 29.85% with a median of 22.48%. These results were compared with the complainant's profitability indicator for 2012, which stood at 16.35%.

Finally concluding that the transaction analysed is within the normal range of values and that, consequently, it does not present transfer pricing contingencies.

FORTY-NINTH: For its part, the SII in the Liquidations uses the interquartile range for the analysis of the sample of returns of comparable companies, determining the use of the median, under the argument that the OECD guidelines, in paragraph 3. 57 state that "it may be appropriate to use measures of central tendency that allow this point to be determined (e.g. median, mean or weighted mean, depending on the specific characteristics of the data) in order to minimise the risk of error caused by defects in comparability that persist but are not known or cannot be quantified".

That, as a result of the interquartile range indicates that the operating margin for the year 2012 was 0.05%, while the interquartile range for comparable companies yielded an operating margin for the average of the years 2010-2012, ranging from 3.82% to 6.00%, with a median of 4.14%. This is reflected in the following table:

Result year 2012

Avery Dennison Lower Quartile Lower Quartile Median Upper Quartile

0,05% 3,82% 4,14% 6,00%

Finally, the conclusions of the contested act state that in the year in question the taxpayer's results in its distribution activity do not show a reasonable profitability for the characteristics of the operations carried out, as they are below the results obtained by comparable companies.

That, the adjustments made to the taxpayer's cost of sales for the period under review in its distribution activity are reflected in the following table:

Business Year 2012

Transfer Pricing Adjustment $426.285.718

Details can be found in Annex 3 of the Settlement.

FIFTEENTH: That, from the review of article 38 of the LIR, in force for transactions carried out from 1 January to 26 September 2012, and article 41 of the LIR in force for transactions carried out from 27 September 2012 onwards, this court confirms the plaintiff's statements to the effect that the tax legislation has not imposed the obligation to make comparability adjustments with the companies chosen as comparables.

For, the general rule is that, if the prices agreed between related companies are within the range determined using as a basis the comparables used by the tax authority, no adjustment should be made. However, these comparability adjustments serve mainly to eliminate possible differences between the companies used as comparables, which may influence the conditions in the application of the method.

In the contested act, nothing is stated with regard to the existence of differences between the companies used as comparables, which would entitle the tax authority to make these adjustments.

Thus, the application of the interquartile range, unlike the one used by the taxpayer, is a measure of statistical variability that eliminates the top 25%, or above 75% (upper quartile), and the bottom 25% (lower quartile) of the observations, accepting only 50% of the central observations of the sample.

Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range "the median" (point 3.61), its application is not mandatory in the national tax administration. Likewise, this cannot be the only argument of the SII to apply the aforementioned range, in addition to the fact that no further analysis of its use is made in the Assessment.

In this sense, in the contested act, the SII does not challenge the EY Transfer Price Study either, in terms of the values set by the range used for the minimum and maximum value of comparables, not substantiating the reason why it rejects the range chosen in the report, and arbitrarily decides to apply the interquartile range, moreover, taking into account that the use of this range should be examined on a case-by-case basis.

Finally, it should be considered that it is an adjustment that is not legally contemplated and the OECD guidelines indicate that it can only be used in cases where there is a difference in the comparables, as already noted, none of which is explained by the tax authority in the contested act, leaving the taxpayer in defencelessness.

Consequently, since the Respondent did not substantiate the adjustment made to the comparables selected in the Assessment, considering that the tax regulations do not require this application of methods, this point of evidence must be credited in favour of the taxpayer.

FIFTY-FIRST: Consequently, the Respondent failed to justify that the transfer pricing methodology used by the Claimant was not the appropriate one for the international commercial transactions carried out during the 2012 business year, so that, based on the background information before it and the transfer pricing studies provided, this Court could reach the conviction that the resale price method was the most appropriate one for the present case.

Hence, the Respondent failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties, or, between independent companies; or, to normal market prices, values or returns that independent parties have or would have agreed or obtained in comparable transactions and circumstances, as the case may be.

FIFTY-SECOND: Finally, regarding the financial transactions challenged by the SII in relation to transfer pricing, test points N°4 and 8 were ruled, namely:

"Effectiveness that the interest fixed in financial transactions with related parties without domicile or residence in Chile, between 27 September and 31 December 2012, and which were objected to in point 7.2 letter A) of the Settlement claimed in the proceedings, have been made at market prices, values or returns. Background facts and circumstances justifying this".

"Background facts and circumstances, considered by the Internal Revenue Service, to determine the prices, values or yields in the trading operations and interest in financing operations for the 2012 business year, claimed in these proceedings".

In this regard, the complainant points out that the loans granted to Avery Management KGAA correspond to excess cash flow remittances, which all group entities must transfer to their treasury centres. The interest rate used for these transactions is 0.79%, which was established by Avery Dennison Corporate, which are in line with the ranges for operations of the same nature, and it is not appropriate to make a comparison with domestic time deposits in order to modify the interest rate, as this is not in line with the specific nature of these operations.

For its part, the SII considers that the analysis used by the complainant to justify the rate of 0.79% agreed in these contracts is not correct, since it uses the 12-month Libor rate as a comparable rate, which, by definition, is a reference rate based on the interest rates at which a group of London banks offer funds to other banks in the interbank market, and in practice operates as a risk-free rate.

He adds that the Capital Asset Price Model (CAPM) indicates that the rate of return that any company, project or asset should provide should be a function of a risk-free rate, and a spread for the inherent risk involved. Therefore, financial theory indicates that the expected return on an investment, or a deposit in this case, should contain at least the return of a risk-free rate and a spread for the risk of default or non-payment by the counterparty.

It concludes that in the analysis presented by Avery Dennison, only the return for the risk-free rate was considered, but that the spread to be paid for the risk of non-payment was not taken into account.

FIFTY-THIRD: That it is not disputed that the Claimant carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the "Avery Dennison" conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.

The Comparable Uncontrolled Price method used is also uncontested.

The loan contracts signed between Avery Dennison Chile S.A. and Avery Dennison Management KGAA allow the taxpayer to request the restitution of the money, establishing a maximum period of 6 months for restitution. However, they do not meet the requirements to be term deposits, as described by the SII in the Settlement.

That, the Libor rate (London Interbank Offered Rate) is an interest rate determined by the rates that banks, participating in the London market, offer each other for short-term deposits. Libor is used to determine the price of financial instruments such as derivatives and futures. It is a widely used benchmark indicator for short-term rates.

Thus, the SII's main basis for rejecting the rate applied by the complainant is that it did not consider the risk spread for non-payment, classifying the operation as a term deposit. This conclusion is not true, since, after verifying the loan contracts, the existence of such a risk is not observed, since they are exceptional types of loans considered to be short-term, and therefore the Libor rate is appropriate for these types of transactions. For its part, this magistrate denies classifying them as term deposits because the reading of the agreements entered into does not recognise the requirements demanded for this type of loan to be classified as such.

Consequently, it was corroborated that the loans in question were made at market prices, values or yields. Both points of evidence in favour of the taxpayer must be considered as accredited.

FIFTY FOURTH: That, based on the allegations made by the parties and the accompanying documents, assessed according to the rules of sound criticism, this Court concludes that the claimed action is not in accordance with the law, given that the SII does not distinguish between the regulations applicable to international transactions carried out by the plaintiff with related companies during the 2012 business year, according to the date of publication of Law No. 20,630, in breach of the current legal regulations and administrative instructions, mandatory for the Administration. Likewise, it could be verified that the Service did not substantiate the challenges to the transfer prices determined by the taxpayer.

In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed.

Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.

FIFTY-FIFTH: That, the other evidence rendered and background information provided in the case file in no way alter the above reasoning and conclusion.

HAVING REGARD, FURTHER, to the provisions of Articles 38 and 41 of the Income Tax Law; Article 1 of Law No. 20.630; Article 7 of Law No. 18.575; Articles 17, 18, 21, 59, 115, 124, 125, 127, 130, 131, 131 bis, 132, 148 and 200 of the Tax Code; Articles 144 and 170 of the Code of Civil Procedure and other pertinent legal provisions, IT IS RESOLVED:

THE COMPLAINT lodged on page 1 below by Mr.

GUILLERMO INGANTE CORTÉS, on behalf of AVERY DENNISON CHILE S.A., represented by Mr. GUILLERMO INGANTE CORTÉS.

DENNISON CHILE S.A., both already named, in accordance with the reasoning and conclusions set out in recitals eight to fifty-five.

As a consequence, the Liquidation No. 210, dated 30 August 2016, issued by the Santiago Poniente Metropolitan Regional Directorate of the Internal Revenue Service, is hereby annulled.

In view of the merits of the proceedings, the Internal Revenue Service is not ordered to pay costs, as there are plausible grounds for litigation.

Be it noted, registered and filed in due course.

NOTIFY this Resolution to the claimant by registered letter, and to the respondent by publication of its full text on the Tribunal's website. Leave testimony in the file.

RUC: 16-9-0001493-0 RIT: GR-16-00102-2016

In view of the health contingency and the teleworking mode in which the Tribunal is operating, this decision is signed electronically only.

RESOLVED MR. OSCAR MERIÑO MATURANA, TITULAR JUDGE OF THE SECOND TAX AND CUSTOMS COURT OF THE METROPOLITAN REGION.

AUTHORISED BY MR. JOSÉ ANTONIO GUERRERO URIARTE, TITULAR SECRETARY OF THE SECOND TAX AND CUSTOMS COURT OF THE METROPOLITAN REGION.