COLOMBIA vs CARBONES
EL TESORO S.A. (Glencore)
COUNCIL OF
STATE
CONTENTIOUS-ADMINISTRATIVE
CHAMBER
FOURTH
SECTION
Adviser
rapporteur: MYRIAM STELLA GUTIERREZ ARGÜELLO
Bogotá
D.C., sixteen (16) September two thousand twenty-one (2021)
Case number:
08001-23-31-000-2011-01033-01(22352)
Plaintiff:
CARBONES EL TESORO S.A.
Defendant:
DIRECCIÓN DE IMPUESTOS Y ADUANAS NACIONALES - DIAN (National Tax and Customs
Directorate)
JUDGMENT
The appeal
lodged by the plaintiff against the judgment of 27 March 2015, handed down by
the Administrative Court of Atlántico, Decongestion Subsection, the operative
part of which is as follows:
"FIRST:
Declare the objection raised by the defendant's legal representative not
proven, in accordance with what is set out in the grounds of this judgment.
SECOND:
Deny the claims in the application, in accordance with the reasons set out in
the grounds of this decision.
THIRD:
Reimburse the plaintiff, if any, the costs of the proceedings.
FOURTH: No
order as to costs (Art. 171 C.C.A., amended by Article 55 of Law 446 of
1998)".
(...)
BACKGROUND
TO THE ADMINISTRATIVE PROCEEDINGS
On 25 April
2008, Carbones El Tesoro S.A., filed an income tax
return for the taxable year 2007. Subsequently, on 13 July 2008, it filed its
individual transfer pricing information return (DIPT) for the same tax year.
On August
25, 2010, the DIAN issued Special Demand No. 022382010000221, which was
notified on August 30, 2010 (fls. 109 to 137) and on
November 26, 2010, the plaintiff responded to the special demand (fls. 138 to 163).
On 29 April
2011, the Settlement Management Division of the Barranquilla Regional Tax
Directorate issued the Official Review Settlement 022412011000132 by which it
modified the income tax return for the taxable year 2007, in the sense of
disregarding as a net loss for the year the amount of $30. 509.961.000 and
imposed a penalty for inaccuracy of $16.597.418.784, based on the questioning
of the method that the taxpayer chose to establish the profit margin in the
coal supply operation with its economic partner abroad.
PROCEDURAL
BACKGROUND
Complaint
In an
action for annulment and reestablishment of rights provided for in article 85
of the Contentious Administrative Code (CCA, Decree 01 of 1984), the plaintiff
filed the following claims (fl. 2):
A. To declare the total nullity of the
Official Revision Settlement No. 022412011000132 of 29 April 2011, issued by
the Settlement Management Division of the Barranquilla Regional Tax Directorate
of the U.E.A. National Tax and Customs Directorate - DIAN.
B. As a consequence of the above, declare
the finality of the income tax return of CARBONES EL TESORO S.A. for the
taxable year 2007, as well as the inadmissibility of the penalty for
inaccuracy.
C. That as a consequence of the
declaration of nullity, the company CARBONES EL TESORO S.A. be reinstated in
its rights, declaring that it is in full compliance with its income tax
obligations for the taxable year 2007.
D. Declare that CARBONES EL TESORO S.A. is
not liable for the costs incurred by the Directorate of National Taxes and
Customs in relation to the administrative proceedings, nor for the costs of
these proceedings.
In the
complaint, articles 13, 29, 83 and 363 of the Constitution, 35 of the
Contentious Administrative Code, 102, 178 and 260 of the Code of Civil
Procedure, 121, 260-1, 260-2, 647 and 647-1 of the Tax Statute and article 7(B)
of Decree 4349 of 2004 were indicated as violated. The concept of the
infringement is summarised as follows (pages 6 to
51):
The
plaintiff raised the disregard of the purpose and aim of the transfer pricing
regime, due to the fact that the Administration speculated about how the
taxpayer's operation should work without offering any legal or commercial
basis. He argued that the defendant
exceeded its powers by modifying the structure of the business, which is
contrary to the very nature of the transfer pricing regime, which seeks to
ensure that once the operation is defined, it is governed by market ranges. To
support the above, he explained the characteristics of the coal sale
transaction with its foreign affiliate, its shareholder composition, and the
violation of the transfer pricing regime by the Administration, by suggesting
that the remuneration of its foreign affiliate should be received via dividends
when the transaction is based on a supply contract.
He argued
that the principle of autonomy of will enshrined in article 1602 of the CC and
article 121 of the ET were not respected, because the Administration concluded
that its foreign affiliate acts as a commercial agent, according to its own
analysis of functions and assumption of risks, and determined that it should
receive a 5% commission on the price proposed by the affiliate in the sale of
coal in accordance with article 121 (a) of the ET and Resolution No. 2296 of 22
March 1976. In this regard, he stated that the aforementioned rules established
a tax benefit for those payments to commission agents, consisting of the
deductibility of these payments without the need to demonstrate that
withholding tax had been paid, so it is a rule that facilitates access to a tax
benefit, but it is not a market range and has no application in the transfer
pricing regime. Similarly, it argued that the 5% commission was not agreed by
the parties, so it is not possible for the Administration to "pretend to
impose a commercial value that must be assumed for any commercial relationship,
because by assuming this it does not take into account the principle of free
will".
It argued
that the administration did not refute the validity of the method of
transactional profit margins (TU) used, nor did it object to the supporting
documentation for the year 2007. In this regard, it argued that, under the free
determination granted by article 260-2 of the ET (in force for the year 2007),
it applied the TNMM method because it was more reliable to assess the
profitability of the company according to the sample obtained from independent
companies with comparable business activities, and presented the suitability of
the method based on what was reported in the supporting documentation.
It stated
that Management did not take into account the comparability criteria set out in
Article 260-3 of the ET, the rules on the selection of the method, nor did it
explain the reasons for considering the comparable uncontrolled price (CP)
method more appropriate for the transaction. This is because the CUP method
does not reflect the reality of the transaction, nor the terms of negotiation
used by the company. In this regard, it stated that neither the Colombian legal
system nor the OECD guidelines indicate any of the methods established in article
260-2 of the ET as the only and priority method.
He alleged
the violation of the right to equality enshrined in article 13 of the
Constitution, due to the fact that the Administration ignored the coal sales
price certified by the Ministry of Mines and Energy for similar companies
applicable in 2007, which led it to infer that the plaintiff should assign a
price that was not in accordance with the real transaction developed with the
economic partner; thus applying an excessive and unrealistic price.
He argued
that the official liquidation suffered from false motivation, since it is not
true that he assumed all the risks of the transaction, as stated in the
supporting documentation, so he should not obtain a higher profitability.
Furthermore, it argued that the supporting documentation demonstrated that its
profit margin was within the interquartile range determined in its
comparability analysis.
He asserted
the violation of the right to due process, inasmuch as the Administration did
not give reasons for the act being challenged, by not presenting the reasons of
fact and law to support that the taxpayer made an error in choosing the TNMM
method, and did not even read the response to the special requirement, but
simply replicated the same arguments in the official review liquidation.
It argued
the violation of the principle of good faith (article 83 C.N.), since it
complied with its transfer pricing obligations and the Administration did not
take into account the correct performance of the plaintiff with respect to the
year 2007, and did not value the supporting documentation provided and inferred
the bad faith of the plaintiff in determining the commission applicable to its
related party from abroad in the coal supply operation.
He stated
that the defendant did not comply with the rules of the sanctioning process,
given that it should have initiated an audit of the supporting documentation
and the DIPT, before questioning the determination of the income tax.
He
explained the improper evidentiary assessment of the Administration in
rejecting the reported loss, based on prices consulted in international coal
databases, which do not correspond to those outlined in its supporting
documentation. He questioned that the Respondent used as evidence the prices
taken from the McCloskey database, as well as e-mails exchanged with this
entity, analysed and freely translated into Spanish, in an imprecise manner, in
violation of the requirements of article 260 of the CPC on the use of documents
in a foreign language.
Additionally,
it argued that the Administration intends to demonstrate that the selected
method is inaccurate; but for this purpose it uses a database that takes into
account spot prices, while the plaintiff conducts its negotiations with its
related party abroad using forward prices.
Finally,
with regard to the penalty for inaccuracy due to the decrease in losses, it
stated that it was inadmissible because it did not engage in any punishable
conduct. Furthermore, it alleged a difference of criteria with regard to the
applicable law, since the adoption of a method different from that indicated by
the defendant could not give rise to a penalty, insofar as the tax rules do not
establish a single method, to such an extent that they left it to the
taxpayer's discretion to determine it.
Opposition
to the claim
The
defendant contested the claims of the plaintiff, as follows (fls. 188 to 208):
It raised a
plea of insufficiency of the claim, because the plaintiff did not appeal the
official review liquidation in a timely manner, which led to the rejection of
the appeal for reconsideration as untimely, and therefore, there was no
exhaustion of governmental channels.
Regarding
the disregard of the purpose and aim of the transfer pricing regime, it stated
that it did not exceed its powers insofar as it amended the income tax return
based on the information provided by the taxpayer, which led to the conclusion
of the omission of income, which when added generated the reduction of the loss
and the consequent penalty for inaccuracy.
He stated
that, both in the special requirement and in the official liquidation, he
presented the arguments by which he questioned the method used and concluded
that it was not the most appropriate. Furthermore, it claimed that it has the
competence to disregard the method used by the taxpayer and to determine the
most appropriate one in order to comply with the purpose of the transfer
pricing regime.
Regarding
the application of the comparability criteria and the violation of the right to
equality, it indicated that it applied the regulations as set out in the
contested acts, and that these contain all the information related to the
evidence collected and the analyses carried out.
Regarding
the false motivation of the administrative act, he indicated that in the
evidence and analysis it was possible to conclude that the company assumes all
the risks of the operation, that therefore the foreign affiliate only acts as
an intermediary, where it assumes the risks inherent to that activity, and that
in addition, by virtue of the total control that it exercises over the
shareholder, derived from the shareholding relationship, there should be no
such intermediation in the coal operation to the end customer, because the
affiliate obtains its profit via dividends. In fact, it argued that the company
should obtain a higher return, but this is not reflected in the chosen method.
It argued that the TNMM method applies only when market conditions are not in
line with the situation of the product sold, and if there are no public prices
that can be applied to the product sold or if the product sold is significantly
different from the publicly quoted price, which is not the case for the
applicant, as there are public reference prices for thermal coal.
Similarly,
it stated that since world trade in coal is driven by price lists issued by
public databases with a standard quality of the product, in a given port and
taking into account the variables that can influence its price, it was
appropriate for the taxpayer to apply the CUP method, taking as comparable the
sale price of coal set in those lists.
Based on
the above, it stated that the foreign affiliate acted as a commercial agent
with functions and risks in accordance with its participation in the
transaction, to which a commission of 5% of the sale price should be applied,
as provided for in article 121 of the ET and Resolution 2296 of 22 March 1976.
In accordance with the above, it recalculated the sales invoices provided by
applying the international quotation price for the date of the transaction, to
which it subsequently subtracted the 5% commission corresponding to the foreign
affiliate, and thus adjusted the plaintiff's income tax return by adding
income, which resulted in the aforementioned decrease in tax loss.
Regarding
the violation of the right to due process by not giving reasons for the act
being appealed, he argued that he did not agree, because the plaintiff had all
the relevant instances to exercise her right of defence.
Furthermore, he acted in accordance with the evidence in the file (art. 742 of
the ET).
Regarding
the improper evaluation of the evidence, he argued that he did not disregard
article 102 of the CPC because the entire process was carried out in Spanish.
In relation
to the disregard of the principle of free will and the violation of articles
1602 of the CC and 121 of the ET for improper application, he stated that he
studied the way in which the method should be chosen to determine the price or
profit margin of the plaintiff, based on the evidence provided by the
plaintiff.
Finally, he
indicated that the penalty imposed on the plaintiff is that established in
article 647-1 of the ET, which refers to the theoretical tax resulting from the
reduction of the net loss, which can be proposed in the special requirement
without the need for a statement of objections or a separate penalty
resolution.
Judgment
appealed
The
Tribunal Administrativo del Atlántico, Subsección de Descongestión, by
judgment of 27 March 2015, denied the pleas of the claim based on the following
considerations, without ordering costs (fls. 289 to
305):
It declared
the plea of unfounded claim not proven because the untimeliness of the appeal
for reconsideration has the same effect as not having filed it, which implies
that the plaintiff did not exhaust governmental channels to go directly to the
administrative jurisdiction within the four months following the notification
of the official review liquidation.
On the
merits of the case, he stated that although it is the taxpayer's right to
choose the most appropriate method to determine the price or market margin
applicable to the transaction subject to the transfer pricing regime, the CUP
method is the one that best suits the transaction because independent coal
companies usually set their prices according to the market values of thermal
coal and, therefore, the comparable price was the one provided by the
international market databases.
It stated
that since the disputed transaction should have been agreed according to the
international price applicable in October, November and December 2007, as
stated by the defendant, and in those months according to the McCloskey
database the market price was higher than 70 dollars, the sale of coal between
the related parties did not comply with the transfer pricing regime.
Accordingly, the taxpayer could not set a price lower than the international
market price, and thus carry a loss on its return that would decrease taxable
income.
In
addition, it considered that the defendant demonstrated the situation of
control of the foreign affiliate over the plaintiff, with which the source of
income of the foreign affiliate should be via dividends and not payments for
commercial intermediation, especially when such income amounts to 54% of the
total of the transaction.
As for the
inappropriateness of the penalty for inaccuracy, it considered that the
plaintiff was not right either, because the plaintiff omitted income and
incurred in a punishable conduct that makes the penalty for inaccuracy of
article 647-1 of the ET applicable.
Appeal
The
plaintiff appealed the judgment of first instance, reiterating the arguments of
the complaint and adding the following (fls. 307 to
339):
The Court
violated article 170 of the CCA and its right to due process, because despite
the fact that in the supporting documentation it accredited each comparability
requirement as required by article 7 (num. 7, lit. B) of Decree 4349 of 2004,
and justified the absence of internal comparables, the Court did not specify
the legal basis and the evidentiary assessment that led it to consider that the
CUP method was the appropriate one, and not the TNMM method applied by the
plaintiff.
He also
stated that the Court limited itself to transcribing sections of the contested
act, vitiated by false reasoning, and therefore failed to note that the
transaction between the plaintiff and its related party consisted of the former
selling thermal coal to the latter, and the latter remaining free to resell it
at its own risk abroad.
The
applicant cannot be forced to use the CUP method, which is not based on the
profitability of the business, but on a market price at a time after the goods
were traded. It added that its related party is an essential part of the coal
production and marketing chain, insofar as it is responsible for the resale of
the product to the final consumer, the supply of the asset, delivery delays,
knows the needs of the customers and the types of coal required. Therefore, it
is not true that the work of that company is minimal and that it is the
complainant who must obtain a higher profitability in order to justify the
modification of the chosen method. It reiterated that the CUP method is not
applicable because it is not based on comparable data since it does not take
into account the terms of negotiation, the forward price contracts and the
distribution of the risks assumed by each party to the transaction.
He stated
that the profitability of the taxpayer was adjusted to that obtained by
independent companies, functionally and objectively comparable, which were part
of the sample of the price study developed under the TNMM method, in such a way
that the principle of full competition was respected, which undermines the
Court's thesis that the sales price of the plaintiff with its related party
abroad was much lower than the internationally agreed.
He stated
that the average price of the official liquidation, which the Court endorsed (US$88.14),
does not take into account the economic reality of the taxpayer nor the price
that the Ministry of Mines and Energy established that year for large companies
in the sector, and which is much lower than the one stated by the defendant,
which violates the principles of legality and equality.
With
respect to the sanction imposed, he stated that it is not based on a clear and
thorough investigation by the Administration, since it takes the information
from a database - McCloskey - that does not adjust to the economic reality of
the plaintiff. The above shows a clear difference of criteria between the
parties, arising from the defendant's lack of knowledge of the applicable law
and the use of irrelevant elements of evidence, as well as the misrepresentation
of the transaction on the basis of unrealistic assumptions, such as that its
related party should receive dividends without being a shareholder of the
plaintiff.
Arguments
in conclusion
The
plaintiff insisted on the points made in the appeal and the defendant in turn
reiterated the arguments of the defence.
The Public
Prosecutor's Office remained silent at this stage of the proceedings.
CONSIDERATIONS
OF THE COURT
1. The Chamber must decide on the nullity
of the contested act in accordance with the precise grounds of appeal raised by
the applicant against the judgment under appeal.
Specifically,
it is for the Chamber to determine whether the amendment of the income tax
return, based on the change of transfer pricing method proposed by the defendant,
whether the transfer pricing penalty regime was violated due to the lack of a
prior audit of the DIPT and the supporting documentation, and whether the
penalty for inaccuracy derived from the reduction of the tax loss is
appropriate.
2. In relation to the applicable method
for determining the price or profit margin of the controlled transaction, the
applicant claims that the TNMM method is the most appropriate method for
determining compliance with the arm's length principle in its operation of
selling thermal coal to its related party abroad, since it meets the
requirements laid down in Article 7(7) of Decree 4349 of 2004 to be considered
the most appropriate method. Furthermore, it argues that the regulation does
not establish any particular preference or order in the application of transfer
pricing methods.
For its
part, the Administration argues, based on its analysis of the structure of the
transaction, that the CUP method is the most appropriate method for determining
the market price, because in the world coal trade there are public price lists
applicable to a standard quality of coal, with reference to which the price can
be directly determined. To this end, it added that, depending on the assumption
of risk involved in the transaction, the foreign related party should obtain a
lower return and the plaintiff a higher return, a situation which is not
reflected in the method selected by the latter.
2.1. It
should be made clear that the first legal problem raised is related to the
selection of the most appropriate transfer pricing method for the controlled
transaction, i.e. the sale of thermal coal from the plaintiff to its foreign
affiliate, and not, as the defendant argues, in the sense of understanding that
between the related parties an intermediation or commercial agency operation
has been executed, for which the plaintiff should recognise
a 5% commission to its affiliate. This would lead not only to a distortion of
the contracts and their actual execution, but also to an inconsistency in the
application of the transfer pricing regime, since it would be recharacterising the controlled transaction - a sales
operation - as an intermediation, which in turn would lead to the questioning
of the method used and the price of the goods used in the sales transaction,
referring to a transaction between independent parties, i.e. between the
plaintiff and the final customers, since the related party would remain as a
commission agent in relation to its relationship with the plaintiff, in the
terms set out in the defendant's act.
3. The Chamber emphasises
that, as stated in the judgment of 22 February 2018 (exp. 20524, CP. Julio
Roberto Piza Rodríguez), the objective of the
transfer pricing regime is that, in the determination of income tax, the
taxpayer that carries out operations with foreign economic partners quantifies
its income, costs and deductions, at values that are comparable with those
determined between independent parties, so that market prices are used, taking
into account the existing relationship, in accordance with the provisions of
article 260-1 of the ET, in force at the time of the facts.
In order to
demonstrate compliance with the arm's length principle, the taxpayer must
comply with the formal duty to file the informative declaration of the
operations carried out with foreign economic partners or related parties, and
to prepare the supporting documentation regulated in article 260-4 of the same
law, which acts as support for the information reported in the informative
declaration.
In order to
determine compliance with the arm's length principle, article 260-2 of the ET
(under the wording of Law 788 of 2002), established the methods for determining
the price or profit margin of operations with related parties, among which it
listed: comparable uncontrolled price, resale price, added cost, profit split,
residual profit split and transactional profit margins of the operation. In
addition, the same provision indicated that the price or profit margin in
transactions between related parties could be determined by applying any of the
methods listed, for which the most appropriate one should be taken into
account, in accordance with the characteristics of the transactions analysed.
In relation
to the specific information that forms part of the supporting documentation,
article 7 of Decree 4349 of 2004, in force at the time of the facts,
established that the documentation and information to be kept, insofar as it
was compatible with the type of operation under analysis and with the method
used, should include the method used by the taxpayer to determine the prices,
amounts of consideration or profit margins, indicating the criteria and
objective elements considered to conclude that the method used is the most
appropriate in accordance with the characteristics of the type of operation
analysed.
In
addition, the same provision stipulated that, in order to determine that the
method used was the most appropriate, it should be the one that best reflects
the economic reality of the type of transaction, be compatible with the
business and commercial structure, have the best quantity and quality of
information, provide the highest degree of comparability and require the lowest
level of adjustments.
3.2. For
their part, the OECD Transfer Pricing Guidelines (1999) noted on the selection
of methods, that they allow determining whether the terms of the commercial or
financial relationships between associated enterprises are compatible with the
arm's length principle, that no single method is useful in all circumstances,
nor should the application of any particular method be disregarded (paragraph
1.68). These Guidelines also point out that it is not possible to establish
specific rules covering all cases, and that in general, parties should try to
reach a reasonable compromise, bearing in mind the imprecision of the various
methods, the preference for higher degrees of comparability and for a more
direct and closer relationship to the transaction (para. 1.70).
In
particular, regarding the CUP method, which falls within the traditional
methods, the cited Guidelines indicated that it consists of comparing the price
charged for assets or services transferred in a controlled transaction with the
price charged for assets or services transferred in a non-controlled
transaction in comparable circumstances (para. 2.6.). For these purposes, a
non-controlled transaction is comparable to a controlled transaction for
purposes of applying the CP method if: (i) none of
the differences (if any) between the two transactions being compared, or
between the two undertakings involved in those transactions, is likely to
materially affect the free market price; or (ii) sufficiently precise
adjustments can be made to eliminate the effects of those differences (para.
2.7.). It may be difficult to find a transaction between two independent
companies that is sufficiently similar to a controlled transaction that there
are no differences that have a material effect on the price. For example, a
minor difference in the assets transferred could affect the price, even though
the nature of the business activities may be sufficiently similar to generate
the same profit margin. Where this is the case, some adjustments are
appropriate, and the extent and reliability of these adjustments will affect
the reliability of the analysis performed under the CUP method (paragraph 2.8).
In
addition, in considering whether controlled and uncontrolled operations are
comparable, the effect on prices of other broader functions of the
undertakings, and not just the degree of comparability of the product, must be
considered. As with any other method, the relative reliability of the CP method
is conditional on the degree of precision with which adjustments can be made to
achieve comparability (paragraph 2.9.). If precise adjustments cannot be made,
the reliability of the CUP method would be reduced and it would be necessary to
supplement it with other, less direct methods, or, ultimately, to use these
other methods (paragraph 2.11.).
Now, while
traditional methods may be the most straightforward way to establish whether
conditions in commercial and financial relationships between related parties
are conducted on an arm's length basis, the complexities of real business life
may pose practical difficulties in the application of traditional methods. In
these exceptional situations, when there is insufficient information available,
or the information available is not of sufficient quality to use a traditional
method, it may be necessary to define whether and under what conditions other
methods can be used, i.e. transactional utility methods, of which the TNMM
method is one (paragraph 2.49).
In short,
although the CUP method may be the most direct means of determining whether the
price set in a transaction between related parties corresponds to the market
price between independent parties in comparable transactions, it is not always
possible to find means of comparison that ensure that there are no significant
differences that could materially affect the determination of the price, or
that such differences cannot be accurately calculated and adjusted, in terms of
the characteristics of the good, the functions performed by the parties,
including the risks assumed, and the terms of negotiation. In such cases, it
may be necessary to conduct the comparability analysis using a transactional
utility method to determine whether the transaction under analysis ensures
compliance with the arm's length principle, in which case the TNMM method may
be more appropriate. Under this method, special emphasis is placed on the
functions performed by the parties and the utility indicators may be less
affected by differences in the goods and conditions of the transaction.
4. In view of the above, in order to
establish whether the change of method claimed by the Respondent was
appropriate, and thus the adjustment raised in the official assessment, the
Chamber considers the following facts to be proven:
1. After
filing the income tax return for the taxable year 2007, the plaintiff submitted
the corresponding DIPT, in which it reported net income operations for the sale
of inventories produced for $63.804.872.000 (fl. 14 Volume II).
2. When
requested by the defendant, the plaintiff submitted the transfer pricing study,
in which it stated that (fls.114 A 253 Cuaderno Corrección Demanda):
a. It recorded income operations for the
sale of inventories produced (sale of thermal coal produced by the company
itself) with its foreign affiliate Glencore International AG. In the specific
case, the plaintiff, in administrative and judicial proceedings, affirmed that
the contract signed with its foreign affiliate was for the supply of coal.
b. Within the review of the attributes of
the relevant transactions to carry out the comparability analysis, it included
the "risks" of market, credit, interest, exchange rate, inventory,
compliance, supply, force majeure, environmental and country (fls. 157 and 161 of the Complaint Correction Notebook).
c. The method selected as appropriate was
the Transactional Transaction Profit Margins, TU (f. 115 Claim Correction
Booklet). To apply it, it chose the profit indicator "Operating income
over total cost" (OITC), defined as operating profit over total costs and
expenses.
d. The party to be examined was the
Complainant itself (fl. 114) and the comparables selected were fifteen
companies located abroad (fl. 165 Cuaderno Corrección Demanda).
e. The operating margins of the selected
comparables were subjected to economic adjustments for accounts receivable,
inventories and accounts payable, and the interquartile range was narrowed to
increase the reliability of the comparability analysis. The result was (fl. 115
Demand Correction Booklet):
Statistical
measure Adjusted Range
Lowest
value 4.352
Lower
quartile 6.534% Median
Median
16.653% Median 16.653% Upper quartile
Upper
quartile 25.197% Maximum value
Maximum
value 46.909%.
f. The margin determined for the
appellant for the period under examination was 22.234%, i.e. within the
adjusted range.
4.1. Now,
taking into account that the appellant's arguments are aimed at demonstrating
the validity of the TNMM method over the one determined by the respondent in
the official liquidation (CUP method), on the basis of which the latter made
the adjustment of the income operation analysed with the foreign related party,
the first thing to mention is that the rule in force at the time of the facts
did not establish any preference for the application of one or the other method
of those listed in article 260-2 of the ET (in force at the time of the facts).
In fact,
the literal wording of the rule shows that the legislator referred to the fact
that the taxpayer "could" determine the price or profit margin by
"any" of the methods listed in article 260-2, the only orientation
being "which one is more appropriate according to the characteristics of
the transactions analysed". The legislator did not foresee an order of
priority in the methods, nor did it specify the cases in which each one was
applicable, so that for the tax year under discussion, the Colombian rule left
the taxpayer free to choose the method, as long as he demonstrated the reasons
why the one selected was the most appropriate for the particular circumstances
of the transaction analysed.
Therefore,
under the assumption of the power granted by the rule to the taxpayer to choose
the most appropriate method, it must be analysed whether the plaintiff
demonstrated the circumstances for which the TNMM method was the most
appropriate for its particular transaction. In this regard, the taxpayer
submitted the following information in its transfer pricing study (f. 113 et
seq. in the Complaint Correction Notebook):
1.
Corporate purpose - Carbones El Tesoro S.A.: CET
belongs to the Glencore group and operates as a producer and exporter of
thermal coal in Colombia. Its corporate purpose includes, principally, the
prospecting, exploration, exploitation, production, transformation,
acquisition, sale, marketing and transportation of coal and any other mineral
substance related to coal. Its principal place of business is in the city of
Barranquilla. The company exports coal extracted from the El Tesoro mine,
located in the municipality of La Jagua de Ibirico,
Department of Cesar, which is transported to the yards of the Sociedad Portuaria de Santa Marta and then loaded onto ships bound
for international markets. The company operates exclusively within Colombia and
has no international operations or offices. (fl. 145 Cuaderno
Corrección Demanda).
2. Business strategy: Since the start of
mining activities in 2007, CET does not have its own marketing infrastructure
to penetrate the existing market, nor any capacity to increase its market
share. Its operational structure responds to its profile as a limited risk
producer.
In order to
achieve rapid growth in production and sales, and with the objective of
achieving cost effective growth in planned production, CET has adopted the
strategy of utilising Glencore's globally recognised
marketing expertise and infrastructure. CET is not expected to extend any
credit terms to end customers and is therefore considered to have zero exposure
risk. All credit risk is borne externally by Glencore and therefore CET does
not assume any risk related to debt collection or the processing of negotiable
instruments. CET has not incurred any additional start-up or development costs,
as the products are marketed immediately after production. As a production
service provider, CET does not directly manage or assume market risk (fl. 146
Correction to Complaint).
3. Scope of operations: CET's operational
network is limited to operations at the El Tesoro mine. The company's expertise
is mainly in technical areas of coal production, these being the key areas
along with logistics and finance. The company has no direct experience or
networks in the market area in Colombia or globally (fl. 148 Cuaderno Corrección Demanda).
4. Marketing and sales: CET's
responsibility is to plan production at the El Tesoro mine, coordinate the
receipt of coal purchased from local suppliers and transport it to Santa Marta,
where it is loaded onto vessels contracted by Glencore. Thanks to the
efficiency at the port and the high level of coordination between supplier and
trader, Glencore can guarantee quality and reliability to its customers. CET
prepares regular production, transportation and inventory forecasts for
distribution to Glencore, reporting on coal availability to ensure the
timeliness of vessel arrival.
Based on
its experience and knowledge of the market, Glencore decides on the sales
strategy for the coal it purchases from CET (fl. 155 Statement of Claim).
5. Distribution and delivery logistics:
The planning, coordination, contracting and procurement of ship insurance is
the responsibility of Glencore. All logistics related to the delivery of coal
to customers from Carbosan is the responsibility of
Glencore. All risks related to the coal are transferred to Glencore once the
coal has been loaded onto the vessels (fl. 156 Correction to Complaint).
6. Quality control: CET is responsible for
ensuring that the coal loaded onto the vessels complies with the specifications
agreed with Glencore's customers (fl. 156 Correction Statement of Claim).
7. Comparables search strategy - internal
comparables and external comparables: It indicated that it does not have
internal independent comparable transactions because it does not sell thermal
coal to independent third parties, and that its related company abroad does not
buy the same type of coal from unrelated companies in Colombia. Likewise, it
indicated that the information in the Superintendencia
Financiera is not sufficient to guarantee
comparability (fl. 165 Cuaderno Corrección
Demanda).
8. Adjustments: It indicated that by using
the TNMM method, it only had to make routine adjustments to balance sheet
accounts, accounts receivable, inventory and accounts payable (fl. 115 Cuaderno Corrección Demanda).
9. Functional analysis and assumption of
risks (f. 161 Complaint Correction Book):
Glencore
CET Risks
Market risk
- price X
Market risk
- volume X
Market risk
- price/volume (long term) X
Credit risk
X
Interest
risk X
Country
risk X
Exchange
Rate Risk X
Inventory
risk (during storage) X
Inventory
risk (from delivery at port) X
Compliance
risk - quality X
Compliance
risk (delivery term to port) X
Compliance
risk (delivery term from port) X
Supply risk
X
Force
majeure risk X
Environmental
risk X
Glencore CET
functions
Operational
- distribution X
Operational
- production X
Strategic -
production X
Strategic -
sales X
Intangibles
Glencore CET
Know How
Sales processes X
Sponsorship
(know how production processes) X
10. Selection of the TNMM method: It
indicated that the selection of the most appropriate transfer pricing method is
based on the determination of the method, which under the facts and
circumstances of the transactions under review, provides the most reliable
measure to determine the correct application of the arm's length principle in
transactions between related parties. To determine the appropriate choice of
method, the Colombian transfer pricing regulations establish the following
factors to be taken into account: (a) that it is the one that best reflects the
economic reality of the type of operation; (b) that it is compatible with the
corporate and commercial structure; (c) that it has the best quantity and
quality of information; (d) that it contemplates the highest degree of
comparability; and (e) that it requires the lowest level of adjustments (fl.
162 Cuaderno Corrección Demanda).
11. Application of the CUP method: It
indicated that in relation to the possibility of using external comparables, it
was not possible to find comparables for transactions between unrelated
entities that met the comparability criteria for using the PC. The possibility
of using international coal market benchmark prices was ruled out as the above
comparability requirements - (a) best reflecting the economic reality of the
transaction; (b) compatible with the business and commercial structure; (c)
with the best quantity and quality of information; (d) providing for the
highest degree of comparability; and, (e) requiring the lowest level of
adjustments - were not met, and the possibility of making adjustments to
increase comparability might not result in appropriate conclusions. This is a
different stage in the production chain as sales are not made to the final
customer (fl. 162 Corrective Action Booklet).
4.2. On the
occasion of the Ordinary Injunction No. 1-00-211-230-0003335 of February 4,
2010 (fl. 73 Volume I) in which the DIAN requested "How did you determine
the unit sales price per metric ton that is detailed in each invoice", the
plaintiff explained (fl. 161 Volume I):
In order to
determine the unit selling price per metric tonne of
coal, variables are considered such as: (i) the
quality of the coal (calorific value, sulphur,
humidity, volatile material, HGI, etc.) required by the final consumer, (ii)
the type of vessel that can reach the country of final destination (cape, panamax, handymax, etc.), and
(iii) the period of delivery of the coal (spot sales vs. long-term contracts).
Based on
these variables, the possible ports of shipment of other exporters that meet
the required quality characteristics are identified and an analysis is carried
out to establish who can supply the type of coal required by the final consumer
abroad. Subsequently, an analysis is made of the ports that meet the required
specifications to load the vessels that will be received by the final consumer
at the port of destination abroad. And finally, an analysis is made of the
availability of coal inventories that these competitors have in order to
determine which of them will be able to offer coal to the final consumer who is
demanding it in the market.
Once the
competitors and the ports of shipment have been defined, the price of maritime
freight from each of these ports to the destination port abroad is analysed. In
this way, the variables that allow the exporter to set the price at which he
can sell coal to a specific customer abroad are available. This price is
compared with the other possibilities of selling the coal to other consumers
and it is determined whether the price to be offered maximises
the company's profitability.
The
ordinary request also asked "What criteria do you take into account to penalise or decrease the revenue or to grant a premium on
the sale of coal" (fl. 73 Volume I), to which the plaintiff clarified (fl.
161 Volume I):
The
calorific value of coal measured in Btu/Lb is the
criterion taken into account to penalise or award a
premium on the sale of coal. The calorific value is the amount of energy that
coal can give off in an oxidising chemical reaction.
The higher the calorific value of the coal sold compared to the contractual
calorific value, the higher the premium and vice versa.
In the case
of CET's coal sales, the typical calorific value is in the order of 12,400 Btu/Lb and based on the quality certificates issued by an
internationally recognised independent laboratory, the premium or penalty is
calculated according to the following formula (...).
4.3. Now,
in the official liquidation under discussion, the defendant concluded, based on
the information included in the supporting documentation submitted by the
plaintiff, that (fl. 71):
a. CET is the producer of that good which
arrives at the port of the end user (consumer).
b. CET establishes very clearly that the
ownership of the coal will pass to the buyer when the ship leaves Colombian
territorial waters, it is clear that in all that previous stage the risk is
being assumed by CET, which coincides with the reality of the operation.
c. CET is the one who must assume and
guarantee the quality of the exported product, as defined in the contract
signed between Glencore and CET.
d. CET is the one who defines the annual
production quantity, according to its mining planning submitted to the Ministry
of Mines and Energy.
e. CET is the one who transports the coal
from its mines to the port of shipment, performing and assuming quality tests
in each of them, until the product is shipped to its final destination.
Therefore,
if CET is the one who exploits a natural product, determines the amount of coal
to be produced in the year, guarantees the quality of the product, assumes the
risk of transporting the coal from the point of exploitation until the product
leaves Colombian territorial waters, has a high capital impact both in
investment and operation, among other risk factors inherent to the operation,
it should be CET who should have a higher return of profitability, since an
independent operator would expect that higher profitability.
It went on
to state that the CUP method was the most appropriate method for analysing the
sale of thermal coal:
(... ) due
to the structure of the operation' and warned that, because 'world trade in
this product is driven by the different price lists issued by public databases
with a standard coal quality at a given port and taking into account the
different variables that can influence the price of the product, it is
considered that for the present case it is possible to take these price lists
as a basis for determining the price at which CET sells coal to Glencore;
especially when it should have as a return a minimum margin and CET should
obtain a higher profitability, a situation that is not reflected in the method
selected by the taxpayer as was the transactional margin of profit; and taking
into account that this method would be applicable if the market conditions were
not adjusted to the situation of the product sold, if there were no public
prices that could be applied to the product sold, if the product sold differed
significantly from the public quotation (fl. 72).
As a
consequence of the above, the defendant explained its methodology to increase
the revenues from the sale of thermal coal and proceeded to adjust the price of
each invoice, based on the international average price per ton of coal for the
months of October to December 2007, indicated in the McCloskey database for
coal of 11,300 Btus (British thermal unit); and to that result it applied the
5% commission, which in its opinion should be collected by the foreign
affiliate, thus adjusting the price of coal sales in each invoice.
As to the
use of the public price database, the defendant stated (fl. 72):
Throughout
this brief we have been demonstrating the reasons why we move away from
accepting the method selected by the taxpayer which was the "transactional
of TU utility" and we consider the method to apply is the comparable price
not controlled with existing databases either Platts, McCloskeys
on the grounds that the price quoted corresponds to a coal with similar
characteristics, do not require adjustments since the price given is in
Colombian Port, with a minimum BTU of 11,300, similarly is the international
reference price that would be the first called to analyze.
Even though
we know that the price of these exchanges is not given in terms of the final
client, it is true that it is the basis for negotiation between the final
consumer and the market agent, inferring from this that the price at which the
client (consumer) is invoiced is even much higher, due to this other stage of
intermediation, which is not publicly known. Therefore, we start from the
publicly quoted price and recognise Glencore's
intermediation percentage, to which we assign 5% and the resulting difference
is the price that should be recognised as the market price and which we
consider complies with the arm's length principle and for Colombia the
independent operator principle.
4.4. In
accordance with the above, and in accordance with the information provided by
the plaintiff in the supporting documentation, the Chamber finds that the
plaintiff set out in detail the economic reality of its operation of
exploitation, production and sale of coal to its related party abroad,
including the business and commercial structure, and the activities that each
of the parties involved carried out. From this, it can be seen that the
plaintiff operated as a producer with limited risks insofar as the risks
assumed were limited to those related to its functions of exploitation, production
and transport from the mine to delivery at the port, so that all those risks
related to the functions of negotiating the price with the final customer,
invoicing, collection, commercialisation, marketing,
marketing, sales and distribution of the coal to the final customer, and the
sale of the coal to the final customer were limited to those related to its
functions of exploitation, production and transport from the mine to delivery
at the port, collection, commercialisation,
marketing, logistics and transport - including the contracting of vessels and
the respective insurances - from the port of the vessel in Santa Marta to the
delivery to the final client, were assumed by the foreign affiliate, since it
was the one with the necessary infrastructure and expertise for such work, as
indicated in the supporting documentation.
4.5. Considering the supporting documentation
submitted by the applicant, the Board notes that the applicant presented the
criteria used to eliminate possible comparables on the basis of the functions
performed. To this effect, it eliminated companies whose function in addition
to coal mining was the performance of other activities such as electricity
generation and/or distribution, or gas exploration and/or production, companies
whose mining activity corresponded to products other than coal, companies that
leased coal mines, or that were engaged in the oil industry without segmenting
their financial statements by activity, companies that were in Chapter 11, and
companies that did not have insufficient descriptive information about the
business (fl. 167 Cuaderno Corrección
Demanda).
This
demonstrates that the plaintiff undertook a functional level analysis to
support that, under the TNMM method, the information that was available and
used presented a high level of comparability that was more suited to its
particular situation. In the same vein, in its functional analysis, the
complainant presented aspects related to the company's management, production
planning, mine contracting services, coal mining operations and the way it
transported coal. He further stated that his responsibility was to plan the
production of the El Tesoro mine, coordinate the receipt of coal purchased from
local suppliers and transport it to Santa Marta, where it was loaded onto
vessels contracted by his company. In addition, it included information about
the market and sales, where it stated that it had not carried out any
marketing, sales or distribution activities in relation to the exported
products, given that 100% of the sales were made to its related party abroad,
the latter being the one who decided the sales strategy. It added that the distribution and logistics
of the delivery from the port in Santa Marta was the responsibility of its
related party and the risks related to the coal were transferred to it once the
coal was loaded on the vessels (fls. 153 to 156 of
the Correction to the Complaint).
4.6. On the other hand, as stated in legal
ground no. 3, the CUP method compares the price of goods or services agreed
between independent parties in comparable transactions. Its use implies that
the economic characteristics of the transactions being compared must be
analysed to determine a high degree of comparability. Thus, the CUP method is
not the most appropriate when the conditions of the good are not sufficiently
similar, or when the functions, including the risks assumed by the parties,
cannot be adjusted in the particular case. When using commodity price lists (in
a recognised and transparent commodity market), relevant circumstances such as
the nature of the commodity, volume discounts, timing of transactions, terms of
insurance, terms of delivery, and currency, among others, must be considered.
In this case, the agreements and contracts that fix the terms of these factors
are contrasted with those of third parties, in order to verify whether they
coincide with those that would have been agreed in comparable circumstances.
Under these
premises, the Chamber finds that the defendant, by using the CUP method,
applied a database in which the price, even though it referred to a good
similar to the one traded - thermal coal - and to the Btus of this, was not
sufficient to prove that the prices set in said database were for transactions
in which the parties assumed similar functions, risks and negotiation terms as
those of the transaction analysed. Nor is there any analysis of the
appropriateness or otherwise of reasonable technical economic adjustments in
the application of that method, such as differences in contractual terms, the
level of the distribution chain, the geographic market, the date, the
associated intangible property, exchange rate risks, realistic alternatives of
buyers, among others, which could eliminate the differences between the
transactions compared, and make the CUP method the most appropriate.
All the
factors referred to in the previous paragraph had a direct bearing on the price
determined in the thermal coal sales transaction between the related parties,
since, otherwise, the McCloskey price list would end up setting a price
equivalent to that which would have been obtained in sales to final customers,
without taking into account that the allocation of functions and risks must
attribute a value to the functions performed by Glencore in the controlled
transaction. This is because the analysis must be carried out with respect to
the price of sale to an entity that then resells the coal to the final
customer, which assumes significant risks, not only of invoicing, collection
and maintenance of the customer with a low portfolio risk as the defendant
claims.
Indeed, the
Chamber notes that the Defendant assumes the allocation of risks in the coal
sales transaction, but in applying the McCloskey price list does not set out
the reasons why it considers that the price set therein is the one that effectively
reflects the risk allocation raised, and whether it is identified with the
conditions fixed between CET and its related party, but merely states that,
since it is the plaintiff who bears most of the risks, it should receive a
higher remuneration, and that, since the sale price is lower than the price
quoted on a public market, the price indicated in the McCloskey database should
be used.
Furthermore,
the Board notes that the defendant did not set out in detail the reasons why it
considered that the method selected by the applicant (TU) was not the most
appropriate for the controlled transaction, but merely stated that this method
would be applicable if the market conditions did not match the situation of the
product sold, if there were no public prices that could be applied to the
product sold, and if the product sold differed significantly from the publicly
traded product.
4.7. In these terms, the Chamber considers that
the applicant was not obliged to use the CUP method because it demonstrated the
reasons why the TNMM method was more appropriate according to the
characteristics of the transaction analysed, and the defendant did not refute
the reasons for applying the TNMM method, nor did it question the information
in this respect contained in the supporting documentation to support the
selected method.
For the
reasons set out above, given that the plaintiff demonstrated compliance with
the criteria for choosing the method required by the applicable regulations and
compliance with the arm's length principle, the Chamber considers that the
official assessment of the income tax submitted for the taxable year 2007 is
not admissible.
The appeal
charge is upheld.
5. The Chamber will be relieved from
analysing the other charges of appeal, insofar as, as stated throughout this
ruling, the respondent act officially settled the income tax on the basis of an
improper modification of the method selected to fix the transfer price of the
plaintiff, which constitutes sufficient reason to declare it null and void.
6. Finally, the Chamber will refrain from
imposing costs in the second instance, since there is no evidence of bad faith
or recklessness in the defendant's conduct, which would allow for such an
imposition, in accordance with article 171 of the CCA.
In view of
the foregoing, the Fourth Section of the Contentious-Administrative Chamber of
the Council of State, administering justice in the name of the Republic of
Colombia and by authority of the law,
ADJUDGES
1. Revoke
the second paragraph of the operative part of the judgment appealed against,
handed down on 27 March 2015 by the Administrative Court of Atlántico,
Decongestion Subsection. In its place
SECOND: To
declare the nullity of the Official Review Settlement 022412011000132 of 29
April 2011 by which the Settlement Management Division of the Barranquilla
Regional Tax Directorate of the National Tax and Customs Directorate - DIAN
modified the income tax return for the taxable year 2007 and imposed a penalty
for inaccuracy.
By way of
reestablishment of rights, declare the finality of the income tax return of
CARBONES EL TESORO S.A. for the taxable year 2007.
2. For the rest, to uphold the judgment
under appeal.
3. Without
an order for costs in the second instance.
4. Recognise Dr.
Mauricio Andrés Del Valle Chacón as a person
authorised to act on behalf of the defendant, in accordance with the power of
attorney contained in folio 451 of the file.
Copy,
notify, communicate and return the file to the court of origin. Comply with
This order
was adopted at the meeting of the day.
(Signed
electronically)
MILTON
CHAVES GARCÍA
President
(Signed electronically)
STELLA JEANNETTE CARVAJAL BASTO
(Signed electronically)
MYRIAM STELLA GUTIÉRREZ ARGÜELLO (Signed electronically)
JULIO ROBERTO PIZA RODRÍGUEZ