COUNCIL OF STATE
Adviser rapporteur: MILTON CHAVES GARCÍA
Bogotá D.C., fifteenth (15) July two thousand and twenty-one (2021)
Case number: 25000-23-37-000-2012-00182-02(20641)
Plaintiff: SONY MUSIC ENTERTAIMENT COLOMBIA S.A.
Defendant: DIRECCIÓN DE IMPUESTOS Y ADUANAS NACIONALES - DIAN (National Tax and Customs Directorate)
The Chamber decides the appeals lodged by both parties against the judgment of 4 September 2013, handed down by the Administrative Court of Cundinamarca, Fourth Section, Subsection "A", which partially granted the claims in the application and refused to award costs.
The operative part of the judgment under appeal provided as follows:
"FIRST: The following administrative acts issued by the UAE DIAN on behalf of the company SONY MUSIC ENTERTAINMENT COLOMBIA S.A. are declared partially null and void, only with regard to the imposition of the penalty for inaccuracy:
(a) Official Revision Settlement No. 31241211000015 of 24 March 2011, whereby it amended the income tax return for the taxable year 2007 filed by the aforementioned company.
b) Resolution No. 900075 of 27 April 2012, by which the (sic) unfavourably resolved the appeal for reconsideration against the Official Revision Settlement No. 31241211000015 of 24 March 2011.
SECOND: By way of reestablishment of the law, declare that the aforementioned company is not obliged to pay the penalty for inaccuracy that was assessed in the administrative acts accused.
THIRD: The other claims in the application are denied [...].
FIFTH: No order as to costs [...]'.
On 18 April 2008 the applicant filed her income tax return for the taxable period 2007 in which she determined a credit balance of $408,328,000. Subsequently, on 7 July 2008, she filed her individual transfer pricing information return for the aforementioned period, in which she declared income operations for $1,485,316,000 and expenditure operations for $7,291,659,000.
On 19 June 2009, the applicant submitted to the DIAN the supporting documentation for its transfer pricing declaration. Subsequently, on 3 July 2009, the applicant corrected its transfer pricing information return.
On 5 November 2009, the applicant submitted to the DIAN corrections to its supporting documentation, based on the aforementioned correction of its transfer pricing information return.
On 29 March 2010, the defendant issued Special Ruling 31238201000021 in which it proposed to amend the plaintiff's 2007 income tax return in consideration of the information submitted for transfer pricing, in the sense of increasing income by $48,756,625, and reducing costs by $1,963,234,941. The effect of the aforementioned adjustment is a tax value of $232.633.000 and a penalty for inaccuracy of $372.213.000.
On June 28, 2010, the plaintiff responded to the special requirement in which she explained that she filed a correction of the income tax return for the 2007 taxable period on June 25, 2010, because she accepted the correction suggested by the DIAN regarding the income operations, but did not accept the changes suggested regarding the expenditure operations.
On 24 March 2011, the defendant issued the Official Revision Settlement 312412011000015 in which it disregarded costs and expenses for $1.963.235.000 originated in the outgoing operations reported by the plaintiff in her individual transfer pricing declaration, so that on 30 May 2011 the plaintiff filed an appeal for reconsideration against this act. The DIAN issued Resolution 900.075 of 27 April 2012 in which it confirmed in its entirety the official assessment referred to above.
SONY MUSIC ENTERTAINMENT COLOMBIA S.A., as plaintiff, and in the exercise of the remedy of annulment and restoration of rights, brought the following claims :
"1.1 Declare the total nullity of the Official Revision Settlement No. 312412011000015 of 24 March 2011, whereby the Settlement Management Division of the Regional Tax Directorate of Large Taxpayers of the National Tax and Customs Directorate (DIAN) officially amended the income tax return filed by the Company for the taxable year 2007.
1.2. declare the nullity of Resolution No. 900.075 of 27 April 2012, by which the Subdirectorate of Legal Resources Management resolved the appeal for reconsideration lodged against the administrative act referred to in the previous paragraph, insofar as it confirmed it in its entirety.
1.3. As a consequence of the above, restore my client's rights by declaring that (i) there is no need to modify the income tax declared by her for the taxable year 2007, (ii) in no case is there any need to impose a penalty for inaccuracy, (iii) her private income tax assessment for the taxable year 2007 is final, and (iv) ordering the filing of the file that has been opened against the Company in this regard.
1.4. Declare that SMEC is not liable for the costs incurred by the DIAN in relation to the administrative proceedings, nor for the costs of these proceedings".
The applicant invoked as violated the following norms:
- Articles 29 and 95 of the Political Constitution.
- Articles 260-1, 260-2, 260-10, 647, 692, 703, 707, 711, 714, 724, 742, 745 and 746 of the Tax Statute.
- Articles 2 and 35 of the Contentious Administrative Code.
- Articles 177, 179 and 187 of the Code of Civil Procedure.
- Article 8 of Regulatory Decree 4349 of 2004.
The concept of infringement is summarised as follows:
He alleged that the contested acts are contrary to the opinion of the Deputy Director of International Taxation of the DIAN, who explained in an academic article, that the expression "shall be considered" of Article 260-2 of the Tax Statute is a presumption, which is not absolute as it can be debatable. Consequently, the burden of proof regarding irregularities in the transfer pricing information lies with the DIAN, so there is a clear difference of criteria between the parties.
It indicated that the challenged acts do not prove the existence of manipulation or fraud in the transfer pricing information, so it was not necessary to adjust to the median the outgoing operations that were reported outside the range. In addition, it clarified that it is clear that the outbound transactions were with a related company in the United States, so no price changes were sought to shift tax benefits to a tax haven or a lower tax country.
It pointed out that the principles of the Organisation for Economic Co-operation and Development (OECD) were not applied in the present case by the defendant, which automatically considered that there was manipulation of profits by related companies, and no proof of compliance with the arm's length principle was allowed. Furthermore, it noted that the information return and the transfer pricing documents were not analysed jointly.
He stated that the adjustment of the income tax return established in the acts being challenged is not appropriate, because point 4.1.3 of Chapter 2 of the 2007 DIAN Transfer Pricing Booklet of the DIAN allowed the analysis of the aforementioned issue with respect to itself or its counterpart in order to reflect compliance with the arm's length principle. The analysis of the counterpart was carried out, as the information of the company in the United States is more reliable, there was a policy of the related companies to distribute common expenses, and the possibility of making fewer adjustments to the information.
He explained that having applied the transactional margin method of operating profit with an operating markup on his related company, it was determined that it was within the interquartile range, and therefore the certificate of the tax auditor submitted to the file explaining the operations carried out with his related company should be validated.
He warned that the acts being challenged violate the principle of legitimate expectations, because the 2007 Transfer Pricing Booklet issued by the DIAN allowed the application of the transactional margin method of operating profit with operational markup on its related party abroad, and did not apply the OECD guidelines which establish that transfer prices are not a certain science. Furthermore, they are in violation for not complying with the provisions of paragraph 2 of article 260-1 of the Tax Statute, as they do not evidence a violation of the transfer pricing regime.
He alleged violation of the principle of congruence between the special requirement and the official assessment of revision, because in the latter the defendant explained ten more reasons, different from those of the requirement, and there was no evidence in the challenged acts of a due analysis of the evidence provided. In addition, the acts being challenged are affected by false reasoning, since they make modifications to the 2007 income tax return without taking into account the correction of the informative return and the explanations of the supporting documentation.
He indicated that the DIAN, in proposing the adjustment to the median, did not analyse the particular circumstances of the transactions carried out with his related party, thus showing an erroneous application of article 260-2 of the Tax Statute. In addition, he stated that several of his defence arguments were not resolved by the Administration, and therefore the right to due process was not complied with.
He stated that there was a violation of the right of defence, for not complying with the burden of proof, and for not disproving the veracity of his 2007 return. In addition, the penalty for inaccuracy does not apply in the present case, since the punishable conduct was not proven and there is a difference in criteria.
DEFENCE TO THE CLAIM
The DIAN opposed the claims in the complaint in the following terms:
It explained that although it is true that the 2007 Transfer Pricing Booklet and the OECD guidelines allow the taxpayer to analyse its outbound operations based on those of its counterparty, it is recommended that the taxpayer itself be tested, since it is precisely on the counterparty that the price, profit margin and compliance with full competition must be determined. Consequently, it is clear that in order to use an alternative method, the complainant changed the part tested, so that the information in the supporting documentation is accepted, but not the supplier's analysis.
He pointed out that although the claimant decided to perform the expenditure analysis on the related company abroad, the reason for this decision was not justified.
He clarified that the taxpayer entity did not comply with the request for information in Auto 312412010000002 of 6 December 2010, so it was not possible to accurately determine the costs and expenses incurred. In addition, it did not demonstrate compliance with the independent operator principle and the reasons for changing the information.
He indicated that article 260-2 of the Tax Statute was correctly applied, because since the profit margin was outside the determined ranges, the taxpayer should have proceeded with the technical economic adjustment as indicated by the literal wording of said article. Furthermore, this article does not require proof of price manipulation in order to have the obligation to adjust the values.
He warned that there was no violation of good faith and legitimate trust, since the regulations on transfer pricing and the OECD principles were applied. In addition, there was no violation of the principle of congruence between the challenged acts, since the reasons stated in the official assessment complement the reasons of the special requirement.
He stated that the challenged acts were based on the evidentiary material collected in the administrative process, and there was no false motivation since the acts invoke the norms and the evidence on which they are based. Furthermore, the correction of the information return was considered, because it was the basis for the modification of the plaintiff's income tax return by correctly applying Article 260-2 of the Tax Statute.
It explained that it ruled on all the charges proposed by the plaintiff and that the penalty for inaccuracy was not null and void, because it complied with the provisions of Article 647 of the Tax Statute. In addition, there is no need for an order for costs, as this is a matter of public interest and there is no evidence of reckless conduct.
The Administrative Court of Cundinamarca, Fourth Section, Subsection "A", partially granted the claims of the lawsuit and denied an order for costs. The reasons for the decision were summarised as follows:
It explained that there was no violation of the principle of legitimate expectations, because the OECD guidelines on transfer pricing are not binding in the country, are not legal norms of an international treaty approved by Colombia and are not part of the Colombian legal system. Moreover, the plaintiff was able to defend itself at all stages of the proceedings.
It stated that paragraph 2 of article 260-1 of the Tax Statute does not oblige the DIAN to carry out a new transfer pricing study in order to sanction taxpayers, and the plaintiff did not demonstrate the reasons for the reported values. In addition, the charge of lack of consistency between the special requirement and the official assessment was not upheld.
It clarified that the documentation supporting the transfer pricing declaration can only be submitted once, and there is no possibility to correct it in accordance with article 260-4 of the Tax Statute. Moreover, the corrections allowed under Article 260-10 are not of information, but of form.
He indicated that according to article 745 of the Tax Statute the burden of proof was on the plaintiff, because the Administration already had the supporting information. In addition, article 692 of the Tax Statute is not applicable to the transfer pricing regime, because it refers to other types of tax returns, so the correction of the information should not have been taken into account.
It lifted the penalty for inaccuracy, because according to article 260-10 of the Tax Statute, the information in the supporting documentation must be false, erroneous, incomplete or distorted for the penalty of article 647 of the Tax Statute to apply, but in the present case the DIAN did not question the information provided. Furthermore, the other claims were denied and no costs were ordered, as the issue under discussion is of public interest.
The applicant appealed on the following grounds:
She argued that the Court did not rule on the DIAN's Deputy Director of International Taxation regarding the presumption of Article 260-2 of the Tax Statute, that the DIAN did not prove manipulation or fraud, and did not rule on the application of the OECD guidelines on transfer pricing.
The correction of the transfer pricing documentation was not untimely as it was submitted before the special requirement. Furthermore, the DIAN should have carried out a transfer pricing study itself, in order to be able to challenge the transfer pricing study carried out by the taxpayers, in accordance with article 260-1 of the Tax Statute.
In addition, the supporting information can be corrected based on article 260-10 of the Tax Statute, because there is a penalty for correcting such information and because this rule refers to other formal aspects, so the Court erred in its analysis.
It indicated that article 692 of the Tax Statute was not correctly applied, because the gap that was generated between the initial transfer pricing study and the corrected one should have been resolved in favour of the taxpayer. Furthermore, the transfer pricing declaration is a true declaration, so the correction should have been taken into account.
He explained that article 260-2 has a presumption that can be debated, but the first instance judgment only followed the position of the DIAN without giving any reason for its decision, so it must be determined whether the evidence in the file complies with the arm's length principle.
The Respondent appealed on the following grounds:
It argued that the penalty for inaccuracy is appropriate in the present case, because Article 647 of the Tax Statute penalizes the actions of the plaintiff, since it is recognized that the transfer pricing statement was not adjusted to the median and consequently wrong costs and expenses were reported in the income tax return.
The claimant reiterated the arguments set out in the claim and on appeal.
DIAN reiterated the arguments set out in the appeal.
The Public Prosecutor's Office did not comment.
CONSIDERATIONS OF THE CHAMBER
Following the appeals filed by both parties, the Chamber decides on the legality of the Official Revision Settlement 31241211000015 of 24 March 2011 and Resolution No. 900.075 of 27 April 2012, issued by the DIAN.
Dr. Carvajal Basto, by letter dated 6 July 2021, declared that she was unable to hear the present proceedings in accordance with the provisions of paragraph 2 of Article 141 of the CGP, because in the first instance, in her capacity as Judge of the Administrative Court of Cundinamarca, she had knowledge of the present case.
The second paragraph of Article 141 of the CGP establishes as a cause of impediment the fact that the judge has heard the proceedings or taken any action in a previous instance.
The Chamber observes that the cause of impediment is limited to the fact that the judge, or in this case the magistrate, has carried out or known any kind of action within the same process in a previous instance.
The Chamber finds that the impediment stated is proven, as Judge Stella Jeannette Carvajal Basto heard the proceedings in the first instance, given that she signed the appealed judgment.
Consequently, it accepts the impediment of the State Counsellor Dr. Stella Jeannette Carvajal Basto and separates her from the proceedings.
The legal problem is to determine, for the tax return of the taxable period 2007 of the plaintiff:
(i) Whether it is appropriate to take into account the correction of the transfer pricing information return submitted by the plaintiff and its supporting documentation, and whether the information submitted is sufficient to determine compliance with the arm's length principle.
If the first legal issue is unsuccessful, it should be considered.
(ii) Whether the penalty for inaccuracy is applicable
In the present case, the DIAN, by means of the contested acts, disregards operating expenses of $1,963,235,000 of the plaintiff's income tax return for the taxable period 2007, because it considered that the administrative expenses that the plaintiff paid to its related party in the United States of America (United States) were not adjusted to market prices, which had been agreed with other suppliers.
In order to justify the disregard of the aforementioned expenses, the DIAN took as reference the individual informative declaration of transfer prices (DIIPT) and the supporting documentation initially submitted by the plaintiff, in which it was determined that it was outside the market range. Furthermore, it stated that if the corrections to the DIIPT and the supporting documentation are taken into account, there is no reason to justify that the analysis of administrative expenses should be carried out for the company located abroad.
For its part, the plaintiff considers that the DIIPT and the initial supporting documentation should not have been taken into account, due to the fact that the correction was made in which it is demonstrated that the expenditure operation was carried out at market values, since the related company in the United States should be tested, and not the company in Colombia as was done in the original declaration.
The Tax Statute established two special formal duties as a fundamental part of the transfer pricing regime: the duty to file the individual transfer pricing information return, and the duty to prepare and send the supporting documentation. These formal duties, imposed by law, are intended to enable the administrative control work, as they make it possible to determine whether the taxpayer self-assessed the income tax in compliance with the arm's length principle and, in general, with the requirements of the transfer pricing regime.
Regarding the possibility for taxpayers to correct their DIIPT and supporting documentation, this Chamber ruled in a judgment of 12 November 2020, in which it explained as follows:
"Article 46 of Law 863 of 2003, which amended article 260-10 of the Tax Statute, provided as follows:
"ARTICLE 46. Penalties relating to supporting documentation and the informative declaration. Article 260-10 of the Tax Statute is amended to read as follows:
"Article 260-10. Penalties relating to supporting documentation and information returns. The following penalties shall apply to the supporting documentation and the information return:
A. Supporting documentation (...)
The financial penalties referred to in this Article shall be reduced to fifty per cent (50%) of the amount determined in the statement of objections, if the omission, error or inconsistency is corrected before notice is given of the imposition of the penalty; or to seventy-five per cent (75%) of such amount, if the omission, error or inconsistency is corrected within the two (2) months following the date on which notice is given of the penalty.
B. Informative declaration (...)
1. When taxpayers correct the informative declaration referred to in this article, they shall liquidate and pay a penalty equivalent to one percent (1%) of the total value of the operations carried out with related parties during the corresponding fiscal period, without exceeding the sum of seven hundred million pesos ($700,000,000) (Base year value 2004)". (Underlined by the Chamber)
From the cited provisions it is clear that there is room to impose a sanction in the case of the correction of the individual informative declaration or of the supporting documentation, in the event of errors or inconsistencies in these documents.
On previous occasions, this Section has recognised that it is appropriate to correct the information return and supporting documentation.
However, regardless of whether the correction of the return or of the supporting documentation is punishable, such corrections should be examined by the Administration, in order to determine whether the transactions recorded by the taxpayer with his economic partners were in accordance with the arm's length principle.
In accordance with the above criterion, the correction of the DIIPT and the supporting documentation is appropriate, in accordance with article 260-10 of the Tax Statute. Consequently, the DIAN should have taken into account the correction submitted by the plaintiff of the DIIPT and the supporting documentation, in order to determine whether the transactions with related parties complied with the arm's length principle.
In the present case, it is noted that the plaintiff submitted its DIIPT for the 2007 taxable period in which it determined a total amount of income transactions of $1.485.316.000 and $7.291.659.000 of expenditure. Subsequently, the DIAN by means of Ordinary Request 100-211-230-0002292 of 2 June 2009 asked the plaintiff for its supporting documentation for the DIIPT for the aforementioned period, which was submitted on 19 June 2009.
From the information submitted by the plaintiff, the DIAN, through a communiqué of 9 July 2009, informed the plaintiff that the incoming transaction with her related party in Venezuela was outside the market price range, as well as her outgoing transaction for administrative services with her related party in the United States.
It is clarified that in transfer pricing there must be a tested party, which can be the entity that provides a service or to which a service is provided. The tested party's prices are those that are compared to the prices that independent parties have charged in comparable transactions in order to determine whether the arm's length principle is met.
The OECD Transfer Pricing Guidelines explained that the selection of the tested party should be consistent with the functional analysis of the transaction. In addition, as a general rule, the tested party is the one to which the transfer pricing method can be applied with the greatest reliability, and for which there are the most robust comparables, and therefore the one for which the functional analysis is the least complex and involves the fewest adjustments.
For its part, and replicating what was established by the aforementioned guidelines, the DIAN in the instruction booklet for filling out the individual transfer pricing information return for 2007, explained the following:
"Based on the identification of the operations carried out with related parties, it is necessary to establish which party will be tested in the operation, in principle it could be determined that the party to be tested should be the taxpayer with respect to whom the respective price or profit margin is to be established; however, in some cases, it may be advisable to test the counterparty with whom the operations under study were carried out and this will depend on whether its functions are less complex, it has more and less information and a lower level of adjustment is required". (Emphasis added)
The Board notes that in the original supporting documentation, the applicant carried out the analysis of the company in Colombia (tested party) with respect to the administrative services expense transaction using the transactional operating profit margin method, in which it obtained the following result:
"The table above shows that the interquartile range of adjusted OM ranges from 4.779% in the lower quartile to 7.174 % in the upper quartile, with a median of 6.053% Sony BMG Colombia obtained an OM of -1.648 during fiscal year 2007, which is below the aforementioned interquartile ranges."
However, later in the same supporting documentation regarding the same transaction, the plaintiff explained that the analysis can also be performed for the company located in the United States, which she called the alternative method. Consequently, it obtained the following result:
"As can be seen in the table above, the interquartile range MkO without adjustments ranges from 4.244% in the lower quartile to 9.062% in the upper quartile, with a median of 7.582% Sony BMG Music Enterteinment, by agreeing to an MkO of 8.000% is within the aforementioned range."
From what was determined by the plaintiff in its DIIPT and in its initial supporting documentation, it can be established that it submitted a report from two perspectives with respect to the outgoing transaction for the provision of administrative services, the first as an tested party the company in Colombia and the second as an tested party the company located in the United States. From the first perspective the tested operation was outside the range, but from the second perspective it was within the range.
The DIAN, by means of Special Requirement 312382010000021 of 29 March 2010, suggested modifying the plaintiff's 2007 income tax return, in accordance with the income and expenditure operations reported in the communiqué of 9 July 2009, and therefore proposed increasing the income by $48,756,625 and disregarding the sum of $1,963,234,941 for expenditure operations.
The plaintiff, in response to the special requirement, explained that she accepted the adjustment for the income operations, and therefore submitted a correction of her income tax return for the taxable period 2007, but did not accept the suggested change for the expenditure operations for administrative services.
The main reason for refusing the modification of the outgoing operation was that, despite the fact that in his original DIIPT he informed that in said operation an analysis of the company in Colombia was carried out, in the correction sent on 3 July 2009, box 92 was modified, indicating that the tested party is the related company in the United States, and therefore the operation was at market values.
The Chamber notes that the plaintiff did indeed submit a correction of her DIIPT on July 3, 2009, paid a penalty of $1,755,000, and sent the defendant a correction of her supporting documentation in November 2009.
The Chamber highlights that the correction of the DIIPT was sent prior to the notification of the special requirement to the plaintiff on July 3, 2009, and the total amounts of the income and expenditure operations were not modified, but rather box 92 was corrected, in which it was indicated that the part tested was the part linked abroad in the analysis of the expenditure operation of payment of administrative services, as explained by the plaintiff in response to the special requirement and which is not disputed by the DIAN.
Furthermore, contrary to what the DIAN stated in its response to the complaint, the correction of the supporting documentation was submitted before the special requirement in November 2009, since the special requirement was issued on 29 March 2010 and the CD submitted during the tax inspection in June 2010 should be understood as additional information requested by the DIAN and not as a new correction to the supporting documentation.
The file contains a certification from the DIAN dated 24 December 2010, which clarifies that the correction of the supporting documentation was received in November 2009 and that it complies with the provisions of article 7 of Decree 4349 of 2004. Additionally, it is noted that the claimant complied with the tax inspection order of 6 December 2010, since it submitted the requested documents on 7 January 2011 and 10 March 2011, so that, as stated by the DIAN in its response to the claim, the necessary documents were submitted, but not to the extent that the DIAN stated was necessary.
The tax inspection report states that visits were made to the taxpayer and that the DIAN determined that the provision of the service and the payments made to the Sony company in the United States had been proved, but that the handling and determination of prices had not been demonstrated. This analysis is repeated in the reply to the complaint and in the respondent acts, which analysed the DIIPT and its initial supplementary information together with its subsequent corrections.
Regarding the possibility of allowing the transfer pricing study to be carried out taking the entity located abroad or the Colombian entity as the tested party, Article 260-1 of the Tax Statute, ordered the following:
"Transactions with related parties. Income taxpayers who enter into transactions with related parties are obliged to determine, for income and supplementary tax purposes, their ordinary and extraordinary income, and their costs and deductions, considering for those transactions the prices and profit margins that would have been used in comparable transactions with or between independent parties. [...]" (Emphasis added by the Chamber)
Regarding the method applicable in the transfer pricing study, Article 260-2 of the Tax Statute determined the following:
"Methods for determining the price or profit margin in transactions with related parties. The price or profit margin in transactions between related parties may be determined by the application of any of the following methods, for which the most appropriate result according to the characteristics of the transactions analysed must be taken into account. [...]"
According to the transcribed rules, the legislator allowed the taxpayers responsible for the transfer pricing declaration to choose the method, but as long as it is the most appropriate to the transaction. In the present case, the plaintiff chose the Transactional Operating Profit Margins method, which is not challenged by the defendant.
In order for taxpayers to carry out the analysis of comparable transactions in the taxable period 2007, the DIIPT in box 92 allowed the company analysed to be identified between the company in Colombia and abroad, thus the DIAN explained the possibility of choosing the part tested in the official assessment sued, in accordance with the following:
"In accordance with the reasons given by the legal representative in his reply on the matter, the Office considers that although the respective instruction booklet and the OECD guidelines contemplate the possibility that the taxpayer may select the party to be tested and that it may be the counterparty, and also that from the legal point of view there are no conditions whatsoever, due to the special nature of the taxpayer and in view of the special nature of the taxpayer, the DIAN has not been able to determine the party to be tested in the official assessment; due to the special nature and in view of the purpose of transfer pricing, it is advisable and desirable that the party being examined should be the declarant itself, since it is the party on which the respective price or profit margin is to be established and its compliance with the arm's length principle, [.... ]"
According to the explanation of the official assessment, it was evident to the DIAN that taxpayers could choose the part to be tested in their transfer pricing study, which in the present case was done by the plaintiff in the correction of its DIIPT, so it was appropriate to change it. Consequently, despite the fact that in the correction of the supporting documentation an analysis was made of the provision of the administration service of both the company in Colombia and the company in the United States, since it was stated in the correction of the DIIPT that the analysis of the company abroad should be taken into account, the DIAN should have given priority to the analysis of the company abroad.
Regarding the supporting documentation, it is noted that the defendant sent 2 CDs to the file by request of order of 27 June 2016 in this instance, but it was clarified in order of 16 August 2016 that they were already part of the file from the first instance, as they were sent as administrative records with the claim, so it is appropriate to analyse them.
In the aforementioned CDs there are three files entitled "Reporte Aclaratorio Final Precios de Transferencia Sony BMG Music Entertainment Colombia 2007" in which the DIAN was sent the supporting documentation of the initial DIIPT, the corrected one and the one sent in the tax inspection process. In the aforementioned documentation, it is evident that in the correction of the supporting documentation, the plaintiff again presents the analysis of the outgoing payment transactions for administrative services of the company in Colombia and Sony in the United States of America.
In the present case, the DIAN in the administrative acts sued only stated that the most reasonable thing to do was to analyse the Colombian company, since the declarant was the party under examination. However, in the supporting documentation, the claimant explained in a reasonable manner that in the present case it was appropriate to analyse the company in the United States, due to the fact that this company was the one that provided the administration service, and therefore, since it had the option and there was no legal limitation, it was appropriate to do so.
Regarding compliance with the arm's length principle, this Chamber, in its judgment of 5 November 2020, explained the following:
"In order to ensure that the result of the controlled transactions is consistent with that which they would have had if they had been carried out between independent parties, it is necessary to identify comparable transactions, which serve as a means of contrast to determine the price or profit margin at arm's length. According to article 260-2 of the ET, in the version in force at the time, the profit margin in controlled transactions would be determined by selecting the method that the taxpayer considered appropriate, from those listed in the regulation itself; and, if there were two or more comparable transactions, a range of prices or profit margins could be obtained, which would be adjusted with statistical methods, especially the interquartile range as an appropriate measure of variability of dispersion (paragraph 2.º). Therefore, under the transfer pricing regime, the price or margin of the controlled transaction is considered to comply with the arm's length principle if it is within the range (adjusted or not, as the case may be) of prices determined by independent parties, after carrying out the respective comparability analysis and applying the most appropriate method; otherwise, "the price or profit margin in transactions between independent parties shall be considered to be the median of that range".
According to the above criterion, the arm's length principle is fulfilled as soon as the price of the controlled transaction is within the price range determined by independent parties, after the respective comparability analysis and the application of the most appropriate method. In the present case, the plaintiff in the correction of DIIPT and its supporting documentation carried out its comparability analysis, by means of the method transactional margins of operating profit of the transaction of expenditure for administrative services, in which it was clarified that the tested party was the company in the United States and the result was that the transaction was within the ranges of the price determined by independents, therefore the arm's length principle is complied with.
It is clarified that, in contrast to what was established in the acts sued and in the response to the complaint, the supporting documentation complies with the requirements of article 7 of Decree 4349 of 2004, since this was certified by the DIAN in a document dated 24 December 2010, and contains general information, specific information, and annexed information. In the same sense, it is reiterated that the DIAN in the official assessment accepts that the transactions with the related party in the United States were proven.
In addition, the documentation clarifies that the reason for the study from the company abroad was an administrative services contract that had been in place since 2005, for which the company abroad was paid $3,569,194,000, a payment that was corroborated by the DIAN in the audit process by means of the withholdings made, transactions carried out and items paid. This contract was submitted to the file and shows that Sony Colombia and Sony United States agreed that "The Services provided by SBME will be invoiced to the Company at a rate calculated at cost plus an increase of 8%. The Services will be billed periodically, but in no case will they be billed for periods longer than one year", a clarification together with the global situation of the music industry that justifies the Markup analysed, and the comparable companies in the supporting documentation.
In the same sense, it should be noted that in response to the special requirement, the plaintiff warned that the information of the company in the United States was more reliable, due to the fact that it has a strict control of costs and administration expenses because it has access to the information of its companies in other countries. Additionally, he warned that due to the possibility of the company abroad to access international information, no adjustments were required in the transfer pricing information in comparison with the Colombian company, and clarified that since the United States is not considered a lower taxation country, there is no benefit in transferring income to it.
It is noted that no information adjustments were made to the transfer pricing analysis regarding the transaction under discussion, according to the organisation chart of the plaintiff, the company in the United States has a greater possibility of having access to pricing information on administration expenses, and it can be determined that it is the least complex part, since it is the one that provides the administration service to the company in Colombia and to other companies at the international level.
In this order of ideas, the Chamber notes that the analysis of the United States party is justified, and therefore it is not appropriate to determine what is determined in the acts being sued.
Regarding the alleged lack of proof of the costs and expenses incurred by Sony in the United States by the DIAN in the response to the complaint, and which the plaintiff argued were proven in the audit process, it is observed in the file that receipts for services provided by the company abroad to Sony in Colombia were sent, in which the payment of costs and expenses, such as human, legal and digital resources, are individualised, and therefore proof of these expenditures is found.
In the same sense, the supporting documentation clarifies that not many adjustments were required, the preponderant activity of the evaluated party in the United States, the reason for the chosen method, the search of the comparable companies, the date of consultation of the data, the selection of the financial ratio used, financial information of the tested party, information of the comparables supported in annex c, interquartile range and conclusion of the transaction. Consequently, it is reiterated that the change of the tested party was supported and it is clarified that such change only affects the information of the administrative services transaction, since the transfer pricing methods apply to individual transactions, as determined by article 260-2 of the Tax Statute.
Furthermore, contrary to what is established in the contested acts, the applicant submitted in its supporting documentation as annexes, the matrix of the comparables, description of the comparable companies, financial information of the comparable companies, technical description of the adjustments, description of assets together with the financial statements, and other contracts, so the mere fact of saying that it is not sufficient does not undermine the veracity of the information or the reason for having chosen the analysis of the foreign company.
Despite the fact that, as warned by the DIAN, there is a general description of the business of the comparable companies in English, the financial information of the comparable companies is in Spanish, which does not limit the study of full competition, in addition, as for some contracts in English, these are related to the issue of royalties and not with the operations of outgoing payments for administrative services. It is clarified that the applicant did prove its individuality with respect to the companies compared, since it reported the structure of the corporate group and its related companies.
In this context, the plaintiff could correct its DIIPT and its supporting documentation, the information submitted in its corrections should have been taken into account, the plaintiff was free to choose to carry out its analysis of the foreign company, and it complied with the requirements of its supporting information together with the arm's length principle. Consequently, the contested measures should be annulled, and the other pleas in law are dismissed as the main plea is well founded.
Order for costs
Finally, with regard to the award of costs (legal representation and costs of the proceedings), it is noted that in the light of articles 188 of the CPACA and 365 (num. 8) of the CGP, there is no evidence to demonstrate or justify them, which is why no costs will be awarded in this procedural instance.
In view of the foregoing, the Council of State, Chamber for Contentious Administrative Proceedings, Fourth Section, administering justice in the name of the Republic and by authority of the Law,
FIRST: TO ACCEPT the impediment expressed by the Councillor of State, Dr. Stella Jeannette Carvajal Basto, who, as a consequence, is declared to be separated from the knowledge of these proceedings.
SECOND: REVERSE the judgment handed down by the Administrative Court of Cundinamarca, Fourth Section, Subsection "A", on 4 September 2013. In its place:
"1. declare the NULLITY of the Official Revision Settlement 312412011000015 of 24 March 2011 and Resolution 900.075 of 27 April 2012, issued by the DIAN.
By way of reinstatement of rights, DECLARE the income tax return for the taxable period 2007 filed by SONY MUSIC ENTERTAIMENT COLOMBIA S.A. to be final".
THIRD: No order as to costs.
FOURTH: RECOGNISE the capacity of Isabella García Prati to act as agent of the DIAN in accordance with the terms of the power of attorney conferred on page 665 of the main file and Valeria Osorio Rodríguez to act as agent of the plaintiff in accordance with the power of attorney conferred in SAMAI's index registry 30.
Copy, notify, communicate and return the file to the Court of origin. Comply with.
The foregoing order was considered and approved in session on the date of this date.
(With electronic signature)
MILTON CHAVES GARCÍA
(With electronic signature)
MYRIAM STELLA GUTIÉRREZ ARGÜELLO
(With electronic signature)
JULIO ROBERTO PIZA RODRÍGUEZ