Contentious Administrative Court
II Judicial Circuit
of San José - Building Annex A
Blancos de Goicoechea
Street
Central: 2545-0003
Fax: 2545-0033 E-mail: tproca-sgdoc@poder-judicial.go.cr
File:
11-006793-1027-CA
Case: Puro derecho
Plaintiff: Reca Química, S.A.
Defendant: The State
N° 147-2015-VI
ADMINISTRATIVE AND
CIVIL CONTENTIOUS COURT OF FINANCE (SIXTH SECTION). Second Judicial Circuit of
San José, at nine hours and thirty minutes on the third day of September two thousand
and fifteen.
Administrative
contentious process declared of pure right, followed before this Court by RECA QUíMICA, S.A., with legal identity card number
3-101-011283, represented by its general attorney-in-fact with no limit of
amount Jorge Vargas Ulate, certified public
accountant, resident of Escazú, with identity card
number 1-0682-0903 (f. 1 and 47); against THE STATE, for which initially
appeared Attorney B Lic. Iván Vincenti
Rojas, divorced, with identity card number 1-695-983, resident of Moravia (f.
57) and, most recently, Deputy Prosecutor MSc. Sandra Sánchez Hernández,
single, with identity card number 1-942-634, resident of Heredia (f. 186). Also
intervening in the proceedings, on behalf of the plaintiff, were her special
attorneys-in-fact, José María Oreamuno Linares, resident of San Rafael de Escazú, with identity card number 1-0594-0025; Adri án Torrealba Navas,
single, resident of Granadilla de Montes de Oca, with identity card number
1-0603-0891 (f. 46 and 70); and Isisis Torrealba Navas, single, with
identity card number 1-0603-0891 (f. 46 and 70). 46 and 70); and Isis Ulloa
Ocampo, resident of La Unión de Cartago, with identity card number 1-1224-0348
(f. 70). The aforementioned natural persons are of legal age and -with the
aforementioned exceptions- married and lawyers.
RESULTING:
1.- That the
plaintiff, on the basis of the facts and citations of law that she set out,
formulated a claim in whose pretension she expresses:
"1. I request
that the adjustment identified as 'Il - Omission of Sales of related companies
abroad', visible on page 4 and following of the transfer of observations and
charges number 2752000014321 of the Large Taxpayers Administration, be declared
not to be in accordance with the legal system, and, consequently, that the
adjustment be revoked, confirmed by resolution number DT-10CVR-060-07 of 10:00
a.m. on 9 July 2007, confirmed by resolution number DT-10CVR-060-07 of 9 July
2007: 00 hours of 9 July 2007, as well as by resolution number TFA-440-2009-P
of the First Chamber of the Administrative Tax Court at 12:30 hours on 25
November 2009. /
2. I request that the
adjustment identified as 'III - Reclassification for Depreciation', visible on
page 9 and following of the transfer of observations and charges number 2752000014321
of the Large Taxpayers Administration, adjustment confirmed by resolution
number DT-10CVR-060-07 of 10:00 hours of 9 July 2007, be declared non-compliant
with the legal order and, consequently, revoked: 00 hours of 9 July 2007, as
well as by resolution number TFA-440-2009-P of the First Chamber of the
Administrative Tax Court at 12:30 hours on 25 November 2009. /
3. Damages. The
damages ALREADY CAUSED TO MY REPRESENTATIVE, WHOSE CLAIM RECA QUÍMICA S.A.
SUESTS ON THE BASIS OF ARTICLE 1045 OF THE CIVIL CODE, derived from the
expenses that my represented party had to incur for the fees paid in the
administrative court for the defence of this case. These damages amount to the
sum of THIRTEEN MILLION FOUR HUNDRED AND FOUR HUNDRED AND NINETY TWO THOUSAND
SEVEN HUNDRED AND FIFTY COLONES (13,492,750), which is demonstrated by the
invoices for professional services paid by my client, plus SIX MILLION ONE
HUNDRED AND EIGHTY FOUR THOUSAND SEVEN HUNDRED AND NINETY SEVEN COLONES (6.
184,797) corresponding to the legal interest generated to date; therefore, the
total damages correspond to the sum of NINETEEN MILLION SIX HUNDRED SEVENTY
SEVEN HUNDRED SEVENTY SEVEN THOUSAND FIVE HUNDRED FORTY SEVEN COLONES
(19,677,547) /.
4. And I request
that, in the event that the State opposes the present claim, it be ordered to
pay all the costs of these proceedings". (f. 1-45).-
2.- The defendant
answered the action in the negative and raised the preliminary defences of caducidad and consented act, as well as the exception of lack
of rights. He also stated his refusal to conciliate (f. 71-131).- 3.
At the preliminary
hearing held at 8:36 a.m. on 29 June 2012, attended by both parties, the
proposed adjustments to the claims were rejected, which are therefore
maintained in the terms set out in the complaint. By resolution No. 1140-2012
of 10:25 a.m. on that date, the processing judge, Francisco Hidalgo Rueda,
rejected the prior defence of consented act and deferred the defence of caducidad for the judgement on the merits. He also rejected
the expert evidence proposed by the plaintiff. Thus, as there was no other
evidence to be received apart from the documentary evidence, in accordance with
article 98, paragraph 2) of the Contentious Administrative Procedural Code, he
declared the process to be of pure law, and the parties orally rendered their
conclusions (recorded hearing, which is attached to the file in its
corresponding electronic support; minutes at f. 143-145).
4.- By judgment No.
230-2012-VI of 11:20 a.m. on 19 October 2012 (f. 148-155), this Court - by
majority vote and insofar as is relevant - resolved: "The preliminary
defence of caducidad is accepted. As unnecessary, no
ruling is made on the plea of lack of rights. The claim brought by Reca Química, S.A. against the
State is declared INADMISSIBLE. No special order as to costs".
5.- Faced with an
appeal in cassation lodged by the plaintiff, the First Chamber of the Supreme
Court of Justice, by resolution No. 324-F-S1-2015 of 11:38 a.m. on 12 March
2015 (f. 197-205), ruled: "The appeal is declared admissible. The
contested decision is annulled. The case file is to be returned to the office
of origin so that it may continue to be processed".
6.- This decision is issued
after deliberation. No grounds of nullity capable of invalidating the
proceedings are noted.
Judge Hess Araya,
with Judge Fernández Brenes and Judge Garita Navarro voting in the affirmative; and,
WHEREAS:
I.- ACRONYMS USED.
Throughout this pronouncement, the following will be understood as (in
alphabetical order):
1. ATGC: Tax
Administration of Large Taxpayers of the DGT.
2. CNPT: Code of Tax
Rules and Procedures.
3. CPCA: Code of
Contentious-Administrative Proceedings.
4. DGT: Directorate
General of Taxation.
5. LGAP: General Law
of Public Administration.
6. LISR: Income Tax
Law, No. 7092 of 21 April 1988.
7. IFRS:
International Financial Reporting Standards.
8. RGGFRT: Reglamento General de Gestión, Fiscalización y Recaudación Tributarias, Executive Decree Nº 29264-H of 24 January 2001
(now repealed).
9. TFA:
Administrative Tax Court.
II.- PROVEN FACTS. As
such, the following are of relevance (unless otherwise indicated, all folio
references correspond to the administrative determination file):
1. That the plaintiff
is a company engaged in the industrial production of paints and synthetic
resins, its parent company being H. B. Fuller Company, of the United States.
The Costa Rican companies Kativo Costa Rica, S.A., H.
B. Fuller de Centroamérica, S.A. and Kativo Chemical Industries Sucursal
Costa Rica, S.A. are also related to the latter (facts 1 and 2 of the
application). (facts 1 and 2 of the application, not in dispute).
2. That during the
fiscal periods 2003 and 2004, the plaintiff applied a pricing policy
established by its parent company, according to which it sold its products to
related companies abroad with a 5% profit margin, while for other local
affiliates, the profit margin was 10% (fact 5 of the complaint, not contested
as to what is indicated).- 3.
3. That by act
notified on 20 July 2006 to the plaintiff, the ATGC informed the plaintiff of
the initiation of auditing proceedings relating to the determination and
payment of income tax (as indicated in the document on f. 2-13).
4. That by means of
Transfer of Charges No. 2752000014321 of 23 April 2007, the ATGC notified the
plaintiff of the existence of differences payable by the taxpayer,
corresponding to income tax for the fiscal periods 2003 and 2004, for a total
of one hundred and eighty-five million eight hundred and twenty-seven thousand
nine hundred and forty-one colones (¢185,827,941.00).
The act was notified on 26 April of the following year (facts 6 to 9 of the
complaint, not contested; f. 2-13).
5. That by memorial
presented to the ATGC on 18 June 2007, the plaintiff contested the transfer of
charges mentioned in the previous fact (f. 53-84).- 6.
6. At 10:00 a.m. on 9
July 2007, the ATGC issued Determinatory Resolution
No. DT-10CVR-060-07, which declared the challenge raised, inter alia, against
the transfer of charges No. 2752000014321, to be inadmissible. The act was
notified on the 13th of the same month and year (f. 137-221).
7. Against the
aforementioned ruling, the taxpayer filed an appeal for revocation with an
appeal in subsidy, by means of a libel filed on August 7, 2007 (f. 222-242).-
8.
8. The appeal was
rejected by resolution No. AU-10-CVR-109-07 of 1 p.m. on 1 October 2007,
notified on the following 9th (f. 256-280).
9. By decision No.
TFA-440-2009 of 12:30 p.m. on 25 November 2009, the First Chamber of the TFA
confirmed the contested act. The applicant was notified of this on the
following day, 26 November 2009 (f. 335-437).
10. That for
professional advice aimed at defending the interests of the plaintiff in
administrative proceedings in this case, the latter paid ICS Consultores, S.A., on 21 August 2007, the sum of seven
million eight hundred and eleven thousand two hundred and fifty colones (¢7,811,250.00) (f. 48 of the judicial file).
III.- FACTS NOT
PROVEN. Of importance, only the following:
That the sum of ten
thousand dollars ($10,000.00) paid by the plaintiff to ICS Consultores,
S.A., on December 24, 2010 (sic) corresponds to the defense
of the interests of the plaintiff in administrative proceedings in this case
(the invoice of f. 49 of the judicial file only
refers that this was due to "Professional Services", without any
indication that these are specifically due to the aforementioned work).- iv.
IV.- SUBJECT MATTER
OF THE PROCEEDINGS. From the framework of the claims deduced and the
conclusions formulated by the parties, it is clear that the present proceeding
is about the alleged illegality of the adjustments contained in sections II and
III of the transfer of observations and charges number 2752000014321 of the ATGC,
confirmed by resolution number DT-10CVR-060-07 of 10:00 hours of 9 July 2007,
as well as by the resolution of 12:30 hours of 25 November 2009 number
TFA-440-2009-P of the First Chamber of the TFA.
By way of preamble,
the plaintiff's attorney explains that his client is engaged in the industrial
production of paints and synthetic resins, its parent company being the US
company H.B. Fuller Company, to which are also linked the Costa Rican companies
Kativo Costa Rica, S.A., H.B. Fuller de Centro, S.A.,
H.B. Fuller de Centroamérica, S.A. and Kativo Chemical Industries Sucursal
Costa Rica, S.A. It states that, in the fiscal periods 2003 and 2004,
approximately 58% of total sales were made to Kativo
Costa Rica, S.A., while approximately 39% of sales were made to other companies
related to H.B. Fuller Company, domiciled abroad. According to the
"Transfer Pricing Policy" set by the parent company and in place
since 1992, a 10% margin on sales was applied to inventory transferred between
affiliates. However, during the fiscal periods 2003 and 2004, the parent
company changed the policy so that sales to related companies abroad were to be
made with a 5% profit margin, while for local affiliates, the margin would be
10%.
Now, however, in the
transfer of observations and charges No. 2752000014321 challenged here, the
ATGC made two categories of adjustments that it considers contrary to law, for
the reasons that will be explained below. The appeal against the transfer of
charges was declared inadmissible by decision number DT-10CVR-060-07 of 10:00
a.m. on 9 July 2007, while the appeal was also declared inadmissible by
decision of the First Chamber of the TFA, number TFA-440-2009-P of 12:30 p.m.
on 25 November 2009. It seeks to "revoke" (i.e. annul) these
adjustments and to award damages to the State. The latter is an ancillary
request that depends on the acceptance of the claimed invalidity. For what is
considered to be a better order, the examination of the legality of the formal
conducts being challenged and the remaining claims will be addressed below, as
well as the thematic axes raised by the plaintiff and the arguments of the
defendant, in order to avoid unnecessary repetition, with the corresponding
analysis -of course- of all the arguments.
V.- ON THE PREVIOUS
DEFENCE OF CADUCIDAD. As was outlined in the section of the recitals, the state
ombudsman filed a preliminary defence of caducidad,
the hearing and resolution of which was postponed by the judge for the judgement.
This plea was initially accepted by this Chamber in the ruling that was later
annulled by the First Chamber, which in this regard stated:
"IV.- From the
reading of the charge, it is clear that the crux of the matter lies in
determining whether or not the Court's interpretation of canon 41 of the CPCA
is correct, in terms of the time limit for initiating proceedings in tax
matters. The issue in question has recently been settled by this Chamber, when
deciding a case similar to the present one: 'IV.- Before analysing the
applicable time limit, it is necessary to define whether canon 41 of the CPCA
establishes a statute of limitations or a limitation period for tax matters. As
it is of interest, it is essential to refer to the decisions of this decision-making
body in relation to the issue, from the perspective of the Law Regulating the
Contentious-Administrative Jurisdiction (LRJCA): '...it should be pointed out
that articles 2 paragraph c) and 3 of the LRJCA establish the so-called
unification of channels. In a recent vote of this Chamber, it was considered:
In this way, within the classification of administrative litigation, it has
been said that there are processes of full jurisdiction, which apart from
challenging or requiring a specific administrative conduct (to do, not to do,
or the nullity itself), also contain claims in relation to the payment of
damages; There are pure annulment actions, in which the claim is limited to the
invalidity of a specific conduct, and the so-called civil actions, whose claims
are limited to patrimonial aspects that are essentially related to the
contractual and non-contractual civil liability of the administration, domain,
possession and ownership of real estate, judicial recovery and expropriations
[...] it should be added that, precisely because no specific conduct of the
Administration is objected to or required, civil proceedings for the Treasury
could not revolve around an administrative act. ' (Resolution of 11.30 a.m. on
31 October 2008, number 733)'.
This led this Chamber
to point out that, in civil tax proceedings, there is no statute of limitations
for the action, but the statute of limitations for the substantive right, just
like in any ordinary civil proceeding. Hence, as will be explained, in the
hypotheses of canon 41 of the CPCA, despite its wording, the action is not
time-barred, but the statute of limitations of the right. As stated, since the
entry into force of the LRJCA, this body has stipulated that in civil finance
matters, the statute of limitations applies to the substantive right. The
following is an analysis of tax matters, which includes matters relating to the
right of appeal [paragraph 2) of the aforementioned regulation]. The plaintiff
argues that Article 41 of the CPCA stipulates a special limitation period for
the civil law of finance, taxation and the right to lese majeste,
without making any distinction, whether it is a matter of nullity of acts or
reimbursement of sums of money.
Furthermore, he
argues, this Court has ruled that when the proceedings concern tax assessment,
the three-year limitation period applies by express mandate of the legislature.
The central issue under debate lies in determining the scope of the
aforementioned canon 41. Therefore, the first step is to examine the content of
that provision in order to unravel its meaning. In the appellant's opinion,
this provision establishes an exception to the limitation period applicable in
cases where tax matters are at issue, without taking into account the nature of
the claims (annulment or reimbursement), or the parties (Administration or
taxpayer). On the other hand, the judge ruled that in cases where the nullity
of tax acts is sought, the general nullity regime of the LGAP and the CPCA
applies, so that the ordinary one-year limitation period applies. Furthermore,
the time limits of article 51 of the TC do not extend to the taxpayers and that
the time limit regulated in article 43 of the TC is only for the reimbursement
of amounts overpaid. Canon 41 of the CPCA provides: 'The maximum time limit for
initiating the process shall be the same as that established by the legal
system as the limitation period for the respective substantive right under
discussion in the following cases:
1) In civil tax
matters.
2) In taxation
matters, including in the process of lese majeste'.
Although in its
literal wording it establishes that in the case of civil tax and tax matters,
including the process of lien validity, the period of time for bringing the
action (an aspect that is proper to caducidad) is the
period of limitation of the corresponding substantive right that is provided
for in the legal system; It cannot be overlooked that in the two hypotheses
mentioned, it refers to the limitation period of the substantive right, so that
it must be understood that in these cases, what operates is the limitation of
the right; this can be extracted from the legislative acts when the regulation
in question was discussed. It should be noted that in the civil law of finance
since the LRJCA came into force, there is no statute of limitations for the
action, only the statute of limitations of the substantive right applies, which
currently includes tax matters by legal provision. Furthermore, it is
unquestionable that, beyond what the legislator apparently regulated, the rule
must be acted upon with regard to the institute that it actually entails, which
is not caducity, but rather, in accordance with what has been stated,
prescription.
This Chamber, in
ruling no. 552 of 9.25 a.m. on 5 May 2011, cited by the plaintiff, stated:
'This body of law (CPCA) establishes in its canon 41 that the maximum period
for initiating the process is that of the statute of limitations of the
respective substantive right. In accordance with the above, as it is an
activity of the Tax Administration aimed at determining the amount of the tax
obligation, the time limit for the filing of the respective process is the
three-year period provided for in paragraph 1 of mandate 51 of the CNPT. This
precept establishes: The administration's action to determine the obligation
prescribes after three years. The same period applies to demand payment of the
tax and its interest...' This limitation period can be extended to the taxpayer
in order to challenge the transfer of charges, since, in accordance with canon
41 of the CPCA, in tax matters, the limitation period of the substantive right
(three years in accordance with article 51 CNPT) is the maximum period for
initiating the process'. (emphasis added).
As can be seen, this
precept establishes that in civil tax and fiscal proceedings -including the
right to lesee damages-, the time limit is that which
is regulated by the legal system as the statute of limitations for the
corresponding substantive right that is being disputed. Hence, it constitutes
an exception to the provisions of Article 39 ibidem, in the sense that for the
matters cited, the limitation period for the respective substantive right
applies. Thus, the appellant is right when she points out that the judge was
wrong when she ruled: '...despite the specific nature of tax matters, there is
no reason or rule that separates... tax determinations, which excludes them -
such as those being challenged here - from the general rule that applies to all
administrative acts, since these determinations are considered to be
administrative acts to which all the general rules laid down in the General Law
on Public Administration would apply, Therefore, there is neither reason nor
legal rule that provides for a different expiry period with respect to the rest
of the Administration's formal actions, especially when there is an overriding
public interest in the collection of the taxes necessary to comply with the
purposes of state activity'.
As has been
explained, it is precisely cardinal 41 of the CPCA which provides for an
exception in the case of the civil matters of finance and taxation (which is of
interest in this case), even for the process of taxation injunctions. On the
other hand, it must be stated that the spirit of said rule was to standardise
the statute of limitations in the matters expressly indicated in the
aforementioned cardinal 41, with the purpose of eliminating the disparity of
regulations, and of course, aimed at providing equitable treatment to the
statute of limitations of substantive law, both for the Administration and for
the administered party, and in the case of the tax sphere, to the taxpayer and
the State by means of the lesevity, so that they have
the same period of time. In line with the above, this decision-making body has
ruled in civil finance matters (Judgments no. 185 of 8.55 a.m. on 3 March 2011
and no. 469 of 3.20 p.m. on 3 March 2011) and in tax matters (Judgment no. 469
of 3.20 p.m. on 3 March 2011). 469 of 15 hours 20 minutes on 7 May 2009) and in
tax matters (Judgement 552 of 2011 already cited), has ruled that when the
legal system grants the Administration a certain period of time to make a
claim, although it is not precisely established for the taxpayer, it is certain
that by virtue of an analogical integration, also considering the principles of
equality and balance of interests, it is possible to establish that a similar
period of time must be applied when it is the latter who makes the claim. Thus,
if the Administration had three years to determine the tax liability, as well
as the payment and its interest, it would be unreasonable and, consequently,
those principles would be violated, if when it is the taxpayer who makes the
claim, another time period is applied, in this case a shorter one, as the judge
ordered.
Therefore, the judge
is not right in stating that the limitation period stipulated in canon 51 of
the TC, regarding the power to determine tax charges (payment and interest)
only operates in favour of the Administration, and therefore does not favour the
taxpayer, since, as indicated, this would imply unequal treatment to the
detriment of the taxpayer. From the foregoing, it is clear that the restrictive
normative exegesis made by the judge does not apply, since there is no need to
delimit what is expressed in regulation 41 of the CPCA, given that it
establishes identical limitation periods, whether the Administration or the
taxpayer is the one filing the proceeding. Likewise, since, as stated above, it
would lead to a breach of the principles of equality and balance of interests.
This interpretation is not relevant in the case under analysis, given that, as
indicated, the spirit of the legislator was to equalise the time periods
available to the Administration and taxpayers. On the other hand, in order to
safeguard the principle of equality between the parties involved, the
integration with the legal system leads to applying the statute of limitations
periods provided in favour of the Administration in Article 51 of the TC, also
to the taxpayer. In support of the above, it must be stated that, contrary to
what was expressed by the judge, what is stipulated in canon 43 of the TC is
applicable in the case at hand. Note that this rule not only regulates what is
relevant to overpayments, but also what concerns undue payments (related to
taxes, penalties, interest and payments on account), given that in the matter
of interest it provides: '...shall have the right to claim the restitution of
what has been unduly paid by way of taxes, payments on account, penalties and
interest...'. Consequently, in the hypothesis of a tax assessment that is
contested, if the taxpayer is right, once it is declared null and void, the
amount paid for such concept would constitute a credit right (for undue payment
according to cardinal 43 above), the reimbursement of which is what is sought
in the administrative litigation proceedings, after nullity of the assessment
act. Likewise, as the payment of interest is also sought in accordance with the
provisions of article 58 Ibid, it is clear that the right to compensation for
damages is exercised. Hence, the appellant's objection is well founded' (no.
1536-F-S1-2013, of 9.45 a.m. on 14 November 2013).
V.- Consequently, the
appeal will be upheld. The decision of the Court will be annulled with regard
to the forfeiture of the action, since, as stated in the civil matters of
finance and taxation, the forfeiture of the action does not apply, but rather
the statute of limitations, the term of which is that which pertains to the
corresponding substantive right. In the case at hand, the final decision of the
determinative procedure no. TFA-440-2009 of 12 hours was issued in the case at
hand. TFA-440-2009 of 12 hours 30 minutes on 25 November 2009, was notified to
the plaintiff the following day (26 November 2009) consequently, if the libel
was filed on 1 December 2011 and notified to the State on 29 March 2012, it is
undoubtedly, the period of three years (in force at that time) provided for in
Article 51 of the TC had not elapsed."
Consequently, re-examining
the previous defence filed in the light of what was expressed by the superior,
it must be dismissed, as indeed it is.
VI.- ON THE
ALLEGATION THAT THE ACT CANNOT BE CHALLENGED. Although it was not formally
raised as a prior defence, the fact is that in its response to the complaint,
the then State agent stated that the complaint cannot be directed solely
against the transfer of charges number 2752000014321, since it is a preparatory
act without its own effect and, therefore, not subject to challenge in this
administrative court, as indicated by the First Chamber of the Supreme Court of
Justice in Judgement No. 768-F-S1-2009 of 16:05 hours on 24 July 2009. Although
the transfers of charges initiated the phase of the ordinary administrative
determinative procedure, they are not the ones that cause status. On the
contrary, the resolution of the case is given in other subsequent
administrative acts, specifically resolution DT-10CVR-060-07, resolution
AU-10-CVR-109-07 and finally TFA resolution number 440-2009.
The plaintiff does
not make any allegations of illegality against these latter acts, as she bases
her arguments on extracts taken from the transfers of charges, failing to
demonstrate how these arguments are reproduced in the administrative acts that
actually cause status. Therefore, the complaint has a fundamental flaw, which
is that it bases its arguments against an administrative act that is not
subject to challenge, such as the transfer of charges 2752000014321. When it
was given the time limit to refer to the response to the complaint, the
plaintiff did not argue anything about this specific issue. Having examined the
point, this collegiate body considers that the argument raised by the State
lacks legal support and must be rejected.
While it is true that
a transfer of charges is nothing more than the initial resolution of the
determination procedure and, as such, is per se unchallengeable (insofar as it
is a procedural act lacking its own effects), the truth of the case is that, in
the manner in which the claim was established in the sub lite, there is no
doubt that the challenge made by the plaintiff to said transfer is made in
conjunction with the final act and its confirmatory resolutions, in the manner
provided for in section 163.2 of the LGAP. Consequently, what is required is to
continue with the analysis of the merits of the case in order to establish
whether the act of transfer has its own defects and, if so, these will be
subject to be declared in the appropriate manner.
VII.- REGARDING THE
ALLEGATION OF INVALIDITY OF THE ADJUSTMENT IDENTIFIED AS "II - OMISSION OF
SALES TO RELATED COMPANIES ABROAD". As the first substantive issue raised
in the complaint, it is stated that, in the adjustment called "II -
Omission of sales to related companies abroad" of the transfer of
observations and charges No. 2752000014321 here challenged, the ATGC objected
to the 5% margin used by the plaintiff in sales to affiliated companies abroad,
reclassifying it to 10% (which is the margin applied to affiliates and other
local companies), considering that the former does not allow covering operating
expenses, causing net losses in relation to such sales. The plaintiff considers
that the above is not in accordance with the law, for the following reasons
(which are summarised below (and which we have grouped into two blocks because
of their logical connection), contrasting them with the defendant's position in
this respect and finally stating the Court's opinion on each issue.
A. Contradictory
reasoning and the absence of a rule enabling transfer pricing adjustments to be
made:
1. The applicant's
counsel complains that the transfer of charges is based on contradictory
reasoning, since in order to carry out the aforementioned reclassification,
both elements and grounds of a transfer pricing adjustment and elements and
grounds of an interpretation "according to economic reality" are
used, both of which are incompatible with each other. Indeed, even though
neither the transfer of charges nor the determinatory
resolution formally calls the adjustment made a "transfer pricing
adjustment", the fact is that basic or essential elements of that theory
(for example, the reference to the existence of "related companies")
are used to support the adjustment.
Under the aforementioned doctrine, he
explains, the taxpayer's purpose in setting a price different from the usual
market price is to transfer profits or benefits to jurisdictions with no or low
taxation. Thus, in the case of your client, the administration seems to say
that prices with a profit margin of 5% are not normal market prices, where the
reference margin is 10% used in sales to other local companies.
In other words, the
administration suspects that the former is intended to transfer profits from
Costa Rica to abroad in order to reduce the tax burden. For this reason,
instead of considering the actual transaction price in the profit tax base, a
so-called "normal market price" was applied. This is precisely what a
transfer pricing adjustment consists of, he says, where the factual reality
(the price actually charged in the transaction) is ignored and replaced by a
legal construct (the 'normal market price'). In contrast to the above, he goes
on to say, what articles 8 and 12 of the CNPT allow the interpreter to do is rather
to apply a criterion of "economic reality", in those situations where
taxpayers make manifestly inappropriate use of legal forms, to the detriment of
the tax authorities.
In this case, what is
done is to disregard the legal reality chosen by the individuals and replace it
for tax purposes with the "economic reality" of the business
concealed under an inappropriate legal form. In other words, an intellectual
operation diametrically opposed to that of a transfer pricing adjustment is
carried out. On the other hand, the plaintiff continues, if the challenged tax
assessment was based on a transfer pricing adjustment, the tax administration
would have acted without any enabling rule to do so, in violation of the
principle of the material reservation of law (article 5 of the CNPT). In the
LISR, there is no rule authorising the administration to make an adjustment to
prices agreed between related companies, as, for example, there is in paragraph
16 of the Selective Consumption Tax Law. In the former, the tax base is the
effective transaction price, without being authorised to resort alternatively
or in certain cases to the normal market value. Although the DGT has tried to
substantiate the possibility of making transfer price adjustments using the
economic reality criterion in its Interpretative Guideline No. 20-03, it
considers that its grounds are erroneous and the guideline itself is illegal.
Thus, if there is no specific rule to deal with the problems generated by
agreements between related companies, attempting to apply articles 8 and 12 of
the CNPT to solve them rather leads to the opposite consequence, which is to
effectively ignore economic reality; a transfer price adjustment rule, far from
seeking reality, what it creates is the fiction that the transaction was made
at a market price.
2. In this regard,
the State's representatives are of the opinion that the plaintiff's position
diverges from what the Constitutional Chamber, the First Chamber and this Court
have established in this regard. Of the former, it cites Judgment No.
4940-2012; of the latter, it mentions Resolution No. 1181-F-S1-2009; and of
this Court, it refers to Judgments No. 26-2009-VIII of Section VIII and
4314-2010 of Section IV. Based on these criteria, it argues, the plaintiff is
not right in claiming to find an alleged contradiction or lack of reasoning in
the contested acts, since the aforementioned rulings do not consider the
provisions of articles 8 and 12 of the CNPT to be contradictory or exclusive of
the theory of transfer pricing. Thus, there is no impediment to the application
of the latter and, in that sense, the claim that a rule of legal rank is
required for its adoption has been rejected.
3. Criteria of the
Court. In a broad sense, "transfer prices" are understood to be those
agreed between two companies for the exchange of goods, services or rights
between them. In tax law, this concept becomes important when those companies
share ownership or management links (they are then referred to as "related
entities" or "connected entities"), as this may lead to prices
that are not the same as those that would be agreed between entities without
such links.
In such a case, when
such prices differ from those that would be expected to be found in an open and
competitive market ("normal market prices" or "arm's length
prices"), it can be assumed that the related entities intend to distribute
profits among themselves in order to favour one of them in tax matters, with
the correlative affectation of tax interests. For this reason, after the Second
World War and especially in recent decades, countries have been promoting the
regulation of this phenomenon, seeking to prevent transfer pricing between
related companies from leading to a reduction in the profits of companies based
within their territory, to the extent that this could lead to an artificial
reduction in their taxable income and, consequently, to lower tax revenue.
These regulations are
inspired by a principle set out in the Organisation for Economic Co-operation
and Development (OECD) Model Double Taxation Avoidance Agreement, known as the
"arm's length principle", which provides that "where conditions
are established or imposed between two related parties in their commercial or
financial transactions which differ from those which would have been stipulated
with or between independent parties, profits which would have been earned by
one of the parties in the absence of such conditions but which, by reason of
the application of those conditions, were not earned, shall be quantified and recorded".
Based on this
guideline, the OECD has established a whole methodological framework to
determine, by means of rules that enjoy a broad technical consensus and that
have eventually become a de facto global standard (the so-called "Transfer
Pricing Guidelines for Multinational Enterprises and Tax
Administrations"), whether or not transactions between related companies
follow the aforementioned arm's length principle. Ultimately, the aim of these
stipulations is to avoid both over-taxation by tax administrations and
under-taxation by corporate groups.
In brief, the
transfer pricing mechanisms approved by the OECD include:
1. The comparable
free price method, which determines the price of goods or services transferred
in a controlled transaction by comparison with the price of goods or services
transferred in a comparable uncontrolled transaction. This comparison can be based
on internal comparables, i.e. the taxpayer's own transactions with independent
enterprises, or on external comparables, i.e. transactions between independent
enterprises.
2. The resale price
method, which compares the resale margin on a linked purchase transaction with
the resale margin that has been obtained on unrelated and similar purchase and
resale transactions.
3. The cost plus
method, which compares the mark-up on direct and indirect costs incurred in a
controlled transaction with the mark-up on direct and indirect costs incurred
in an uncontrolled transaction.
4. The net
transaction margin method compares the net margin set on the basis of an
appropriate denominator that a firm earns in a controlled transaction with the
similar margin in an uncontrolled transaction. Y,
5. The profit split
method attributes to each company involved in a controlled transaction the
share of the profit or loss generated in that transaction that a stand-alone
company would expect to earn in a comparable uncontrolled transaction. It can
be applied to the total profit or to the residual profit obtained after
offsetting the roles played by each party (see:
www.oecd.org/ctp/transfer-pricing/transfer-pricing-guidelines.htm).
In our environment,
the issue of transfer pricing was first addressed in Interpretative Guideline
No. 20-03, entitled "Tax treatment of transfer prices, according to the
normal market value", issued by the Director General of Taxation on 10
June 2003 and subsequently by Executive Decree No. 37898-H of 5 June 2013,
"Provisions on transfer pricing". We will not make further reference
to the latter, since it had not been enacted at the date of the facts relevant
to the sub lite.
4. Now, according to
the Guideline cited -which had already been issued at the date of the relevant
facts of this case- "The power of the Tax Administration, to assess
transactions between related entities, which contemplate transfer prices
different from those of the market and make the relevant adjustments in income
taxation matters, has its legal basis in articles 8 and 12 of the Code of Tax
Rules and Procedures." Indeed, it explains:
"The
aforementioned Article 8 grants powers to the Tax Administration, in the
following aspects:
A. To attribute to
the situation and legal acts a significance in accordance with the reality of
the facts, regardless of the legal forms adopted by the taxpayers, and to
disregard those legal forms and apply the rule regardless of them, when they go
against the reality of the taxed facts and consequently affect the amount of
the tax obligations.
B. To create the
fiction that the agreed price was different from the real one, in those cases
where the conditions established or imposed between the associated enterprises,
in their commercial or financial relations, differ from those that would have
been established between independent enterprises. Thus, profits which, except
for those conditions, could have accrued to one of the enterprises, may be
included in the profits of that enterprise and taxed. The fiction consists in
valuing the transactions as if they had been carried out between independent
companies.
Unlike the previous
one, in this last aspect, in the case of companies with some degree of linkage,
it is normal that the agreements that establish a certain transfer price exist,
so the principle of economic reality requires recognising the economic reality
of the operation, as this is what was effectively agreed by the linked
companies, the terms of which are explained precisely by the phenomenon of linkage.
This creates the fiction that in some cases the agreed price may be different
from the actual price.
Consequently, the
valuation of transactions between related parties, at market value between
independent parties, is based on the correct classification of the facts,
regardless of the legal-formal coverage that the parties have conferred on
them, so that they are given the tax treatment that corresponds to them in
accordance with that classification." (Emphasis added.)
The following is an
illustration of the kind of cases in which the proposed approach is of
interest:
"When the market
functions properly between independent parties, economic value and price are
generally coincident. Under particular conditions, however, this coincidence
breaks down, as can happen when the parties are not independent, but related,
causing the real economic value and the agreed price to abandon their
relationship of identity".
In conditions such as
those described, it is concluded:
"The Tax
Administration may value, transactions carried out between related persons or
entities, when the agreed valuation would have determined a lower tax than that
resulting from the application of the normal market value. In this case, the
relevant adjustments must be made.
The company or related
party may make the corresponding adjustment, once the Tax Administration has
determined a new price for the audited entity".
5. As mentioned
above, in the sub examine the plaintiff accuses that -without explicitly
mentioning it- in the formal conducts in question there is a reference to the
doctrine of transfer pricing, which it considers incompatible with the
"principle of economic reality" that the ATGC used in the adjustment
applied to it, based on the provisions of paragraphs 8 and 12 of the CNPT. This,
from their point of view, entails a flaw in the material element 'motive' of
the contested acts, which would render them null and void. Furthermore, he
complains that there is no legal provision which authorises the reference made
by the administration to that first methodology. Notwithstanding the foregoing,
as the State's defence correctly points out, these issues were settled by the
Constitutional Chamber as of its judgment No. 2012-04940 of 15:37 hours on 18
April 2012, when it stated:
"III.- On the
merits. Pursuant to Interpretative Guideline No. 20-03 on the 'Tax Treatment of
Transfer Pricing, according to the Normal Market Value', an interpretation of
Articles 8 and 12 of the Code of Tax Rules and Procedures is sought. Its
application corresponds to the Division Directors, Managers of the Tax
Administrations and Large Taxpayers, so that the remaining staff is aware of
them. Its objective is to interpret tax legislation, as well as the freedom of
individuals organised within business groups, and the legal effects of the acts
they carry out with respect to tax obligations. In this sense, the aim is to
dispense with legal forms and to consider the true economic intention of the
parties, so that the legal forms that the parties use to establish their business
are not binding (sic) for the administration, but to reveal the economic nature
of the operations.
There are cases where
benefits are received without exchange of consideration, through an agreed
transfer price or the establishment of certain clauses, conditions and
agreements. Thus, the Guideline states that it incorporates the pricing
doctrine of '... the application of the Arm's length principle [...] in related
transactions is generally based on a comparison of the terms of a related
transaction with those of transactions between independent enterprises, i.e.
those prices must be equivalent to those of similar transactions between
independent enterprises [...]'.
Consequently, the
Interpretative Guideline allows valuing transactions between related entities,
where transfer prices exist, and making the respective income tax adjustments.
Consequently, it creates a fiction that resides in establishing the
transactions as if (sic) they were carried out between independent companies,
establishing the correct qualification of the facts, instead of what it calls
the legal-formal coverage. In accordance with article 12 of the Code of Tax
Rules and Procedures, it is established that particular agreements are
disregarded and it is assumed that the market coincidence works properly
between independent parties, the economic value and the price coincide, and
when they do not, it is because there are related companies, causing a
difference.
IV.- Transactions
between related companies. In the opinion of the Chamber, related-party
transactions are those economic operations that are carried out between persons
or economic entities with their partners, administrators and other persons who
are in some way related to a company. It is a problem that arises from a reality
that exists in the world of business transactions, from the universality of
businesses that operate in a sphere of total freedom, and in which the
different companies are linked both formally and informally, because they are
economically linked to each other.
The guideline in
question is that if these (sic) operations have some kind of artificial
manipulation, and this is detrimental to the tax authorities, it allows the
application of articles 8 and 12 of the Code of Tax Rules and Procedures to
establish that certain transactions correspond to a market value as if they had
been established between independent persons or entities that concur in free
competition. Although there are different methodologies to conclude that a
price corresponds to a certain reality or not, the problem before the Chamber
is an issue closely linked to one that arises for any legal operator that must
apply rules that seek to compensate forms of abuse of law or that do not
correspond to an economic reality in order to avoid tax liabilities. The main
argument of the action is that Interpretative Guideline No. 20-03 requires a
legal provision regulating transfer pricing and the mechanisms to specify it.
V.- Infringement of
the constitutional procedure of incorporation of international law. The
background of the Organisation for Economic Co-operation and Development (OECD)
is to be found in the European Organisation for Economic Co-operation and
Development (OEEC), created for Europe in 1948 as part of a recovery strategy
for the countries that were in conflict in the Second World War. Having
achieved its objectives, principally the economic reconstruction of Europe, it
was transformed from a European organisation that broadened its horizons to
include other countries of the world, including members from the Americas (with
the United States and Canada), and with the idea of contributing to the
peaceful and harmonious development of relations between peoples, recognising
that there are global problems and acknowledging the interdependence of the
world's economies, as well as a commitment to collective action in favour of
underdeveloped countries. This international body does indeed have a clear
emphasis on contribution and collaboration to the world economy, doing so
through the mechanisms set out in Article II.
Article II
In pursuing these
objectives, the members agree that they shall individually and jointly:
(a) promote the
efficient use of their economic resources;
(b) in the scientific
and technical field, promote the development of their resources, encourage
research and foster vocational training;
c) pursue policies
designed to achieve economic growth and internal and external financial
stability and to prevent the emergence of situations that could endanger their
economy or that of other countries;
d) continue efforts
to reduce or remove barriers to trade in goods and services and current
payments and to maintain and extend the liberalisation of capital movements;
(e) contribute to the
economic development of both members and economically developing non-members by
appropriate means, in particular through the inflow of capital to those
countries, taking into account the importance to their economies of technical
assistance and of ensuring an expansion of the markets offered to their export
products' (emphasis added).
As can be seen from
the above rules, this International Organisation has a technical vocation with
the world economy, both with member and non-member developing countries,
constituting an important forum for collaboration with countries that wish to
keep their own economies as well as the world economy healthy. From what the
plaintiff has raised before this Chamber, the lack of approval of the OECD in
the legal system and the principle of the reservation of the law arise as a
question of constitutional relevance.
It is alleged that
our country, without having approved any international treaty related to the
OECD, incorporates provisions of this international organisation into the
contested Interpretative Guideline, which, moreover, it is claimed are not
technical standards. It is argued that in order to incorporate these OECD
provisions, it is necessary to comply with the constitutional procedure of
approval of the Treaty in order to have legal effects in our country or of a
law that incorporates them (articles 121 (4), 140 (5) and (10) of the Political
Constitution). Notwithstanding the foregoing, our country does not need to be a
member of said body to make use of certain rules or practices that contain a
high degree of consensus, especially if, as in the case at hand, Articles 15
and 16 of the General Law of Public Administration establish the limits to
discretion, even in the absence of a law, which is precisely what is happening
in the present case. This Chamber agrees with the Attorney General's Office and
the Minister of Finance that these are rules with a high degree of subjection
to science and technique, as in the case of the general principles of
accounting, where a law would not be necessary to reach a technical consensus.
In this sense, those methods or techniques make it possible to arrive at a
result that is as close to reality as possible, without the need for them to be
formally incorporated into the legal system.
Similarly, the
intervener, in addition to making the same observation, points out that the
GATT negotiation incorporated a criterion or concept of 'transaction value' to
arrive at the prices actually agreed or paid for goods by valuation methods, in
order to establish that there should be no different methods from other
techniques not incorporated into the legal system, these methods are intended
to discover real, not artificial, prices, and that although they are specific
provisions for the import and export of goods, they do not refer to other taxes
where there is self-assessment by the taxpayer, which is why the contested
Guideline can be considered by different legal operators when analysing tax
returns to rule out the legal forms used by the parties, if there are doubts
about the real scope of transactions between economically linked companies.
VI.- Interpretation
of tax rules. It is clear that the interpretation of tax rules is intended to
implement the tax rule as a constitutional obligation. The tax obligation is a
duty derived from the Political Constitution. In this sense, this Chamber ruled
in Judgment No. 2003-02349 that:
' If we start from
the principle derived from constitutional articles 18 and 33, that in tax
matters everyone must contribute to the expenses of the State in proportion to
their economic capacity (in identical conditions the same taxes must be imposed),
this does not deprive the legislator of creating special categories, provided
that they are not arbitrary and are supported by a reasonable basis. Thus, the
authorities in charge of issuing legal rules are obliged to categorise with
respect to the principles of rationality and proportionality, in order to
achieve a legal balance between the taxpayers. The only unconstitutional
inequalities will be those that are arbitrary, lacking any reasonableness. In
theory, as far as tax law is concerned, the idea is to tax the true contributive capacity of taxpayers, and in order to
establish taxable income, the law must accept the deduction of the respective
costs and expenses necessary to produce it'.
On the other hand, by
judgment No. 2009-000309 of fifteen hours and seventeen minutes of January
fourteenth, two thousand nine.
In general, and
referring to the tax issue, the Court has stated that the immediate purpose
that leads the State to establish taxes is to have resources to meet the
expenses demanded by the provision of public services; neither the State nor
the market alone can meet the social needs of its inhabitants. For this reason,
it is essential that the members of a society collaborate economically to
fulfil those social purposes that are in the interest of all, which is why it
is necessary that these resources reach the Treasury in a timely manner. The
payment constitutes, then, the natural means for the extinction of the tax
obligation; by paying the money of the amount of the tax debt, satisfying the
respective total according to the liquidation that adjusts to the law and in
the opportunity that it foresees, the taxpayer is released from the
consequences that such tax obligation implies. However, the constitutional
obligation to contribute to public charges implies not only the effective
payment of taxes, but also the duty to provide the Administration with
information regarding their tax situation, so that it has sufficient elements
to corroborate the correct fulfilment of tax obligations. However, there may be
cases in which the Tax Administration considers that the information provided
by the taxpayer regarding his tax situation is untrue or incomplete. In such
cases, the Tax Administration may apply certain objective criteria that allow
it to reasonably 'presume' the real truth of the amount of the debt, or its
non-existence. On this aspect, the Chamber has stated:
' (...) there is a
clear public interest that taxpayers comply with their tax obligations in an
exact and lawful manner, and thus, the fair payment of taxes is a principle of
obligatory compliance for the inhabitants and the State. The above reasons
justify the duty of taxpayers to provide the necessary information in order to
prove the legal tax situations that concern them. On the other hand, the
constitutional order provides for and protects the essential principles and
fundamental guarantees of taxpayers. This also determines a balance in the
public order, in which fair payment, good faith, legality, objectivity,
technique and reasonableness, among others, are parameters that not only
protect individuals, but also ensure the existence of the tax system as a
source of resources for the realisation of the interests of society and
democracy'. The administration must have effective means of control, otherwise
evasion and not payment would be the rule, with the eventual detriment to
society as a whole'.
Given the autonomy of
tax law, Article 8 of the Code of Tax Rules and Procedures establishes a
principle of economic reality, which, together with Article 12 of the same body
of law, establishes an important rigour in the interpretation of the legal acts
of individuals vis-à-vis the Tax Administration. In the opinion of the Chamber,
it is clear that there is a delicate balance between the interests of the tax
administration and what the national doctrine indicates in terms of the
taxpayer's opportunity to save tax, so that he can lawfully organise himself to
reduce taxes.
The problem posed by
the plaintiff is reduced to arguing that the guideline requires a legal norm
that enables it, or better still, a legal norm that adopts OECD techniques as
occurs in other latitudes. But it should not be forgotten that the principle of
economic reality is a principle that operates in a dual manner, so that it is
an instrument of legal hermeneutics of the generating fact of the tax
obligation, so that if the legal forms used by commercial parties do not
represent an economic reality, this can be objected, but its results can also
benefit the taxpayer in the determination of the generating fact based on the
aforementioned articles, or to establish the obligation contained in Article 18
of the Political Constitution, to contribute to public burdens. In order to
reach plausible results, it must be logical that there is an analysis of the
formal and material accounting obligations of the taxpayer, since commercial
activity is also linked to these tax obligations, in an area of great state
interest, to determine the economic reality of the companies.
Other examples can be
found in the civil, commercial and family law fields, where it is possible to
talk about issues such as the lifting of the social veil of companies to
establish a business reality or abuse of law, if this is used as an instrument
to harm third parties, in an attempt to commit fraud with illegitimate
patrimonial benefits. This doctrine was developed in the early 19th century in
the American courts in equity, which later became known as 'piercing the
corporate veil'.
In this sense, the
problem that arises is one of ordinary legality, where the Contentious
Administrative Courts have a preponderant role, as does the Tax Administration
when, through various legal instruments, it can pierce the legal person or its
organisations, reducing precisely a legal fiction to observe an economic
reality, authorised by articles 8 and 12 of the Code of Tax Rules and
Procedures. It is not possible to think that an express rule is the only
solution to the legal problem posed by the plaintiff, or to suppose that the law
is so imperfect that a judge cannot adapt its application to the reality of a
generating fact. It is not even possible to understand that the absence of a
rule allows a specific case to be left undecided. It follows from Article 153
of the Political Constitution that the judge, when interpreting and integrating
the law in accordance with the sources of law, must provide a solution to
social conflicts, as well as offer legal certainty to the legal system, in this
sense, even (sic) when there is no concrete solution established in a legal
rule, it can be constructed from Articles 8 and 12 of the Code of Tax Rules and
Procedures.
The judge plays a
fundamental role, especially when the legislation cannot provide an exhaustive
plenitude of solutions for all conflicts. In this sense, it is possible that
the will of the State, on many occasions, must be acted upon without the
legislation contemplating each of the elements of the administrative act, as
occurs when the Public Administration must act with discretion in order to
materialise general precepts of the legal system contained both in the
Political Constitution and in the Law. Notwithstanding the above, such
administrative acts are valid and effective if they comply with the law, and
when they do not, their nullity may be administratively and judicially demanded
insofar as they are subject to the limits of discretion (the examination of
which may be the subject of an administrative procedure or judicial process
before the Contentious Administrative Courts [sic]).
The judge, therefore,
can substitute for the Public Administration, becoming the guarantor of the
legality of the administrative act, which will be subject to the provisions of
Articles 15 and 16 of the General Law of Public Administration. The above leads
us to the specific case, in which there is a discussion as to whether it is a
technical rule that should be applied to the specific case, which, as has been
said, it will ultimately be up to the judge to determine the nature and
legitimacy of the use of a technique, and not others. In this regard, the
plaintiff bases his argument on the lack of a legal provision (the intervener
likewise in a legal and regulatory provision authorising or), which provides
normative support for the technique adopted by the Directorate General for
Direct Taxation. What is clear for the Chamber is that, despite the absence of
a legal norm that effectively incorporates the OECD rules, but as the technique
is a parameter of the Administration's discretion, the latter is obliged to
incorporate the whole technique into the legal system, which is why, if they
are accepted, the discussion is reduced to their application or not before the
judges of the Republic, as in the case where there is a discussion of whether
one technique is better than the other, or that it does not represent the most
convenient for a given accounting result or business reality. In view of the
above, this is a discussion of ordinary legality. With regard to the alleged
infringement of the freedom to conduct a business, this Court does not see how
this can be affected by the contested directive, and the plaintiff does not
offer solid and logical arguments in this regard.
VII.- Conclusion. The
contested Guideline does not establish or impose a single method of transfer
pricing analysis, so that, in the absence of a law, the autonomy of tax law
allows for the determination of the tax to be paid by resorting to the
provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures,
without prejudice to the possibility of admitting other better techniques. What
is important is that the contested Interpretative Guideline does not seek to
eliminate multiple other scenarios arising from different forms of business
organisation, but is directed at transfer pricing between related companies.
Even if the legislator may adopt a certain technique or several techniques to
regulate a certain behaviour of companies, or recognise legal practices to
reduce taxes, it is possible to admit that if there are clashes with tax law
and reality, in the absence of a law, it is ultimately up to the judge to
decide on the correct application of the technical rules. Thus, in the absence
of any particular legislation, this fact does not prevent the parties in
conflict from presenting their arguments, producing evidence and demonstrating
the need to apply other criteria that allow for the non-application of the
technical rule that adopts the guideline in question, or of another possible
method, a situation that evidently makes the discussion a matter of ordinary
legality. For all of the above reasons, the action should be dismissed, as
indeed it is dismissed". (Emphasis added.)
Thus -based on what
the Chamber has indicated and taking into account the erga
omnes binding effect of the constitutional
jurisprudence (article 13 of Law 7135)- there is no contradiction between the
transfer pricing methodology and the application of the principle of economic
reality of paragraphs 8 and 12 of the CNPT, nor is there any impediment to
resort to the former even in the absence of an express legal rule that
incorporates it into the Costa Rican legal system. For this reason, the first
of the grievances raised in the application must be dismissed.
B. Failure to comply
with the requirements for making a determination on a presumptive basis and
infringement of accounting rules:
1. If, the
complainant alleges, the ATGC resorts to an indirect assessment or assessment
on a presumptive basis for the purposes of the contested determination, it has
done so without complying with the requirements for that purpose laid down in
Article 124 of the CNPT. In the present case, it argues, we are not dealing
here with a direct assessment on a basis of certainty (since the tax liability
is not determined on the basis of the invoices and the applicant's accounts),
but rather, the statement of objections and the decision on assessment
purported to make an indirect assessment or an assessment on a presumptive
basis. However, the latter is only possible in one of the circumstances foreseen
in the aforementioned ordinal 124, which must be expressly motivated as
required by article 18 of the RGGFRT. In the statement of objections, the ATGC
described the accounts of the plaintiff as "contradictory, insufficient
and irregular", on the grounds that the use of the five per cent profit
margin meant that the accounts did not present the reality of the events.
However, this allegation is fallacious, as using a margin on sales to related
companies abroad that is different from that used on sales to other companies
is not a real accounting irregularity or defect.
He cites sentence No.
307-2005 of the Second Section of this Court, confirmed by resolution No.
597-F-2006 of the First Chamber of the Supreme Court of Justice, which - he
believes - reflects this same line of reasoning. On the other hand, he
continues, in resolution TFA-440-2009-P, the First Chamber of the TFA added a
distinction between "material accounting" and "formal
accounting", which he considers it did in a purely accommodating manner
for the purposes of considering article 124(c) of the CNPT to be complied with,
qualifying the accounting as "defective and irregular" as a
requirement for making a determination on a presumptive basis. According to the
TFA, the material accounts refer to the company's financial statements, which
reflect its economic reality and which are not necessarily correctly reflected
in the formal documentation. However, it states that selling below a normal
market price does not constitute a violation of any principle of material
accounting; on the contrary, it is necessary for material accounting to record
the transaction at that cost in order to reflect the true material economic
reality of the company.
He refers to
International Accounting Standard 24, which, he explains, recognises the fact
that related party relationships are a normal feature of trade and business. At
no point does IAS 24 state that such transactions should be recorded at arm's
length or market value, but that it is indispensable that the accounting
reflects the actual price agreed with the related party. Thus, in the specific
case there was no accounting irregularity or defect that would authorise a
determination on a presumptive basis. The contrary criterion asserted by the
TFA is therefore inadmissible under article 16 of the LGAP, as it is contrary
to accounting science and technique.
2. On these issues,
the defendant states, the TFA certainly objected to the accounting, because
derived from the principle of economic reality, the difference in the profit
margins of the company could not be considered as true and truthful, when
differentiating between sales to related companies with respect to others. This
is precisely the reason why the presumptive basis method was used. In any
event, it is not true that Resolution TFA-440-2009 of the First Chamber of the
TFA includes a "new issue", but rather that the references to the
distinction between formal accounting and material accounting constitute an
additional legal argument to support the position of the Tax Administration,
given that the facts remain the same as those originally stated in the transfer
of charges of interest to the plaintiff here. This being the case, what is
paramount is the correct application of the principle of economic reality that
was made in the present case.
3. The Court notes
that the contested transfer of objections does indeed state:
" ... it
proceeds to partially qualify the accounting as contradictory, insufficient and
irregular because, as has been indicated, by reflecting a lower sales amount
due to the application of a (sic) profit margin over cost, in the determination
of sales prices to its affiliates abroad, reduced by 50% of that applied
locally to affiliates and other companies, said accounting does not present the
reality of the events, the lucrative nature of the companies. In both
accounting and tax information, the substance and economic reality must (sic)
prevail over the form.
Likewise, we proceed
to make this presumptive determination of income, (...), in accordance with the
provisions of articles 124 paragraph c) and 125 of the Code of Tax Rules and
Procedures, inasmuch as the company, by fixing the price of its products to
affiliates abroad, obtains an income from sales, declared and accounted for, resulting
in a net loss on these sales, conduct which is irregular in profit-making
companies". (f. 9 of the administrative determination file).
For this reason, it
is appropriate to refer to what Section V of this Court ruled in a similar
situation, when it said:
"VI.- ON THE
DETERMINATION OF THE OBLIGATION AND THE EXISTENCE OF THE CONSTITUENT ELEMENTS
OF THE ADMINISTRATIVE ACT OF INFORMAL DETERMINATION. The determination of the
tax liability '...consists of the act or set of acts emanating from the
administration, from individuals or from both in coordination, aimed at
establishing in each particular case, the configuration of the factual
assumption, the measure of the taxable amount and the scope of the obligation'
(Carlos Giulliani Fonrouge.
Derecho Financiero. Tomo I.
)° Edition. Argentina. 2004, page 428). It is then an intellectual procedure
through which it is established whether the activities of a taxpayer fit within
the postulates indicated by the law as generating the obligation, and if so, to
quantify the amount of the obligation.
Despite the fact that
some sectors have affirmed that there is only determination when there is
non-compliance, since this gives rise to the issuance of an administrative act
in which the obligation is determined, our tax legal system opts for a self-determination
model, in accordance with the provisions of Article 120 and following of the
Code of Tax Rules and Procedures, so that when the taxpayer, in compliance with
his duty of initiative (Article 120 of the Code), spontaneously complies with
his formal and material duties, he also carries out an act of determination of
the obligation. Therefore, in our legal system, the determination of the tax
liability is, in principle, the responsibility of the taxpayer himself. (...)
Thus, it is the taxpayer who must quantify the tax and pay to the Treasury the
amount that he finally determines as the value of his obligation. However, it
is clear that this duty of initiative on the part of the taxpayer does not
inhibit the auditing power of the Administration, insofar as it has the duty
not only to make up for the omission of the taxpayer, in order to comply with
its self-determination obligation, but also to review the quantifications made
by the taxpayer or person liable, and even to substitute them when they do not
comply with the legal system. This is the meaning of canon 123 of the Code de rito, (...). It follows then that the ex officio
assessment, which is the one made by the administration itself (Articles 121
and 124 of the Code), is of an extraordinary nature, in that the establishment
of the amount of the obligation must come from the obligor himself, '...is of
an exceptional and subsidiary nature, insofar as the tax administration is only
empowered to resort to it in the hypotheses of failure to submit tax returns or
when those submitted can be challenged. That is to say that, in principle, the
method of ex officio determination must be used when the taxpayer's submissions
can be challenged, given that otherwise they are valid'. (Horacio García Belsunce. Tratado de Derecho Tributario. Volume I,
Volume 2, pages 229).
It is precisely in
view of this extraordinary or exceptional nature that the Code establishes
certain objective assumptions for the Administration to proceed with the
assessment: 'Article 124. When tax returns have not been filed, or when those
filed are objected to by the Tax Administration on the grounds that they are
false, illegal or incomplete, the Tax Administration may determine ex officio
the tax liability of the taxpayer or responsible party either directly, due to
certain knowledge of the taxable matter, or by means of an estimate, if the
known elements only allow the existence and magnitude of the tax liability to
be presumed. Likewise, even if the affidavit has been filed, the Tax Administration
may proceed to an ex officio assessment if any of the following circumstances
occur:
a) That the taxpayer
does not keep the accounting books and records referred to in Article 104 of
this Code;
b) Failure to submit
the documents supporting the accounting operations, or failure to provide (sic)
the data and information that is requested; and
(c) The accounts are
kept in an irregular or defective manner, or the books are more than six months
in arrears.
For the purposes of
the above provisions, the indications indicated in paragraph b) of Article 116
of this Code shall be considered to be indicative of the existence and amount
of the tax liability. Therefore, only when the conditions stipulated in the
aforementioned provision are met, an unofficial assessment may be made, which,
as stated in the same paragraph, may be based on certain or presumptive
grounds, which leads us to Article 125, which provides: 'Article 125.- Forms of
assessment. Determination by the tax administration shall be made by applying
the following systems:
a) As a general
thesis on a certain basis, taking into account the elements that allow direct
knowledge of the facts that generate the tax liability; and
b) If this is not
possible, on a presumptive basis, taking into account the facts and
circumstances which, because of their normal link or connection with the event
giving rise to the tax liability, make it possible to determine the existence
and amount of that liability.
Thus, the law has
delegated to the taxpayer the determining action, a function that is assumed by
the Administration only in the cases specifically provided for in the law and
by means of the procedures established therein: on an actual basis, when the
Administration has information from the taxpayer himself, which allows it to
establish the exact amount of the obligation; or on a presumptive basis, in
those cases in which, in order to determine its value, it must carry out a
reconstructive task, based on known facts that allow it to make estimates on
unknown facts. In relation to the concept of presumption Litvak and Laspina point out: '...presumption is a conjectural
operation which, from a fact known with certainty, infers the probability that
another has occurred, whose existence is strictly unknown...it supposes: a) a
certain fact (inferred, proven, or founding fact) about whose existence there
are no doubts; b) to elaborate, from it a rule of experience which does not say
that it is normally the probability of the existence of another fact (inferred,
presumed, founded fact), about which, in reality, we have no certainty
whatsoever.' (José Litvak and Esteban Laspina.
La Imposición sobre Base Presunta. Editorial La Ley, 2007 Edition, page 55).
According to the transcribed regulation, the procedure for determining the tax
liability on a presumptive basis can only be used by the Administration when it
lacks the elements that allow it to establish with certainty its magnitude.
This means that the tax administration must first exhaust the means that allow
it to reconstruct the taxable matter directly or on a certain basis and only in
the indicated cases resort to that exceptional method of determination'
(Horacio García Belsunce). (Horacio García Belsunce. Tratado de Derecho Tributario. Volume I,
Volume 2, page 230). In the case under examination, this Court has considered
it duly established that by means of a transfer of charges (...), the
Directorate General of Taxation calculated an increase in income from sales not
declared by the plaintiff company for the tax periods 2003, (...), and 2004,
(...), a transfer that was challenged by the plaintiff, which in turn was
rejected by the Directorate General of Taxation, Administration of Large
Taxpayers, through resolution (...), which was confirmed by the Administrative
Tax Court (...). Both] resolutions (...) hold that the action of the
Administration carried out an assessment procedure based on the fact that
[XXX], reflected in its accounting and affidavits submitted for the tax periods
two thousand three and two thousand four, sales below cost.
Both the Directorate
General of Taxation and the Administrative Tax Court agreed that the essential
purpose of companies is to obtain profit, and with this maxim as a guiding
principle, it is not possible to sell goods or services at a price below their
cost of sales. Also, both administrative bodies pointed out that the
administrative procedure used by the Fiscalisation
Section was the correct one, since in their opinion, the prices below the cost
of sales are clear evidence of contradictory and insufficient accounting, which
placed the claimant in the budgets of numerals 124, paragraph c and 125 of the
Code of Tax Rules and Procedures. (...). Furthermore, the determination was
justified, indicating that the taxpayer omitted income and that in general its
conduct caused damage to the Treasury, since by agreeing prices below the cost
of sales it reduced its taxable income through an agreement with third parties
that should be disregarded, in the light of paragraphs 8 and 12 of the
aforementioned Code. Thus, the contested conduct contains acts through which
the Administration concerned quantified the tax liability of the plaintiff for
the tax periods 2003 and 2004, which qualifies as an ex officio determinative
function, substituting in this case the self-determining actions carried out by
the taxpayer.
Now, if, as stated
above, in accordance with Article 120 of the Code governing the matter, it is
the taxable person who has the duty of initiative and it is he who, in
principle, has the duty to establish the amount of his obligation by means of
the tax returns, it is necessary to clarify whether, in this specific case, it
was the Administration's duty not only to exercise its supervisory power, which
is indisputable, since the Administration has the obligation to monitor the
veracity of the declarations, as well as the accounting information on which
they are based, but also, and also as a manifestation of that auditing power,
the unofficial modification of the amount of the applicant's tax liability in
respect of the periods audited, based on the arguments put forward by the
Administration concerned in the contested decisions. Pursuant to Article 123 of
the Code, the administration has the power (power-duty) to verify taxpayers' declarations
and financial and accounting information, for which purpose it may carry out
any investigations it deems useful.
In accordance with
Article 124 of the same legal body, when no returns are filed or when, on the
occasion of this verification work, it is considered that those filed are
false, illegal or incomplete, the obligation is determined ex officio, i.e.,
the Administration establishes what it considers to be the true extent of the
obligation. Likewise, the ex officio determination is made when the taxpayer
does not keep accounting books, when the documents supporting the accounting
operations are not submitted or when the taxpayer fails to provide the
information required by the administration, or when the accounting is kept
irregularly, with defects, or when the books are more than six months overdue.
It is this last assumption, contained in Article 124(c) of the Code, which is
the legal basis on which the administration based its informal determinatory action. In support of this thesis, it stated
that the accounts of the (sic) plaintiff were contradictory and irregular, due
to the fact that they reflected sales prices below the cost of sales, which it
qualified as abnormal, based on the premise that the purpose of all business
activity is to obtain profit. The administration then found that although the
formal accounts were in order, the material accounts were not. However, it also
held that the plaintiff's accounts were a true reflection of the sales
transactions, and that the accounting irregularity consisted in recording
transactions at a price below cost. This Court understands that formal
accounting refers precisely to compliance with a series of provisions relating
to accounting technique and conforms to the legal system, when it complies with
the regulations relating to the way in which the accounts must be kept. The
material accounting refers to the actual accounting facts, which, although they
should be reflected in the formal accounts, are not always the case.
In the case under
examination, the administration expressly acknowledged that the accounts
faithfully reflected the transactions carried out by the plaintiff, which, in
the opinion of this decision-making body, means that the sales prices recorded
therein were exactly those that the plaintiff charged for its products to its
related companies for the tax periods two thousand three and two thousand four,
which means that the formal accounts would be a faithful reflection of the
material accounts. Now, the prices that give rise to this controversy occur
within transactions between related companies, which require a different and
specific treatment, precisely because of what the doctrine has been calling
transfer prices, which are used by related companies so that, by means of
agreements in which prices different from market prices are set (in this case,
lower), profits or losses are transferred or transferred between these related
companies, with negative tax effects for the different tax administrations
involved in their condition of active subject, since this practice undoubtedly
has extra-accounting tax effects.
In the case in point,
the administration concerned alleged, as grounds for its unofficial
determination, the finding of contradictory and irregular accounting, but at
the same time it says that the transactions reflected therein actually existed,
that they are true, and that the prices below cost of sales which caused it to
incur suspicions actually occurred, i.e. they were the prices which [...] it
actually charged to its related companies. Therefore, there is indeed a flaw in
the reasoning of the act, since it was not the existence of irregular
accounting that opened the possibility of exercising its ex officio
determinative power, since this assumption did not occur. The factual
assumption that gives the administration the power to proceed to determine the
obligation is precisely the applicant's practice of setting prices below the
cost of sales for its related companies.
In the view of the
Court of First Instance, we are therefore faced with conduct which, contrary to
what the applicant's representatives allege in arguing that the plea does not
exist, is vitiated by a partially inadequate statement of reasons, but which
does not give rise to the defects of absolute invalidity pointed out by the
applicant's representatives.
The Court considers
that the plea does exist, since, as indicated above, the evidence adduced in
the file, including the evidence admitted for the purpose of a better decision,
which refers to the consolidated financial statements of the applicant company,
provides the Court with the certainty that [...] sold at prices below cost
[...], and that [...] sold at prices below cost [...]. ...] sold at prices
below the cost of sales to its related companies, in the fiscal periods two
thousand three and two thousand four, incurring in a practice (sic) that
derived in a self-determining action on the part of the plaintiff company in
which it established as the amount of its tax obligation, an amount lower than
the amount that would have corresponded in the case of applying the market
value. This is the cause or reason for the contested conduct, and it is
precisely the factual assumption that served as a background for the
Administration to issue the contested acts. Thus, although it is wrong to state
as part of the reasoning that the taxpayer's accounts are irregular and
contradictory, the fact is that it is also expressly stated, and implicitly
found throughout the content of the various contested decisions, that the reason
for the administration's intervention, and its unofficial determination action,
was precisely the fact that the taxpayer's accounts were irregular and
contradictory, and that the taxpayer's accounts were irregular and
contradictory, was precisely the fact that it was able to determine the
existence of related operations that, by selling at prices below the cost of
sales, caused damage to the Treasury by reducing the size of the tax obligation
of the taxpayer, conduct that is due to tax planning, and for which the law
offers a solution through sections 8 and 12 of the Tax Code, as we will see
below.
It also appears in
the conduct under analysis that the Administration not only based its actions
on the existence of ambiguous (sic) and contradictory accounting, a criterion
that, as mentioned above, is not shared by the Court, but also, in its
reasoning, the principles derived from paragraphs 8 and 12 of the Code of Tax
Rules and Procedures, which allude to economic reality, are argued in its
reasoning. Thus, the Administration concerned expressly pointed out that, given
the nature and tax consequences of the operations between companies related to
the plaintiff, the principle of economic reality allows agreements made between
private parties to be disregarded, a reasoning which, in the matter of transfer
pricing, was endorsed by the Constitutional Chamber in its ruling on the
occasion of the action of unconstitutionality brought against Interpretative
Guideline number 20-03, (...). The Court concludes that the administrative
conduct examined, in which the Administration proceeded to determine, ex
officio, the amount of the plaintiff's tax obligation, does not have defects in
its essential elements that produce its nullity, since, as stated, the motive
does exist, and from the grounds analysed in an integral manner (Articles 133
and 136 of the General Law of Public Administration), It is evident that the
use of prices below the cost of sales between the companies related to the
plaintiff caused a decrease in the amount of its tax obligation and therefore
an affectation to the fiscal interests of the State, a factual situation that
was remedied on the basis of the provisions of numbers 8 and 12 of the Code of
Procedure, without meeting the requirements set out in canon 166 of the General
Law of Public Administration, to declare the absolute nullity required by the
representation of the plaintiff. " (No. 69-2014-V of 8:11 a.m. on 25
September 2014; square brackets and underlining are ours).
Thus, even admitting
the claimant's objection that the argument of irregular accounting is
ineffective to support the informal assessment action (a subject to which we
will return later), we would have to conclude that the fact of having found
that the taxpayer was selling below the normal market price constitutes
sufficient legitimate grounds to justify the intervention carried out. This was
made clear in the contested transfer of objections, when it states, for
example:
"11- According
to the study carried out, with a profit margin of 5% over cost for products
sold to foreign affiliates, the company operates with net losses in relation to
such sales; since the cost of sales of these products accounted for by Reca Química S.A. in those fiscal
periods, as can be seen in the detail of cost of sales by customers and
affiliates, provided by the company, amount to ¢2,609,301,751. 00 and
¢2,885,638,397.00 respectively, when adding the operating expenses deducted,
prorated in the proportion of the declared income with respect to the total
(38.14% and 38.65%), result in operating losses for the amounts of
¢15,265,000.00 and ¢181,211,786.00 in the mentioned fiscal periods, which means
that the profit margin of 5% incorporated, does not cover the operating
expenses. (...)
(...)
The fixing of sales
prices (sic) with a profit margin of 5% over cost to foreign affiliates by the
manufacturing company Reca Química
S.A., which does not cover operating expenses and does not generate returns for
shareholders, is totally abnormal, illogical, irrational and unnatural to occur
in the commercial environment and between companies incorporated for profit,
especially in the case of the same products and between related companies and
that they are sales that are made frequently in every month of the tax period
and of high volume both in quantities and in terms of amount, i.e. there is
regularity of these transactions with related companies abroad. This is only
possible due to the existing link between the parent company, the manufacturing
company and the foreign affiliates, where the agreed sales price contains a
profit margin of 5% over cost, which represents 50% of that applied to local
affiliates and other local companies. Such a linkage allows the conclusion of
this type of agreement between parties which is not admissible against the
Treasury.
The Tax
Administration therefore rejects the 5% percentage as unrealistic, unreasonable
and unfounded, especially in the case of the same products sold to local
affiliates, other local companies and foreign affiliates; The fact that the 10%
profit margin has always been applied to local affiliates and other local
companies in accordance with pricing policies and that this 10% percentage was
also applied to foreign affiliates prior to 1 October 1994 and subsequently as of
28 August 2005, and that the modification of the profit margin from 10% to 5%
and again to 10% for foreign affiliates was due to compliance with corporate
directives.
The fact that a
profit margin of 10% is applied to set sales prices to local affiliates and
that the pricing policy indicates that this 10% covers administrative costs,
shows that the profit margin for foreign affiliates is actually 10%, however,
the prices are determined by adding a 10% mark-up for local affiliates, the
prices are determined by adding 5%, even (sic) when the company knows that in
reality this does not cover operating costs, so it is inferred that only for
tax purposes the profit margin applied is 5%, which is given by virtue of this
link between companies that make up an economic group at the international
level. " (f. 7-8 of the administrative determination file).
Such argumentation
-i.e., the inappropriateness of establishing differentiated profit margins in
the expressed manner- was subsequently upheld both in the Determination
Resolution DT-10CVR-060-07 (see f. 206-214 of the Administrative Determination
File) and in its confirmatory resolutions Nº AU-10-CVR-109-07 (see f. 271-274
ibid.) and TFA-440-2009 (f. 414-429 of the same file).
4. It remains, then,
to elucidate whether, being legitimate the informal intervention carried out,
it was also legitimate or not to apply to the case the method of determination
on presumptive basis, since according to article 125 of the CNPT, this is of an
exceptional nature and its use is not discretionary for the Administration,
since it can only resort to it in a subsidiary manner, when the taxpayer does
not have or does not provide the Administration with the necessary information
to know directly the fact generating the obligation and its amount.
It is for this reason that the final paragraph
of paragraph 18 of the RGGFRT - then in force - required to demonstrate and
give reasons for the existence of any of the criteria contemplated in Article
124 of the Code when the presumptive basis method is to be used. As mentioned
above, these are: a) That the taxpayer does not keep the accounting books and
records referred to in article 104 of this Code; b) That the taxpayer does not
present the documents supporting the accounting operations or does not provide
the data and information requested; and c) That the accounting is kept in an
irregular or defective manner or that the books are more than six months in
arrears.
It has been seen that
the ATGC tried to justify the presumptive determination in the last mentioned
case, by qualifying the accounts of the now plaintiff as "contradictory,
insufficient and irregular", due to the fact that it used a lower profit
margin in sales to its foreign affiliates than the one used with respect to the
affiliates and other local companies. In the opinion of this Chamber, the
plaintiff is right in claiming that this argument is clearly incorrect, because
as long as the company accounts reflect the transaction prices actually charged
- regardless of whether they may be lower than the market value of the products
and whether the latter is normal or not - they do not accurately reflect the
financial reality of the company, from which it is obvious that it would not be
possible to blame it for the shortcomings in question.
Consequently, it was
not possible in this hypothesis to resort to the determination by the
presumptive basis method, and the partial annulment claimed in this respect had
to be upheld. Indeed, in the opinion of the undersigned, the ATGC should have proceeded
by the method of certain basis, which, since we are in a transfer pricing
scenario, implied carrying out the corresponding analysis based on the
technical rules of the OECD, mentioned above, which was perfectly possible
based on the theoretical and legal framework set out in Interpretative
Guideline number 20-03, already in force at the time. Although in the complaint
the plaintiff claims that the content and justification of the aforementioned
Guideline is erroneous and even illegal, the fact is that it does not challenge
it, so that there is no impediment in this respect, particularly in light of
the related constitutional ruling.
VIII.- REGARDING THE
ALLEGATION OF INVALIDITY OF THE ADJUSTMENT ENTITLED "III. DEPRECIATION
REVALUATION". The plaintiff's counsel argues that, in the adjustment
entitled "III. Reclassification for depreciation' of the contested
transfer of charges, the CMAA rejected the depreciation expenses for the
'Prisma Project', on the basis of an erroneous interpretation of IFRS and
specifically IAS 38, since the decisive element of the rejection is that that
project was included in the 'Furniture and Equipment' account, when in fact -
according to the CMAA - it should have been included as expenses for the period
in which they were incurred, which were the tax periods 2000 and 2001. He
considers that such an erroneous interpretation results in a flaw in the
element which is the reason for the act. It then explains what the IFRS are and
how they form part of the Costa Rican tax system as from Resolution No 52-01 of
the DGT.
He states that the
"Prisma Project" consisted of implementing an entire IT platform, for
which computer equipment was acquired, software was developed and training
activities and other costs were incurred. According to IAS 38, it should have
been recorded as "Property, Plant and Equipment", as your client did,
and therefore the depreciation expense was appropriate. Alternatively, it would
have to be considered an intangible asset, and would therefore be subject to
amortisation. Notwithstanding the above, it reiterates, the ATGC rejected the
depreciation or amortisation expense and asserts that these costs should have
been recorded as expenses in the corresponding period. However, if this were
the case, the administration should also have rejected the capitalisation of
these expenses as part of the "Furniture and Equipment" made by the
client in 2001.
He accuses
inconsistency in the application of the law; the ATGC "only applies the
law in what is convenient for the Treasury, and seriously omits to apply the
law in what benefits the taxpayer".
In conclusion, it is
not appropriate to disallow depreciation or amortisation expenses, since
"Project Prism" has the characteristics of a fixed asset subject to
depreciation or, alternatively, of an intangible asset subject to amortisation.
And if it is concluded that it does not constitute in any way an asset, the
ATGC 'is obliged to recognise that my client should not have capitalised that
project, and therefore to make the adjustment in favour of Reca
Química in the corresponding tax period'. The State's
defence responds that, if the resolution issued by the TFA in this case is
carefully analysed, it will be seen that the real reason why this item was
rejected has nothing to do with the accounting classification applied, but
rather with the absence of reliable evidence to support the depreciation
expense. Therefore, the argument on this aspect of the adjustment is irrelevant
to discuss the validity of the administrative proceedings.
IX.- Having analysed
the issue, this Chamber appreciates that, indeed, the contested transfer of
charges is expressed on this specific aspect:
"8-From the
study carried out it was determined that the 'Prisma project' does not
constitute 'Office Furniture and Equipment' as it was accounted for, with the
exception of the computer equipment for an amount of ¢7,912,590.00. Therefore,
the deduction for 'Prisma Project depreciation' is not justified. In the
periods under study Reca Química
deducted as depreciation what corresponds to expenses according to the list
attached (sic) to the accounting entry that registers charges to the account Furniture
and Office Equipment. With the exception of the aforementioned computer
equipment, it is not an asset subject to depreciation but expenses of the
fiscal periods 2000 and 2001; which are not deductible either, as they do not
correspond to the period being settled, in addition to the fact that said
expenses are not supported by documents. (...)
(...)
These expenses not
only correspond to previous periods, but also do not have supporting documents,
and therefore do not comply with the provisions of articles 7 and 8 of the
Income Tax Law, and are therefore rejected.
In this respect,
articles 7 and 8 of the Income Tax Law state that deductible costs and expenses
are those that, being duly supported by reliable supporting documents, are
strictly necessary and relevant to produce taxable income.
It should be noted
that the depreciation expenses for Project Prisma corresponding to computer
equipment acquired and which was recorded in the account Office Furniture and
Equipment for an amount of ¢7,912,590.00 by means of this same accounting
entry, the deduction for depreciation made for an amount of ¢2,637,530.00 in
the 2003 period and for the same amount in the 2004 period is applicable,
therefore they are accepted.
Legal Qualification
We proceed to reject
depreciation expenses Project Prisma for the amounts of ¢97.019.276.00 and
¢97.019.277.00 in the fiscal periods 2003 and 2004 respectively, in accordance
with the provisions of articles 7 and 8 antepenultimate paragraph, section 1, 9
clause b) of the Income Tax Law, 11 and 12 of its Regulations".
(Underlining added.)
This argument - i.e.,
the inappropriateness of the referred depreciation expenses of the so-called
"Prisma Project" due to the lack of the necessary documentary
evidence - was subsequently upheld both in the ruling DT-10CVR-060-07 (see f.
214-217 of the administrative determination file) and in its confirmatory
rulings Nº AU-10-CVR-109-07 (see f. 274-275 ibid.) and TFA-440-2009 (f. 429-435
of the same file). Even in the first of them, it is underlined that "for
this instance, the claimant did not understand what (sic) is the basis for the
rejection or reclassification of the depreciation expense. In this sense, it is
clear that the audit office proceeded to make the adjustments to the depreciation
expense, given that the taxpayer did not present the documents that support the
initial registration of the asset and that come to support the accounting
records referring to this adjusted depreciation expense in the fiscal periods
2003 and 2004" (f. 215). For this collegiate body, the adjustment made in
this regard is appropriate, and the applicant's allegations in this regard
should be dismissed, since it is entirely unproductive to enter into the
discussion that she proposes regarding the correct or incorrect accounting
classification of the costs involved in the "Prisma Project".
It is clear that the
primary reason that gave rise to the administrative conduct of interest was the
taxpayer's failure to provide the necessary documentary support to substantiate
the expenses that were ultimately disallowed. It is clear from articles 7 and 8
of the LISR, as well as 11 and 12 of its Regulations, that both for the
determination of net income and for the admissibility of deductible expenses,
the "reliable receipts" supporting those operations must be provided.
Although, at the preliminary hearing, the plaintiff's counsel attempted to
justify the lack of submission of at least some of this evidence (arguing that
many of the expenses in question cannot be supported by documentary evidence
due to their nature, such as training activities recorded in payrolls and for
which there are no invoices, electronic bank transfers, etc.), such an argument
cannot be considered here as it was not introduced in a timely manner in the
debate. It could well have been argued in administrative or even judicial
proceedings, in this case, for example, when answering the hearing on the
defendant's objection; however, nothing was said about it. For this reason,
this aspect of the action must therefore be rejected.
As for the allegation
contained in the legal considerations of the claim, in the sense that it should
be declared that the ATGC "is obliged to recognise that my client should
not have capitalised this project, and therefore make the adjustment in favour
of Reca Química in the
corresponding fiscal period", this is also inadmissible as a consequence
of what has just been explained; nevertheless, an express pronouncement in this
respect is omitted in the operative part of the ruling, given that it was not
established as part of the formal claim.
X.- REGARDING THE
CLAIM FOR COMPENSATION. The plaintiff claims damages which it considers it has
suffered as a result of the expenses it claims it had to incur for fees paid in
administrative proceedings for the defence of this case, amounting to the sum
of ¢13,492,750.00. It also requests the recognition of legal interest on this
amount. Now, as proof of the above, a certified copy of two invoices for
professional services rendered by ICS Consultores,
S.A. is provided. Of these, only one (for the sum of $15,000.00 equivalent to
¢7,811,250.00 according to the money receipt attached, dated 21 August 2007)
indicates that the professional work rendered originated in "CONSULTAS.
Transfer of charges and sanctioning process Ref-DT-10 CVR-060-07", which
corresponds to the identification of the determinatory
resolution issued in this case (see proven fact 6) and, consequently, it is
considered to be credited (proven fact 10). On the other hand, the second invoice
merely specifies that it corresponds to the generic provision of
"Professional Services", without any other reference that would allow
it to be associated with the work carried out in this case, and must therefore
be rejected (unproven fact 1).
In addition to the
above, it should be borne in mind that the formal acts challenged here were
only partially challenged, since from the transfer of charges itself three
adjustments were made, of which the first (entitled "I- Omission in sales
Grupo Istmo de Papagayo S.A.": see f. 3-5 of the
administrative determination file) was not challenged in this process.
Finally, of the other
two adjustments challenged, only the plaintiff has been granted reason with
respect to the one entitled "II- Omission of sales to related companies
abroad". Thus, it is the opinion of this Chamber that of the $15,000.00
spent, it is appropriate to distribute the professional advice provided
proportionally, resulting in $5,000.00 (five thousand dollars) for each of the
adjustments made. Then, using the same exchange rate at which the conversion to
colones was made on the date of payment (¢520.75 per
dollar, by simple arithmetical division), it results that the amount to be
compensated to the plaintiff for the professional work corresponding to that
part of the claim that is estimatory, will be two
million six hundred and three thousand seven hundred and fifty colones exact (¢2,603,750.00). On that amount, legal
interest will be awarded from the date of payment (again, 21 August 2007) until
the date of actual payment. For the rest, the claim for compensation is denied.
XI.- ON THE OBJECTION
ON THE MERITS. The State raised the plea of lack of law, which, based on the
foregoing, should be partially upheld with respect to the adjustment identified
as "III - Reclassification for Depreciation" in the contested
transfer of charges, the determination issued and its confirmatory acts, as
well as with respect to a portion of the professional fees claimed in damages.
The remainder of the action is dismissed. Consequently, the adjustment
identified as 'Il - Omission of sales to related companies abroad' in the
transfer of observations and charges number 'Il - Omission of sales to related
companies abroad' is declared to be substantially not in accordance with the
legal order and, consequently, is annulled. The adjustment identified as
"Il - Omission of sales by related companies abroad", of the transfer
of observations and charges number 2752000014321 of the Tax Administration of
Large Taxpayers of the DGT, confirmed by resolutions number DT-10CVR-060-07 of
10:00 hours of 9 July and AU-10-CVR-109-07 of 13:00 hours of 1 October, both of
2007 and of the same Administration, as well as by the resolution of 12:30
hours of 25 November 2009 number TFA-440-2009 of the First Chamber of the
Administrative Tax Court, which, by connection or dependence (numerals 164. 1
and 186, both a contrario sensu,
of the LGAP; and 122 paragraphs a and k of the CPCA) is also annulled only in
relation to the referred adjustment. By virtue of the purely declaratory and
retroactive effect that characterises the absolute nullity (ordinals 171 of the
LGAP, 39.2 and 131.1 of the CPCA), the legal situation of the plaintiff is
restored to the date on which the first of the acts in question was issued
(namely, 23 April 2007: proven fact 4), so that if it is legally appropriate,
the ATGC may issue it again, in accordance with the guidelines set out in this
ruling.
The State shall pay
the plaintiff the sum of two million six hundred and three thousand seven
hundred and fifty colones exact (¢2,603,750.00), with
legal interest from August 21, 2007, until actual payment, as damages for the
expenses incurred by the plaintiff for the fees paid in administrative
proceedings for the defense of this case.
XII.- ON COSTS.
Article 193 of the CPCA establishes that the procedural and personal costs are
imposed on the losing party by the mere fact of being the losing party, a
pronouncement that must be made ex officio, in accordance with the provisions of
the same rule, in accordance with numeral 119.2 ibidem. The waiver of this
sentence is only viable: a) when there is, in the opinion of the Court,
sufficient reason to litigate; b) when the sentence is issued on the basis of
evidence that was unknown to the opposing party; or, c) when there is a plus petitio, that is, when the difference between the amount
claimed and the final amount obtained is fifteen percent (15%) or more, unless
the basis of the claim is expressly considered provisional or its determination
depends on judicial discretion or expert opinion (ordinal 194 ibidem). In the
present case, this Court considers that the reciprocal expiry of the claims in
the action warrants the mutual exoneration of costs. In effect, both parties
are partially correct in their respective arguments (the plaintiff in relation
to adjustment II of the annulled transfer of charges and the defendant in
relation to number III), so that they had sufficient motive to litigate in the
manner in which they have done so.
THEREFORE:
The Defendant's
preliminary plea of time bar and the plea of unchallengeable act are rejected.
The plea of lack of entitlement is upheld in part. The claim brought by Reca Química, S.A. against the
State is declared PARTIALLY PROCEEDED. With regard to the claims, it is
understood that what is not admitted or declared is rejected. The adjustment
entitled "Il - Omission of Sales of Foreign Related Companies", of
the transfer of observations and charges number 2752000014321 of the Tax Administration
of Large Taxpayers of the General Directorate of Taxation, dated April
twenty-third, two thousand seven, confirmed by resolutions number
DT-10CVR-060-07 of ten o'clock on July ninth and AU-10-CVR-109-07 of thirteen
o'clock on October first, both of two thousand seven and of the same
Administration, is declared absolutely null and void; as well as by resolution
number TFA-440-2009 of the First Chamber of the Administrative Tax Court at
twelve o'clock and thirty minutes on the twenty-fifth day of November, two thousand
and nine; acts which are also annulled due to their connection or dependence,
only in relation to the aforementioned adjustment.
The legal situation
of the plaintiff is restored to the date on which the first of the contested
acts was issued, so that if it is legally appropriate, the Tax Administration
may issue it again, in accordance with the guidelines set out in this ruling.
As damages, the State
shall pay the plaintiff the sum of two million six hundred and three thousand
seven hundred and fifty colones exact, with legal
interest from the twenty-first of August two thousand and seven and until
actual payment. There is no order for costs.
NOTIFIED.
Christian Hess Araya
Roberto Garita Navarro Silvia Consuelo Fernández Brenes