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