Ministry of Economy and Finance
FILE Nº INTERESTED 10389-2018
SUBJECT Income Tax
DATE 25 June 2021
HAVING SEEN the appeal filed by , with RUC Nº against Intendencia Resolution Nº of 28 June 2018, issued by the Intendencia de Principales Contribuyentes Nacionales de la Superintendencia Nacional de Aduanas y de Administración Tributaria - SUNAT, which declared unfounded the claim filed against the Determination Resolution Nº drawn for withholding of Non-Domiciled Income Tax of December 2014.
That the appellant maintains that the transfers of funds made by its non-domiciled parent company in its favour in the financial year 2014 constitute assigned capital (capital contributions) and not loans as considered by the Administration.
It bases its position on the legal nature and economic reality of the transactions under analysis; and that from a legal perspective, the Administration's statement that the fact that the parent company and the branch have separate legal status for income tax purposes does not mean that the transaction in question constitutes a loan between related parties is irrelevant. Therefore, it considers that transfers of funds constitute assigned capital of a branch based on the following characteristics: (i) it is an asset that may comprise assets, rights, among others, that a branch receives from the main legal person (parent company), which are not unrelated to the assets of the main legal person, in this case the parent company; (ii) the assigned capital is granted to the branch for a specific purpose, so as to ensure the performance of its operations; and (iii) the assigned capital may be increased or decreased by the main company in a free manner. Therefore, from a legal perspective, it concludes that such transfers qualify as assigned capital.
On the other hand, from an economic perspective, it considers that the transfers of funds qualify as capital contributions, which is corroborated by the classification reported in the Audited Financial Statements, as well as the conditions under which they were granted (with no obligation to repay) and the purpose for which they were delivered. It also takes into consideration its economic and financial situation during the 2014 financial year, as well as the uncertainty regarding the generation of future cash flows as it is a company that until that year was in a pre-operational stage.
Since the transactions involved are transfers of funds, it concludes that the transfer pricing rules would not be applicable.
It argues that the Administration classified the transfers of funds received from the parent company as loans, based on formal errors that appeared in the accounting records and in the original income tax return for the 2014 tax year, which were subsequently corrected, and therefore considers that the Administration violated the principles of material truth and ex officio promotion.
He argues that the arguments put forward by the Administration in the appealed decision are unfounded, stating his position as follows:
- In relation to the rectifying affidavit for the year 2014, without prejudice to whether or not its presentation has taken effect, it considers that it was the Administration's duty to verify the material truth of the operation delimited, which, in its opinion, was not carried out. With regard to the original affidavit (on which a distinction was made between capital and accounts payable - related), he indicates that the voluntary distinction between what was declared in the capital box and the accounts payable - related box should be assessed, pointing out that the former corresponds to the capital allocated at the time of the creation of the branch, while the latter corresponds to subsequent transfers of capital allocated by the parent company.
- With regard to the audited financial statements that support the regularisation of the errors in the treatment of the operation, he specifies that such documentation is suitable evidence that proves the correct treatment of the transfers of limited funds as an equity account, given their status as allocated capital. It also points out that the Administration must verify the material truth of the operation subject to ring-fencing, regardless of its accounting reclassification.
- Regarding the information contained in the audited financial statements, it points out that both the "Allocated capital" and "Accounts payable to the parent company" accounts correspond to equity and not liabilities, since the former corresponds to the capital allocated at the time of the creation of the branch, while the latter corresponds to subsequent capital transfers. This is confirmed in note 17 of the audited financial statements, which expressly states the absence of characteristics of a loan transaction.
- In relation to the letter issued by the parent company regarding the transfers of funds to the branch, it states that these were capital contributions and not loans. However, this evidence was not considered by the administration.
- With regard to the transfers of funds from the branch to the parent company (repayment), it considers that such transactions are consistent with the nature of the allocated capital, since they increase and decrease freely according to the branch's needs in the course of its activities.
- It considers that by excluding from the analysis of the disputed transaction the legal requirements for the development of the branch's activity and the purpose for which the limited fund transfers were carried out, the administration would be carrying out an incomplete analysis. This, considering that it has not taken into account the importance of the transfer of funds from the parent company to the branch, since such resources are necessary to maintain the economic and financial capacity required by Perupetro's regulations. On the contrary, it points out that such legal requirements constitute a legal impediment to Perupetro's activities being financed to a large extent by loans. Thus, if the transfers of funds were to be considered as loans, it would be in breach of that requirement and, consequently, it would not be able to carry out hydrocarbon activities in the country.
- With regard to the fact that the branch and the parent company have separate legal and tax status, it points out that, for income tax purposes, this fact alone would not support the fact that the transaction in question constitutes a loan between related parties.
- In order to reasonably determine whether the transfers of funds carried out by the parent company resemble the nature of equity or debt, it submitted a report based on an economic analysis within the framework of transfer pricing rules and the guidelines set out in the OECD Guidelines, which demonstrates that companies similar to it only accessed financing through the allocation of additional equity and not through borrowing; however, this was dismissed by the Administration as it was based solely on the Audited Financial Statements.
- It submitted reports with the objective of economically supporting that in the case of the transactions subject to the objection, they could not be loans, since debt financing would not be viable in the economic situation of the branch in the year of the objection. In this regard, it considers that the administration's analysis is incorrect, since it focuses on establishing an interest rate applicable to the operation, without considering that it must first validate whether this form of financing is economically feasible between third parties.
- Regarding the analysis made by the Administration on the level of financial leverage of the companies in the hydrocarbons sector, it considers that it is not relevant since, although the companies in the hydrocarbons sector may have a diverse debt-equity structure, it would be necessary to carry out an exhaustive comparison in order to determine that the companies are similar or comparable to the branch and, therefore, the application of transfer pricing rules is supported.
- With regard to the tax stability regime applicable to the branch, it points out that it stabilised its tax regime at the date of signing the contract, which includes the tax obligations of the branch, so that the rules incorporated into the income tax regime after the signing of the contract would not be included in the scope of the stability of the branch, making explicit reference to paragraph c) of Article 32-A.
- Regarding the application of the transfer pricing rules, it considers that transfer pricing adjustments are not applicable, since the tax authorities failed to analyse whether the tax authorities were prejudiced, which, in the opinion of the tax authorities, was not the case.
- He considers that in the event that his position on the objection is not shared, he invokes the Administration to proceed with the recognition of the interest expense generated by the alleged loan.
In its written pleadings, it reiterates the arguments of its appeal and points out that the Administration has not followed the procedure established by the Income Tax Law and the OECD Guidelines to delineate the operation observed, a situation that would have allowed it to note that it does not qualify as a loan.
For its part, the Administration considers that the adjustment for the application of the transfer pricing rules to free loans received by the appellant from its non-domiciled parent company is correct. It supports its position on the basis of information provided by the appellant itself, such as its affidavit, accounting records and statements, in which it verified that the cash flows granted by the parent company to the branch were recognised as loans by the latter, given that no interest rate was agreed on them. Although the appellant alleges that the information initially provided contained formal errors, which were subsequently corrected, it considered what was initially recognised as valid, since it found consistency between the accounting records and the annual income tax return for 2014.
It considers that both the appellant and the parent company are considered as separate companies for tax purposes and, therefore, the actions carried out between the two parties are considered as transactions and are subject to the application of tax rules between them, regardless of the provisions of the corporate rules in this regard. From an economic point of view, it considers that the appellant's argument concerning the economic and financial situation of the branch or the risk that it might face in the event of a possible application for a loan from the financial system is of little relevance. On the contrary, it focuses on the tax relevance of the transaction, having demonstrated that the treatment as a loan of the cash flows granted by the parent company to the appellant, without any interest being agreed, does generate tax losses in the country and, therefore, a market interest adjustment would be appropriate in compliance with the arm's length principle and the transfer pricing rules.
That in the case of free loan transactions, which result in adjustments provided for in the transfer pricing rules applicable to non-domiciled parties, the appellant is liable to pay the corresponding income tax, since it would have been a withholding agent if it had paid the respective consideration.
He adds that he identified the Comparable Uncontrolled Price method as the most appropriate method according to the particularity of the transactions under observation. It states that it identified loan transactions agreed between third parties that reasonably comply with the comparability factors in relation to the financing granted by the parent company. The appellant contested that choice; however, it did not submit alternative comparables that could be used for comparison purposes. In relation to the documentation submitted, it refers that it estimated the inter-quartile range, followed by the calculation of the adjustment of the bounded market interest rate, determining an adjustment to the taxable base of the income of non-domiciliaries for the market interest applied against the debit balance of loans held by the appellant, amounting to S/76 063 108.00, to which the withholding rate of 30% was applied, determining an omitted tax of S/22 818 933.00, for which the appellant is liable.
In its written pleadings, it reiterates what was mentioned in the appeal and also points out that the present case corresponds to one of international taxation in which the tax base of the Peruvian jurisdiction has been eroded through the loan operation received by the appellant from its parent company domiciled in Peru at a 0% interest rate, It should be noted that the appellant is in a pre-operational stage, i.e. it does not obtain income and, consequently, did not determine income tax in 2012 and 2013, so that if it had recorded interest on the loan, it would not have obtained a reduction in taxable income; However, by considering the loan at 0% rate, it intends to avoid the withholding of Peruvian source income tax of non-domiciled persons corresponding to the parent company. In this regard, it states that the appellant intends to change the nature of the loans received to capital, in order to allow it to avoid withholding Peruvian source income tax from non-domiciliaries, thereby eroding the taxable base in the Peruvian jurisdiction. It adds that the rectifying declarations submitted by the appellant significantly alter the entire structure of the liabilities and equity in its different items, without providing any explanation or support for the aforementioned distribution.
That in the present case, according to Annex Nº 3 of Determination Resolution Nº (pages 541 to 561), the Administration determined that the appellant received transfers of funds from its parent company, a non-domiciled company, at a rate of 0%, for which reason an adjustment of the interest rate to the median of the interquartile range .of the market value of comparable interest rates should be made, determining an adjustment for application of the transfer pricing rules. To this adjustment the withholding tax rate of 30% was applied, resulting in the omitted tax. The appellant is responsible for paying the tax for the amount equivalent to the withholding, since it would have been a withholding agent if it had paid the respective consideration, according to the third and fourth paragraphs of article 32-A (c) of the Income Tax Law and articles 11O, 115, 116 and 117 of its regulations. The legal basis is complemented by the provisions of the first paragraph and subparagraph c) of Article 9, paragraph 4 of Article 32, Article 32-A, the first paragraph and subparagraph j) of Article 56 and the first paragraph of Article 76 of the Income Tax Law.
That by means of Annex No. 1 of the Remand No. (pages 517 to 520), the appellant was informed that balances of accounts payable were identified in relation to various related accounts, for which reason it was requested to submit invoices, contracts and documentation in relation to non-domiciled suppliers. Likewise, it was requested to exhibit the journal, general ledger, cash and bank books and the purchase register, providing such information on magnetic media.
In response (pages 471 and 472), the appellant indicated that it does not have a loan agreement as it is a branch, which, although it is independent for tax purposes, for corporate purposes is only an extension of a branch, whereby the contributions of money are a simple allocation of funds and the payment of interest in favour of the parent company is not agreed. He pointed out that during 2014, as a result of the sales made, part of the loans received for $32,291,181 began to be repaid. He added that as the contributions of money from his company are considered loans and no interest rate has been agreed, there is no obligation to make any withholding. He indicated that as he enjoyed the benefit of tax stability, the transfer pricing rules were not applicable to him. '
According to the result of said requirement, the appellant provided a letter confirming the existence of loans.
That by means of Request No. (pages 275 to 277) the Administration requested documentation referring to the expected cash flow at the end of 2013. As a result, the appellant provided the document referring to the projected cash flow for the period 2015-2031 (pages 270 to 271).
That, by means of the Request No. : pages 416 to 428), the appellant was requested to substantiate the observations made by the Administration, referring to omitted withholdings for Income Tax of Non-Domiciled Persons.
In response, the appellant submitted a written statement (pages 373 to 376) in which it points out that the loans referred to by the Administration in the injunction constitute working capital that it assigned to the appellant and, therefore, are not the object of a commercial transaction given that, at the same time, it is the same entity. It also considers that it enjoys the guarantee of tax stability, which means that it could not be subject to a higher tax burden. Therefore, it considers that it would be inappropriate for the Administration to seek payment of an amount for income tax, given that it considers that the funds remitted constitute assigned capital and not loans; furthermore, it indicates that it could not be considered liable for the aforementioned tax and even less apply the transfer pricing regulations in force (paragraph c) of article 32-A of the Income Tax Law) due to the stability agreement signed.
It also indicated that the Administration had not made an adequate choice of the comparable transactions (comparability criteria) on which the valuation method will be applied. In this regard, it refers to article 32-A (d) of the Income Tax Law, which provides that, for the comparability analysis, transactions are comparable with a transaction carried out between third parties "under the same or comparable conditions". It bases its questions about the comparable on the following: (i) it is a company that carries out mining activity and not hydrocarbon exploitation; (ii) the interest rates compared are not referred to a specific financing term; (iii) the comparable is a debtor entity and not a creditor of the loan (in the specific case, it is being analysed as a creditor); and (iv) there is no reference to the contractual conditions of the transaction. Therefore, it argues that the comparables used would not be appropriate in determining the price of the transaction under analysis.
That in a complementary manner, on 12 January 2016, the appellant submitted a first amplifying brief, in which it provided an economic opinion report with the objective of characterising the fund transfer operations carried out by its Limited - . from a transfer pricing perspective (fojas 333 a 337); finally, on 17 April 2017, it provided a complementary report prepared by R.L. (fojas 278 a 321) which concludes that, based on the concepts of capital developed in that report and a recharacterisation of the operation privileging its economic substance (under transfer pricing rules), it would be reasonable to argue that the transfers of funds made by the in favour of the branch, are similar and have a nature of share capital and not debt (fojas 310/reverse). It includes a copy of a letter sent by the parent company, which supports the nature of the operation as additional allocated capital.
That in the Result of Injunction No. that: (pages 377 to 415), the Administration concludes that
- The appellant received loans from its non-domiciled based on the evidence observed in the General Ledger report in account 4510100 - Current accounts with before purchase, in account 4711010 - Accounts payable treasury and account 4711020 - Accounts payable Batch 121; the posting in the General Ledger with the respective credit in the indicated accounts, whose credit balance at the close of 2014 was $923 997 665.52. Since these are loan operations carried out with a related company (additionally, it is a company domiciled in a jurisdiction considered a country or territory with low or no taxation), it should evaluate the transfer pricing regulations, in order to determine the Peruvian source income generated by the being that the appellant is responsible for the payment, since it would have had the quality of withholding agent if it had paid the respective consideration.
- From the review of the document "Contract of Licence for the Exploration and Exploitation of Hydrocarbons in lot 67", the tax stability
of lot 67", tax stability has been granted to the contractor, which in this case is the domiciled subject, particularly for the income obtained by the branches, permanent establishments, referred to the third category Income Tax. Based on this, it determined that the non-domiciled taxpayer (parent company) in terms of its Peruvian source income (loan operations to the appellant in its capacity as a branch) is not covered by the benefit of tax stability of the analysed contract.
- The characteristics of the loan are not in line with arm's length practice, where loans are agreed between unrelated third parties, the creditor receives a return (interest) and the debtor grants guarantees to the creditor.
- The most appropriate method for the analysis of this transaction is the External Uncontrolled Comparable Price method in its external version as the appellant has not carried out financing transactions with third parties, thus ruling out the use of the internal comparable. Comparable loan transactions (Limited) were identified and after their evaluation it was found that the agreed rate was below the interquartile range of market rates (0%). It made the respective adjustment to the median value, which amounted to 2.833%. It concludes that the taxable base of the Non-Domiciled Income Tax, which determines a tax of S/22,818,933.00, should be repaired.
That by means of Ruling Nº (pages 267 and 268), issued in accordance with article 75 of the Tax Code, the Administration requested the appellant to provide its response to the observations made, and in the result of the aforementioned ruling (pages 246 to 265), the omitted withholding for adjustment of interest generated by the parent company with respect to the loan operations received is communicated, reiterating what was indicated in the result of Ruling Nº in reference to the following:
- With regard to the appellant's statement on the need for there to be a "transaction" between the parties in order to apply Articles 32 and 32-A of the Income Tax Law, the Administration points out that the Income Tax regulations have established, for the payment of such tax, a separate legal tax personality (and distinct from its parent company) for branches, agencies or any other permanent establishment resident in the country of non-domiciled legal persons; therefore, it is possible that a transaction or operation between a branch and its originating obligations and deductions for the payment of income tax, refers to Report No. 127-2016 issued by SUNAT. It proves the existence of the loans by means of their registration in the taxpayer's accounts (General Ledger and Journal Books), as well as in the third category income tax return. It mentions the fact that the appellant itself initially acknowledged the existence of the loans in the written response to the Request No. Finally, it points out as consideration the rate that is understood to have been applied (zero rate), which is adjusted by the application of Article 32-A of the Law.
- Although the appellant insists that the transfers of funds from the parent company were not made with the objective of providing financing (and therefore providing interest as consideration), but rather with the objective of providing resources for the execution of investment plans in the country and that, at no time, neither the appellant nor the parent company agreed to the payment of the parent company's funds; the Administration considers that, if it requires economic resources to carry out its operations, this does not necessarily imply that they will be provided via capital, nor does it prevent them from being provided via a loan. In line with this, it points out that there are no rules in the Organic Law on Hydrocarbons, the Regulation on Hydrocarbon Exploration and Exploitation Activities or the Regulation on the Qualification of Oil Companies that oblige the appellant to record transfers received for the development of its activities as capital.
- As regards the appellant's argument that the disbursements made constitute capital contributions in favour of the appellant for the purpose of carrying out its obligations under the agreed contract, the Administration reiterates that it was the appellant itself which classified the transfers as loans, both in the letter submitted and in the accounts and the third category income tax return.
- It considers that the repayment rate of 8.2% of the total funds transferred does not undermine the nature of a debt operation, since a small repayment rate can be associated with the duration of the loan, among other reasons. Lastly, it points out that the appellant described the transfers as a loan from the outset.
- Contrary to the appellant's assertion, the financing needs of a business, given its risk, can be covered not only by equity, but also by debt or a combination of both. As regards the appellant in particular, it states that it itself chose to recognise a debt, which is supported by its accounts, as well as by the third category income tax return declared.
- Regarding the appellant's argument that Peruvian law does not specify what the source should be or whether it should be the one stated in the third category income tax return and that, in accordance with the OECD guidelines on transfer pricing, information should be used that best reflects the nature and economic reality of the transactions to be analysed, Therefore, the administration maintains its position that the funds transferred from the parent company to the branch correspond to an investment account of the parent company (equity) and not a liability account, the administration maintains its position to consider the transfers as debt, based on the accounts and the appellant's declarations. Finally, it considers that the analysis of economic circumstances follows from the application of Article 32-A of the Act at the time of the amount of the interest rate, since the rule is used to find the market value of such interest rates.
- With regard to the appellant's statement that it is incorrect to consider that the fact of recording a transaction as a liability generates a legal agreement leading to an obligation of a contractual nature, the Administration points out that the fact of including in the accounts and in the affidavit a fund transfer as a liability is not in itself a guarantee that it will be effectively returned or recognised as a creditor; clarifies that it is the appellant's own accounts, as well as what is declared in its income tax return, which support the loans, as well as partial payments made during the year. It thus confirms that it is a loan and not capital.
- The taxpayer refers that, although the financing in itself generates a tax shield, the taxpayer does not obtain net taxable income for third category income tax 2014. In this regard, if it had recorded interest expenses for the loans received from the parent company, this would not have meant an additional reduction in taxable income. He considers that, on the contrary, by changing the nature of the capital loans (as the appellant claims), this would allow the non-domiciled parent company to avoid generating Peruvian source income for the related interest.
- It indicates that, based on the revised support, the priority of the cash flow on the loans received from the parent company is low, because such loans can be considered long term, while their large size means that the payment must be spread over several years. It argues that the important point is that it is the taxpayer who wrongly mentions alleged accounts payable, who has accounted for and declared the loans received from the parent company.
- It is the appellant who, at the time of obtaining the right to operate the concession, provided the competent State authorities with evidence of financial sustainability and profitability in pursuit of the concession, and it is the appellant which is responsible for providing reasonable evidence of financial sustainability.
- The appellant states that the appellant does not resemble a 'young company' and, on the contrary, interprets its long-term continuity as certain by virtue of the following facts: (i) the regulations governing oil companies determine that they have the legal, technical, economic and financial capacity of an oil company to comply with all its contractual obligations and the foreseeable investments required; (ii) the taxpayer has acknowledged, in its letter of 17 April 2017 that it has the economic capacity to assume contractual obligations, as well as the projected investments; iii) the subscription of the licence contract for the exploration and exploitation of lot 67 implies long-term obligations, evidence of which was presented during the audit process in the projected cash flow which shows an extensive time interval from 2015 to 2031; and iv) according to what was observed in the financial information provided, the appellant allocated considerable amounts of resources, as shown by the evolution of its assets in the last 5 years. Thus, it is argued that the appellant cannot be considered a "young company".
Therefore, from the evaluation, the Administration concludes that it maintains its position regarding the nature of the loans received from the parent company.
Based on the information submitted by the appellant in its 2014 income tax return and the documentation submitted in Requests No. and the Administration considers that the most appropriate method for the analysis of the transaction is the Comparable Uncontrolled Price method in its external version. It reaches this conclusion considering the theoretical basis of OECD transfer pricing, as well as the characteristics of the transaction subject to analysis: it is a financial transaction in which a price (usually an interest rate) is established and whose market values are usually in the public domain. Likewise, the use of external comparables applies because the analysed party, in this case the appellant, did not carry out credit transactions received from independent third parties that could be used as internal comparables.
That following the issuance of Requirement No. the Administration used as comparables the loans agreed by the company Limited, whose information was obtained from Report 20-F provided to the Security Exchange Commission of the United States of America corresponding to the 2014 financial year and as a result of the analysis performed, it determined the interquartile range of the comparable interest rates, which was calculated in accordance with the procedure established in article 115 of the Income Tax Law Regulations, estimating a median of 2.833%.
That given the result, the Administration compared the interest rates corresponding to the loan subject to analysis, which has been 0%, with the interest rates of comparable loan operations, concluding that the appellant is below the interquartile range of market rates. It then proceeded to make the adjustment with the median, on the basis of which it determined an adjustment to the taxable base of the Non-Domiciled Income Tax, for the Peruvian source income of the parent company on the occasion of the loan to the appellant for $25 473 245.00, equivalent to S/76 063 108.00, amount to which the withholding rate of 30% is applied, which determines a tax of S/22 818 933.00.
That in this sense, the matter of controversy is centred on establishing whether the assessment in reference made by the Administration is in accordance with the law.
Taking into consideration the provisions of the Income Tax regulations on transfer prices, in the present case it is necessary, in the first place, to verify whether the validation of the transfer of funds made by the parent company to the appellant as a loan is correct and, subsequently, to verify whether the adjustment of interest to market value is in accordance with the law.
1. Nature of the funds received from the parent company of the branch (loans or allocated capital)
That according to what was indicated in Determination Resolution No. (fojas 541 a 561), the Administration determined that the transfers of funds from abroad made during the financial year 2014 by the non-domiciled parent company Limited to the appellant, qualify as loans.
The appellant contends that the nature of the disbursements incurred by the parent company in favour of the appellant, corresponds to capital assigned to the appellant (capital contributions).
In this regard, it should be noted that under Article 15 of the Organic Hydrocarbons Law 1, in order to enter into contracts under this Law, foreign companies must establish a branch or incorporate a company in accordance with the General Companies Law, establish domicile in the capital of the Republic of Peru and appoint a representative of Peruvian nationality (...).
Article 1(a) of the Regulations for the Qualification of Petroleum Companies2 defines qualification as: "the determination, after evaluation, of the legal, technical, economic and financial capacity of a Petroleum Company to comply with all contractual obligations, based on the characteristics of the area requested, the foreseeable investments required and strict compliance with environmental protection standards (...)".
Article 2 of the said Regulation states that "all oil companies must be duly qualified by Perúpetro S.A., in order to start the negotiation of a contract (...)".
Article 3 of the Regulation states that "the qualification of foreign oil companies shall be granted to their parent company or corporation, which shall be jointly and severally liable at all times for the legal, technical, economic and financial capacity of the branch or company that it may establish or incorporate and register in Peru, as provided for in Article 15 of the Organic Law of Hydrocarbons.
That the second paragraph of Article 21 of the General Companies Act, Act No. 26887, states that a company incorporated and domiciled abroad that habitually carries out activities in Peru may establish a branch or offices in the country and set up a domicile in Peruvian territory for the acts it performs in the country.
Article 403(3) of the aforementioned law provides that the branch3 of a company incorporated and domiciled abroad is established in Peru by public deed registered in the Register of Legal Entities, which must contain the agreement to establish the branch in Peru, adopted by the competent corporate body of the company, indicating the capital assigned to it for its activities in the country, its submission to the laws of Peru to be liable for the obligations incurred by the branch in the country, among others.
Article 151 of the Regulations of the Registry of Companies, which indicates the content of the entry of registration of the branch in Peru of a company incorporated abroad, establishes in its paragraph b) that the capital assigned to it must be stated therein; being that in accordance with the provisions of article 152 of said regulations, it is not necessary for said capital to be credited to the said registry.
According to Laroza, the so-called "assigned capital" represents a reference to the assets attributed to the activities of the branch.
That there are documents in the file that prove the existence of the transfers of funds, such as the General Ledger, the letter of response to the Request No. the third category income tax return for the 2014 financial year and documentation related to the return of funds made.
That the General Ledger report shows the accounting with the respective credit to accounts 4510100 - Current accounts with prior purchase, 471101O - Accounts payable treasury and 4711020 - Accounts payable: Lot 121, whose total credit balance at the end of 2014 is $923,997,665.52. In addition, it provided documentation evidencing the cash flows received and related bank statements (pages 473 to 512).
That in the written response to the response to the Request No. . on 21 October 2015, the appellant acknowledged that it is a loan; however, it points out that no contract was signed and no interest was agreed (page 472).
That in the annual income tax return for the financial year 2014, filed on 30 March 2015, the appellant entered as a balance in box 408 concerning the detail of "Sundry accounts payable - related", the amount of S/2 856 076 784.00 (page 200/reverse), indicating as a creditor the non-domiciled company Limited (page 512).
That on the occasion of the audit, based on the appellant's own accounting records, the Administration detected accounts referring to repayments of amounts occurring on different dates during said financial year, which was expressly acknowledged by the appellant as repayment of loans, as stated in the response to Request No. (page 472): "During the 2014 financial year, as a result of the sales made, part of the loans received in the amount of US$32,291,181.00 began to be repaid". The above was verified during the review of the General Ledger, detecting the following repayments: i) on 12.08.2014 for $5 003 437.52 in the accounting account 4510200; ii) on 01.09.2014, for $15 373 237.42 in the accounting account 4510200; iii) on 26.09.2014 for $216 546.23 in the accounting account 451021O; and iv) on 07.11.2014 for $11 914 305.98 in the accounting account of 471101O (page 556).
The appellant maintains that these transfers qualify as allocated capital and to this end it submitted supporting documentation at the following stages:
- Audit stage: It submitted the letter issued by the parent company dated 1O April 20175 (foja 3222) the economic opinion report with the aim of characterising the fund transfer operations carried out by its Limited, from a transfer pricing perspective, drawn up on 12 January 2016 (fojas 333 a 337) and a Supplementary Report to the previously contracted one, dated 17 April 2017 (fojas 278 a 321), both drawn up by the firm of auditors R.L., and the accounting records of the transfers from the Branch to the which contained a gloss indicating "devolution
- Claim stage: The appellant submitted additional documentation on 27 July 2017, through the appeal, which included: financial statements corresponding to the 2014 financial year issued on 23 March 2015 (sheets 564 to 587), the annual rectifying income tax return 2014 filed on 1 June 2017 (sheets 768 to 772), the lawyer's Legal Report of 7 July 2017 (sheets 751 to 757) and the report prepared by the "Analysis of the Nature of the transfers of funds from the
to branches in Peru" of 21 August 2017 (pages 722 to 748).
That with regard to the letter issued by the company in which it expressly states that the nature of the transfers of funds was that of a capital contribution and not a loan, it should be noted that the letter is dated 10 April 2017, i.e. it was issued several years after the financial year analysed on the occasion of the assessment made, which contains a statement to which no documentary evidence is attached, and therefore does not concretely support the nature that should be given to said transfers in the financial year or years in which they were received.
With regard to the economic opinion report on the characterisation of the transfer of funds of the company from a transfer pricing perspective, as well as the complementary report prepared by the R.L., the latter concludes that, from an economic perspective, it is reasonable that the true nature of the transfers of funds made by the company in favour of the branch have the quality of allocated capital, given that the companies comparable to the branch only had access to financing through an increase in capital and not through indebtedness. In this regard, no documentation or information has been submitted or attached to reach this conclusion that would specifically support the economic nature of the transactions carried out by the appellant with its parent company, especially since the assertion made in the report is not consistent with the third category income tax return and the accounting records. It is therefore concluded that these reports do not clarify the nature of the operation. Finally, in relation to the account of accounting records of the transfers from the Branch to the , which contained a gloss indicating "return", the same may correspond to the return of funds or repayment of loans, the support being inconclusive.
On the other hand, the financial statements for the financial year 2014 submitted by the appellant, although in this document such transfers are classified in an investment account of the company with patrimonial character to the funds received (page 585), it is not apparent that any documentation or information has been submitted to validate or corroborate this presentation in the financial statements, especially since in the third category income tax return for that year, the funds received from the parent company are declared as a liability account, which reconciles with the appellant's accounting books and records.
That with regard to the annual rectifying affidavit filed in June 2017, it is noted that although the appellant transfers the amounts from the item "Sundry accounts payable - related" to the item "capital", it is not apparent that it has attached supporting documentation for said change.
That as regards the report of the lawyer _ dated 7 July 2017, in which it is stated that legally it is not possible to indicate that the transfers have been made by way of a loan, due to the fact that as the branch and the parent company form a single legal entity, this makes, in his opinion, a single legal entity; It should be pointed out that Article 14 of the Income Tax Law states that, for income tax purposes, branches established in Peru of companies incorporated abroad have their own legal personality distinct from that of their parent company, and therefore, for tax purposes, the economic operations or transactions between the two are considered to have been carried out between two different entities. Likewise, it does not specify specific duly documented facts that show that the transfers of funds were made as capital contributions.
Finally, with regard to the report prepared by the "Analysis of the nature of the transfer of funds from the parent company to the branches in Peru" dated 21 August 2017, this report reiterates the fact that, from an economic perspective, it is reasonable that the true nature of the transfer of funds made by the parent company to the branch has the quality of allocated capital and is based on the financial analysis carried out on the branch, which results in the branch presenting a high risk in its activity and, consequently, it has little chance of obtaining a loan. In this regard, it should be noted that the fact explained in the aforementioned report is not sufficient to support that the transfers of funds should be considered as allocated capital and not as a loan, since it is an ex post evaluation that does not prove that they should be recognised as an increase in equity on the occasions when they occurred, given that no documentation was attached to demonstrate this fact.
According to the verification of the documentation described above, the appellant did not prove that the transfers qualify as assigned capital.
According to numeral 3 of article 403 of the aforementioned General Companies Act, in order for a branch of a company incorporated and domiciled abroad to establish itself in Peru, it must do so by means of a public deed registered in the Registry, which must contain at least the agreement to establish the branch in Peru, adopted by the competent corporate body of the company, indicating, among other things, the capital assigned to it for its activities in the country.
In accordance with the above, the capital assigned to the branch, among other additional information, must be registered in the Public Registry as a requirement for its establishment in Peru. Such information related to the capital assigned serves to provide information to the market about the amount assigned by the parent company to its local establishment, even though the accreditation of the capital is not a prerequisite for the public deed.
That in the present case, from the review of the documentary support included in the file, there is no documentation, such as public deed, communications between the parties, contracts or any other documentation apart from the accounting support or original income tax return, which has been generated in the audited fiscal year or previous fiscal years, which supports that the transfers of funds observed were an increase in the capital assigned to the appellant by its parent company. This fact was noted by the Administration in the appealed resolution (page 781/reverse) and acknowledged by the appellant in the appeal filed (page 826)6.
That in the present case, it was necessary to have evidence of the intention to increase the capital of the branch or the initial registration in the Public Registry of the total amount to be transferred, which would have allowed for certainty as to the nature of the transfer of funds, which were not provided by the appellant.
Therefore, on the basis of the above with regard to the nature of the transactions observed, the validation of the transfers of funds granted by the parent company to the appellant as a loan is confirmed.
The appellant considers that the Administration classified the transfers of funds received from the parent company as loans, based on formal errors that appeared in the accounting records and in the original income tax return for the taxable year 2014, which were subsequently corrected, and therefore considers that the Administration violated the principles of material truth and ex officio impulse; nevertheless, after the evaluation of the documentation submitted by the appellant, it was concluded that there is no evidence that errors had been made at the registration and income tax declaration stage, and therefore, the Administration did not violate the aforementioned principles.
Regarding the appellant's statement that it distinguishes between "Assigned capital" at the time of the creation of the branch and "Accounts payable to the referring to subsequent capital transfers, it should be noted that from the support included in the file, no documentation was identified that proves a clear intention that such transfers of funds were indeed assigned capital.
2. Application of transfer pricing rules
Pursuant to Article 327 of the Consolidated Text of the Income Tax Law, approved by Supreme Decree No. 179-2004-EF, in cases of sales, contributions of goods and other transfers of property, provision of services and any other type of transaction in any capacity, the value assigned to the goods, services and other benefits, for tax purposes, shall be the market value, and if the assigned value differs from the market value, either by overvaluation or undervaluation, SUNAT shall proceed to adjust it for both the acquirer and the transferor.
That the aforementioned rule adds in paragraph 4 that, for the purposes of the aforementioned law, for transactions between related parties or transactions carried out from, to or through countries or territories with low or no taxation, the market value is considered to be the prices and amount of the considerations that would have been agreed with or between independent parties in the following cases
agreed with or between independent parties in comparable transactions, under the same or similar conditions, in accordance with the provisions of Article 32-A.
It should be noted that article 32-A of the aforementioned Law reflects in domestic legislation the so-called "arm's length principle", according to which the prices agreed in transactions between related parties must correspond to those that would have been fixed in transactions between independent parties, under the same or similar conditions. Thus, the provisions of the article in question, which detail and develop what is known internationally as "transfer pricing rules", should be taken into account.
That paragraph a) of the aforementioned article 32-A8 provides that in determining the market value of the transactions referred to in paragraph 4 of the aforementioned article 32, the transfer pricing rules shall apply to transactions carried out by taxpayers with their related parties or to those carried out from, to or through countries or territories with low or no taxation. However, the value agreed by the parties shall only be adjusted to the value resulting from the application of the transfer pricing rules in the cases provided for in the first paragraph of paragraph c) of this article, which refers that the value agreed by the parties shall only be adjusted when it determines a lower tax in the country than the one that would correspond to the application of the transfer pricing rules. It also states that SUNAT may adjust the agreed value even when the above assumption is not met, if such adjustment affects the determination of a higher tax in the country with respect to transactions with other related parties.
For its part, paragraph 2 of subsection a) of article 108 of the Income Tax Law Regulations9 , according to the text applicable to the present case10 , states that for the purposes of determining the scope of application of the transfer pricing rules referred to in subsection a) of article 32-A of the law, these rules shall be applied when the assumptions set forth in paragraphs 1, 2 and 3 of subsection a) of article 32-A of the law are met. In addition, paragraph 3 of the aforementioned subsection states, among other cases, that the transfer pricing rules shall apply in transactions entered into for valuable consideration or free of charge.
Therefore, based on the regulations in force cited in the preceding recitals, the transfer pricing rules should be applied in the case at hand.
Having determined the existence of a loan transaction between related companies in which no interest rate was agreed and which therefore qualifies as a gratuitous transaction, it is necessary to verify the correct application of the transfer pricing rules.
Regarding the appellant's statement that it stabilised its tax regime at the date of signing the contract, which includes the tax obligations of the branch, and therefore the regulations incorporated into the income tax regime after the signing of the contract would not be included in the scope of the stability of the branch, explicitly mentioning paragraph c) of article 32-A; it should be noted that according to the provisions of Article 63 of the Single Ordered Text of the Organic Law on Hydrocarbons approved by Supreme Decree No. 042-2005-EM, the State guarantees to the contractors that the tax regime in force at the date of conclusion of the contract will remain unalterable during the term of the contract, which does not allow the tax burden of the taxpayer itself to be modified for a certain period, and the rules that vary such regime are not applicable to them; However, in the present case, a tax has not been imposed on the taxpayer himself (contractor), but on a non-domiciled person who carries out operations with the taxpayer, the latter being liable for the payment of the tax11. Consequently, such a case is not affected by tax stability, as it is not a tax payable by the appellant as a taxpayer of the tax.
In this context, it is necessary to verify whether the Administration correctly applied the transfer pricing rules.
3. Payment liability for adjustments applicable to non-domiciled taxpayers
That paragraph j) of article 56 of the aforementioned law states that the tax on non-domiciled legal entities in the country is determined by applying the rate of 30% to other income, including interest derived from foreign credits that do not comply with the requirement established in numeral 1 of paragraph a) or in the part that exceeds the maximum rate established in numeral 2 of the same paragraph; interest paid abroad by private enterprises of the country on credits granted by an enterprise abroad with which it is related; or, interest paid abroad by private enterprises of the country on credits granted by a creditor whose intervention is intended to conceal a credit operation between related parties.
Article 76 of the aforementioned law, as amended by Legislative Decree No. 1112, provides that persons or entities paying or crediting non-domiciled beneficiaries with Peruvian source income of any kind must withhold and pay to the Treasury the taxes referred to in articles 54 and 56 of the aforementioned law, as the case may be, within the time limits established by the Tax Code for monthly obligations.
That the fifth paragraph of paragraph c) of Article 32-A of the Income Tax Law, as amended by Legislative Decree No. 1112, establishes that, in the case of adjustments applicable to non-domiciled individuals, the person responsible for paying the tax for the amount equivalent to the withholding resulting from applying the aforementioned adjustment shall be the one who would have been the withholding agent if he/she had paid the respective consideration.
As concluded in the previous paragraphs, the appellant received loans free of charge from its related party, being the transfer pricing rules applicable to such transactions, and therefore the appellant should be liable for the tax not paid for the interest that may be established from the eventual adjustment to the market value determined by application of the transfer pricing rules, in accordance with paragraph c) of article 32-A mentioned above.
4. Market value determination procedure
That in the present case it is a transaction that does not have a loan contract, so it was in accordance with the law that the Administration proceeded to its characterisation based on the facts that occurred during the 2014 financial year, in which it was established that for the transaction no interest was agreed or guarantees were established for the loan made, which is not usual in a context of full competition, given that it is generally expected to obtain some type of return, as well as a guarantee of payment by the debtor.
(a) Applicable method
Subsection e) of the aforementioned Article 32-A of the Income Tax Law, which refers to the methods used, states that the prices of the transactions subject to the scope of application of the transfer pricing rules shall be determined in accordance with any of the internationally accepted methods mentioned in said subsection, for which purpose the most appropriate method to reflect the economic reality of the transaction shall be considered. Likewise, Article 113 of the Income Tax Law Regulations establishes guidelines to be considered in order to establish the valuation method that is most appropriate and reflects the economic reality of the transaction. Therefore, the best method must: i) be compatible with the line of business, business or commercial structure of the company or entity; ii) have the best quality and quantity of information available for its proper application and justification; iii) contemplate the most appropriate degree of comparability between parties, transactions and functions; and iv) require the lowest level of adjustments for the purpose of eliminating existing differences between comparable facts and situations.
Among these methods, paragraph 1 of subsection e) of the aforementioned article 32-A refers to the comparable uncontrolled price method (PCNC), which consists of determining the market value of goods and services between related parties by considering the price or amount of the consideration agreed with or between independent parties in comparable transactions.
According to paragraph h) of the aforementioned 32-A, for the interpretation of the provisions of said article, "the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the Council of the Organisation for Economic Co-operation and Development (OECD), shall be applicable, insofar as they do not oppose the provisions approved by the Income Tax Law".
That on the selection of the most appropriate method in the circumstances of the case (paragraph 2.2) the guidelines consider that: "The selection of a transfer pricing method aims in all cases to select the most appropriate method for the particular circumstances under consideration. For this to be the case, the selection process should weigh the advantages and disadvantages of the methods accepted by the OECD, the appropriateness of the method under consideration in view of the nature of the controlled transaction (as determined by a functional analysis), the availability of reliable information (in particular on unrelated comparables) necessary to apply the selected method or other methods, and the degree of comparability between controlled and unrelated transactions (including the reliability of comparability adjustments necessary to eliminate material differences between them). No single method is appropriate for all situations, nor is it necessary to demonstrate that a particular method is not appropriate in the circumstances.
In relation to the NCPC method, the Guidelines consider that the NCPC method (paragraph 2.13): "(. . .) involves comparing the price charged for assets or services transferred or provided in a related transaction with the price charged for assets or services transferred or provided in a comparable unrelated transaction in comparable circumstances. If there are differences between the two prices, this may indicate that the terms of the business and financial relationships of the associated enterprises are not at arm's length and that the price of the controlled transaction may have to be replaced by the price of the uncontrolled transaction.
An analysis of the Peruvian legislation, Article 32-A(e) of the Law and Article 113 of the Regulations shows that it adopts the best method rule. However, it would be reasonable to consider as the best method the one that is the most appropriate in accordance with the particularity of the transaction under analysis and, in this way, to be able to reflect the economic reality of the transaction in order to define that it has been carried out at market value. At this point, the provisions of article h) of the Law can be considered in relation to the use of the International Transfer Pricing Guides approved by the OECD, as long as they do not oppose the provisions approved in the Peruvian Income Tax Law. In this way, reference is made to paragraphs 2.2 and 2.13 of the aforementioned document, which aims to choose the best method based on the specific circumstances analysed.
That in the case under analysis, it can be seen that in order to find the market value of the transactions observed, the Administration used the PCNC method, which is based exclusively on the price or amount of the consideration that would have been agreed with or between independent parties in comparable transactions.
To the extent that the transactions at issue are money loans where the price or amount of the consideration is the interest rate, the application of the PCNC method in this case implies the comparison of the interest rates of loan transactions carried out under the same or similar conditions to the loan transactions under analysis.
According to the OECD in the document "Transfer Pricing Legislation - Proposed Approach - June 2011"12 , the application of the PCNC method can be based on the taxpayer's own transactions with independent companies (internal comparables), or on transactions between independent companies (external comparables). Although in theory this method can be used for all types of transactions, the degree of product comparability required to apply it in a sufficiently reliable manner is particularly high, as any differences in product characteristics can have a significant impact on the transaction price, and it is not always possible to make sufficiently reliable comparability adjustments to eliminate such differences. Where internal comparables are not available, the NCPC method is the most appropriate method for determining the arm's length price for (a) the sale of commodities traded on the open market, provided that the controlled transaction and the comparable uncontrolled transaction(s) are carried out in comparable circumstances, and in particular at the same level of the marketing process (e.g. sale to a secondary production or assembly company, a distributor, a retailer, etc.), and (b) some current financial transactions, such as money lending. The market price for these types of transactions (such as commodity prices or interest rates) is usually publicly available information.
That from the above and considering that in the case under analysis, the appellant has not carried out credit transactions received from independent third parties that could be used as internal comparables, it follows that the NCPC method in its external version selected by the Administration is the most appropriate for the specific circumstances to be analysed.
b) Comparability analysis
Having selected the aforementioned method as the most appropriate, it is necessary to assess the choice of comparable transactions.
In accordance with paragraph d) of article 32-A of the Income Tax Law, the transactions referred to in paragraph 4) of article 32 are comparable to a transaction between independent parties, under the same or similar conditions, when at least one of the following two conditions is met: (1) none of the differences between the transactions being compared or between the characteristics of the parties to the transactions can materially affect the price, amount of consideration or profit margin; or (2) even if there are differences between the transactions being compared or between the characteristics of the parties to the transactions that can materially affect the price, amount of consideration or profit margin, such differences can be eliminated through reasonable adjustments.
That the aforementioned subparagraph d) adds that in determining whether transactions are comparable, account shall be taken of those elements or circumstances that most closely reflect the economic reality of the transactions, depending on the method selected, considering, among others, the following elements:
(i) the characteristics of the transactions; (ii) the economic functions or activities, including the assets used and risks assumed in the transactions, of each of the parties involved in the transaction;
(iii) the contractual terms; (iv) the economic or market circumstances; (v) the business strategies, including those related to market penetration, permanence and expansion. It adds that when local information is not available for the purpose of determining comparable transactions, taxpayers may use information from foreign companies, making the necessary adjustments to reflect the differences in the markets.
That article 110 of the aforementioned regulation13 provides in paragraphs a) and b) of its numeral 1 that in order to determine whether transactions are comparable in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law, the characteristics of the operations shall be taken into account, including: a) in the case of financial transactions, elements such as: (i) the principal amount, (ii) term or repayment period, (iii) collateral, (iv) solvency of the debtor, (v) interest rate, (vi) amount of commissions, (vii) risk rating, (viii) country of residence of the debtor, (ix) currency, (x) date, and (xi) any other payment or charge, which is made or practiced by virtue thereof; and b) in the case of provision of services, elements such as: (i) the nature of the service, (ii) the duration of the service, (iii) characteristics of the service; and (iv) the manner in which the service is to be provided.
That subparagraphs (c) and (d)(3) of the aforementioned Article 11O state that the contractual terms should also be taken into account, including, inter alia: (c) the responsibilities, risks and benefits assumed between the parties which could be based on: (i) the contractual clauses, (ii) the terms of the contract, (iii) the terms of the contract, (iv) the terms of the contract, and (v) the terms and conditions of the contract: (i) the explicitly and implicitly defined contractual terms, and (ii) the conduct of the parties to the transaction and the economic principles that generally govern relationships between independent parties; and (d) the duration of the contract.
On the other hand, the "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" published by the OECD in July 2014, and applicable to the interpretation of Article 32-A of the Income Tax Law, regarding comparability analysis, indicate that (paragraph 1.33): "The application of the arm's length principle is generally based on a comparison of the terms of a related party transaction with the terms of transactions between independent enterprises. For such comparisons to be useful, the relevant economic characteristics of the situations being compared must be sufficiently comparable. Comparability means that none of the differences (if any) between the situations being compared can significantly affect the terms analysed in the methodology (e.g. price or margin), or that sufficiently precise adjustments can be made to eliminate the effects of such differences. To determine the degree of comparability and what adjustments are necessary to achieve comparability, it is
is required to achieve comparability, it is necessary to understand how independent companies assess potential transactions.
That these guidelines mention that (paragraph 1.34): "Independent companies, in assessing the terms of a potential transaction, compare them with other realistically available options and will only enter into a transaction if they do not see a clearly more attractive alternative. (...) This point is relevant to the question of comparability as independent undertakings will normally take into account any economically significant differences between realistically available options (such as differences in the degree of risk or other comparability factors mentioned below) when assessing them. Therefore, when making comparisons under the arm's length principle, tax administrations should also take these differences into account in determining whether comparability exists between the situations being compared and what adjustments may be necessary to achieve comparability. The guidelines add (paragraph 1.35) that: "All arm's length approaches revolve around the idea that independent enterprises consider the options available to them and, in comparing them with each other, take into account any differences that might affect their value in a significant way. Therefore (...) the arm's length method compares a tied transaction with a similar non-tied transaction in order to provide a direct estimate of the price that the parties would have agreed had they opted for a transaction offered on the market as an alternative to the tied transaction. However, if all the characteristics of the unrelated transactions that significantly influence the price charged between independent undertakings are not comparable, the method loses reliability as a substitute for an arm's length transaction'.
That these guidelines indicate that (paragraph 1.36): "(. . .) in making the comparison, account should be taken of significant differences between transactions or between the undertakings being compared. In order to determine the actual degree of comparability, it is necessary to assess the characteristics of the transactions, or of the undertakings, that would have influenced the terms of the free market trading, and thus to make appropriate adjustments to establish arm's length conditions (or a range thereof). The characteristics or 'comparability factors' which may be relevant in determining comparability are the characteristics of the property or services transferred, the functions performed by the parties (taking into account the assets used and risks assumed), the contractual terms, the economic circumstances of the parties and the business strategies pursued by the parties (...)'.
Regarding the factor "Characteristics of the goods or services", the above-mentioned guidelines state (paragraph 1.40): "Depending on the transfer pricing method, more or less weight should be given to this factor. Among the methods described (...), the requirement of comparability of goods and services is more stringent for the comparable free price method. Under this method, any significant difference in the characteristics of the goods and services may affect the price and therefore requires consideration of an adjustment'.
As for the factor "contract terms", the Guidelines note that (paragraph 1.52): "In arm's length transactions, contract terms generally define, expressly or implicitly, how responsibilities, risks and benefits are allocated between the parties. In that sense, an examination of the contractual terms must form part of the functional analysis (. . .)'.
That in relation to the conduct of a comparability analysis, the aforementioned guidelines state that (paragraph 3.1): "By definition, a comparison involves consideration of two elements: the related party transaction under review and the unrelated transactions that are considered potentially comparable. The search for comparables is only one part of the comparability analysis and should not be confused with, or disassociated from, the comparability analysis itself. The search for information on potentially comparable unrelated transactions and the process of identifying comparables depends on the taxpayer's prior analysis of related party transactions and the relevant comparability factors. (...) A consistent methodological approach should ensure a certain continuity or linkage within an analytical process, thus allowing for a constant relationship between the different stages: from the preliminary analysis of the terms of the controlled transaction, to the selection of the transfer pricing method, to the identification of potential comparables and finally to a conclusion as to whether the controlled transactions under consideration are consistent with the arm's length principle'.
Furthermore, the Guidelines describe a "typical" process that can be followed when conducting a comparability analysis (paragraph 3.4)15 , and indicate the following steps to be followed: "Step 1: Determination of the years included in the analysis. Step 2: Analysing the taxpayer's circumstances as a whole. Step 3: Understanding the controlled transaction(s) to be tested, based in particular on a functional analysis in order to select the tested party (. . .), the transfer pricing method most appropriate to the circumstances of the case, the financial indicator to be analysed (. . .), and to identify important comparability factors to be taken into account. Step 4: Review of existing internal comparables, if any. Step 5: Determination of available sources of information on external comparables where necessary, taking into account their relative reliability. Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (. . .). Step 7: Identification of potential comparables, determination of the key characteristics that an unrelated transaction must meet in order to be considered potentially comparable, based on the relevant factors identified in Step 3, and in accordance with the comparability factors (. . .). Step 8: Determination and application of any relevant comparability adjustments (. . .)".
With respect to comparable uncontrolled transactions, these guidelines state that (paragraph 3.24): "A comparable uncontrolled transaction is a transaction that occurs between two independent parties and that is comparable to the controlled transaction under review. It may be either a comparable transaction between a party to the controlled transaction and an independent party ('internal comparable') or between two independent parties, neither of which is a party to the controlled transaction ('external comparable'J').
15 These guidelines state that such a process is considered accepted good practice, however, its application is not mandatory and any other search process that leads to the identification of reliable comparables is equally acceptable, as it is the reliability of the result that takes precedence over the process.
That in relation to the determination of the market value, numeral 5.14 refers that "(... ) /the tax administration will have to arrive at an arm's length transfer price even when the information available is incomplete", highlighting the importance of having documentation that supports both the transaction under analysis and the comparables. It also cites paragraph 5.17 of the same document, which indicates the use of information about the associated companies involved in the associated transaction "as well as information about independent companies involved in similar transactions or activities".
That this Court has held in Resolutions No. 05608-1-2017 and 00385-10-2019, among others, that the application of the comparable uncontrolled price method implies the comparison of interest rates of loan transactions carried out under the same or similar conditions to loan transactions carried out with related parties, for which each transaction must be evaluated, considering for this purpose the characteristics of the transactions, the economic functions or activities, the contractual terms, the economic or market circumstances, among others.
That in Resolution No. 00652-3-2019, this Court has indicated that in order to determine the value of transactions carried out between related parties, it is appropriate to consider the values of transactions carried out between independent parties, i.e., those carried out between the taxable person and independent third parties or, failing that, between unrelated parties, In any case, they must be comparable transactions, which will be comparable when they have been carried out under the same or similar conditions to the transaction to be analysed, so that any differences that exist between the transactions being compared cannot materially affect the price, and if they do exist, they must be eliminated through adjustments.
With regard to the process of selecting comparable transactions, in Request No. (sheets 416 to 428) the Administration analysed the characteristics of the transaction, noting that there was no loan contract, that no interest was considered as a return and that no guarantee had been granted by the debtor, and it also determined the comparables to be used by analysing the characteristics of the debtor's business and the purpose of the financing granted. It then identified as comparable loan transactions agreed by the Limited, according to the 20-F report provided to the Security Exchange Commission of the United States of America, corresponding to fiscal year 2014.
At this point, it is necessary to characterise the operation analysed, so that the comparability analysis can be carried out in order to search for potential comparables. In this regard, it is important to note that in the absence of a contract characterising the operation under analysis, the characteristics identified by the Administration were detailed, which would allow such analysis to be carried out in order to apply discarding criteria. In this context, the Administration applied criteria such as amount, term and date of subscription in its search. As a result, the following comparable transactions were identified:
Start date Term or amortisation period (years)
Guarantee Interest Rate Structure Agreed Rate (%)
28/11/2012 3 100 Guaranteed O, 58310% 2.450% 3.033% 28/11/2012 5 720 Guaranteed O, 58310% 2.450% 3.033% 2.450% 3.033% 2.450
28/11/2012 5 720 Guaranteed O, 58310% 2.250% 2.833% 2.833% 28/11/2012 3 620 Guaranteed O, 58310% 2.250% 2.833% 2.833
28/11/2012 3,620 Guaranteed O, 58310% 2.000% 2.583% 2.583% 2.583% 2.000% 2.583% 2.583% 2.583% 2.583
In this regard, the table presented shows that four of the elements considered by the law were taken into account. Thus, with regard to the amounts of the transfers at the beginning and end of the year, it can be seen that they were between $784 million and $923 million, while the comparable operations presented amounts of between $100 million and $720 million. In relation to the term or amortisation period, in the case of the transaction under analysis, it was determined that since it was not paid during the 2014 financial year, the term of the comparable transactions should not be less than one year; therefore, in the case of the comparable transactions, terms ranging from 3 to 5 years were identified. Regarding the start date of the comparable loans, it was considered that the subscription date should be at least two years, considering that, according to the information available, the transfer of funds from the parent company started in that period and it was assessed that they should be in force during the entire 2014 financial year. With regard to the guarantees, it was concluded that the comparable operations are secured loans while those analysed are not, which indicates that this constitutes a conservative position, since for the loans received from the related party in their current conditions (unsecured) it would imply the application of a higher interest rate than those selected as comparable.
From the evaluation carried out, it can be seen that the Administration carried out the analysis of some of the characteristics applicable to the case in question, as considered in article 11O of the Income Tax Law Regulations; However, it is noted that it has not taken into account some other elements of the operation that are relevant in order to establish a comparable financial transaction and that may have an impact on the setting of the interest rate to be charged, such as the solvency of the debtor and the risk rating, elements considered by paragraph d) of article 32-A of the Income Tax Law and paragraph a) of numeral 1 of article 110 of the regulations of the aforementioned law.
In this regard, it has not been proven that the Administration had carried out a correct comparability analysis for the transaction subject to assessment, i.e. a proper comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2014 financial year.
That in accordance with the foregoing, the objection of the Administration is not duly substantiated, and it is therefore appropriate to lift it and, consequently, revoke the appealed ruling and annul the contested determination ruling.
Given the sense of the ruling, it is not appropriate to rule on the appellant's other arguments.
That the oral report was heard with the attendance of both parties, as can be seen from the record in the file.
With Mr. Mejía Ninacondor, Mr. Chipoco Saldías, and Ms. Zúñiga Dulanto intervening as rapporteur.
TO REVOKE the Resolution of Intendencia No. Resolution of Determination No.
of 28 June 2018, and TO SET ASIDE WITHOUT EFFECT
Register, communicate and forward to SUNAT, for its effects.
ZÚÑIGA DULANTO VOCAL CHAIRWOMAN
MEJÍA NINACONDOR MEMBER
CHIPOCO SALDÍAS MEMBER
Huertas Valladares Secretary Rapporteur (e) ZD/HV/rmh.
I Note: Digitally signed document 1
2 Regulations for the Qualification of Petroleum Companies, approved by Supreme Decree Nº 030-2004-EM.
3 According to Article 396 of the General Companies Act, a branch is any secondary establishment through which a company carries out, in a place other than its domicile, certain activities included in its corporate purpose. The branch has no legal personality separate from its principal. It is endowed with permanent legal representation and enjoys management autonomy within the scope of the activities assigned to it by the principal, in accordance with the powers of attorney granted to its representatives.
4 ELIAS LAROZA, Enrique. Derecho Societario Peruano - Ley General de Sociedades del Perú. Editora Normas Legales, Volume 111. Trujillo - Peru, 1999. P. 1072.
5 In this letter, the parent company describes the transfers of funds made to the branch as a capital contribution. It states that the purpose of such transfers was to provide it with sufficient capital to cover the investments and oil activities in lot 67, in order to comply with the commitments assumed with the Peruvian State. It points out that because the Branch only started commercial extraction activities in December 2014, in that year there was a high level of uncertainty regarding the generation of future cash flows, which made the business it was developing particularly risky. Finally, it refers that, based on the above and in line with the parent company's financial policies, the financing of its activities during 2014 was oriented more towards sources of equity than debt.
6 According to the appellant: '(...) there was no agreement between the company and the Branch, either express or explicit, stipulating a civil obligation on the part of the parent company to deliver sums of money (... )'.
7 According to the text applicable to the case under analysis.
8 As amended by Legislative Decree No. 1112, published on 29 June 2012, which entered into force on 1 January 2013.
9 Approved by Supreme Decree Nº 122-94-EF.
10 Text of the aforementioned article 108 incorporated by Supreme Decree Nº 190-2005-EF.
11 According to the fifth paragraph of paragraph c) of article 32-A of the Income Tax Law, modified by Legislative Decree Nº 1112.
12 In this regard, see: https://www.oecd.org/tax/transfer-pricinq/48275782.pdf.
13 Text as of the provisions of Supreme Decree No. 258-2012-EF, in force as of 1 January 2013.
14 Hereinafter OECD Guidelines.