Republic of
Panama Administrative Tax Court
Background
Resolution No. TAT-RF-066 of 9 July 2021
FILE: 230-18
The forensic firm -------------------------------------------------., acting on
behalf of the taxpayer --------------------------------------------------------.
, with RUC , has
filed before this Court, Appeal against the tacit refusal, by administrative
silence, of the Appeal for Reconsideration filed against Resolution No.
201-5891 of September 4, 2018, issued by the General Directorate of Revenue of
the Ministry of Economy and Finance, by which an additional liquidation was
issued in the name of the referred taxpayer, on the occasion of a transfer
pricing adjustment, corresponding to the tax periods 2014 and 2015.
By notes Nos. 201-01-4399 of November 23, 2015, and 201-01-2465 of
October 26, 2016, the Director General of Revenue requested the taxpayer to.------------------------------------------------------------------------ --. , with RUC --------------------,
to submit the transfer pricing studies corresponding to tax periods 2014 and
2015, respectively, within 45 days, counted as of the notification of the
referred notes, as provided in articles 762-J and 762-K of the Tax Code (Pages
6 and 24 of the background file).
Subsequently,
by Note No. 201-01-2031-DGI dated July 27, 2017, the Director General of
Revenue informed the taxpayer's legal representative that it had been selected
for an audit on international taxation in particular transfer pricing, for the
years 2013, 2014 and 2015 (Pages 33-34 of the background file).
In its Note,
the Tax Administration requested the taxpayer to submit the following
information within ten (10) business days:
1.
Transfer
pricing studies for the periods 2013 and 2015;
2.
Audited
Financial Statements for the audited periods, in Spanish language;
3.
Explanation of
the accounting and tax treatment of related party transactions in the periods
under audit;
4.
Accounting
movements of the accounts involved in related party transactions in Excel
format;
5.
Work papers
for the preparation of transfer pricing studies and income tax returns for the
years under audit;
6.
Segmented
income statements of the taxpayer according to the transactions observed in the
transfer pricing study and the transactions carried out with unrelated
companies for the years under review, indicating the criteria used for the
segmentation;
7.
Complete
organizational structure of the taxpayer;
8.
Description of
the group's transfer pricing policy pursuant to Section 762-K of the Internal
Revenue Code;
By memorial
filed on August 28, 2017, the taxpayer's counsel submitted the requested
documentation, as well as the transfer pricing study corresponding to the 2014
period, as shown on pages 39 to 319 of the background file.
Likewise, at
pages 320-389 of the background file, there are different records of the
process requesting additional information from the Tax Administration, and the
contribution of the same by the taxpayer, in physical and digital format.
It should be
noted that the taxpayer's attorney requested the accumulation of the audit
processes followed to his client (2013, 2014 and 2015), as well as a motion for
res judicata, as a matter of prior and special pronouncement, both requests
being rejected (see pages 363-365; 390-396 of the background file).
After the
analysis carried out by the Tax Administration, an additional assessment was
issued in the name of the taxpayer, through Resolution No. 201-5891 of
September 4, 2018 (visible at pages 398-440 of the background file), for the
following amounts:
DETAIL |
2014 |
2015 |
Income
Tax |
B/. 2,660,974.97 |
B/. 2,823,290.31 |
Surcharge
(10%) |
B/.266,097.50 |
B/. 282,329.03 |
Complementary
tax |
B/.1,179,452.88 |
B/.1,176,886.84 |
Surcharge
(10%) |
B/.117,945.29 |
B/.117,688.68 |
TOTAL |
B/.4,224,470.63 |
B/.4,400,177.15 |
(Page 440 of the background file)
In this sense,
the Tax Administration based its scope on the following considerations:
1. That the recitals of the challenged act today, refer
to the facts of the fiscal years 2014 and 2015 that have incidence in the
calculation of the Income Tax.
2. That the taxpayer reported, in its sworn income tax
return for the 2014 tax period, transactions with related parties abroad, in
accordance with the provisions of Article 762-I of the Tax Code, in the
following items:
a. Revenues:
B/.195,348.00;
b. Expenses: B/.
51,872,483.23.
3. That in its 2014 transfer pricing report, the taxpayer
reported transactions with related parties for B/. 181,709,403.00, as detailed
in Table 1 (Pages 399-400 of the background file).
4. In relation to the 2015 period, the taxpayer reported,
in its sworn income tax return, expenses for operations with related parties
abroad, for B/. 59,883,105.24, in accordance with the provisions of article
762-I of the Tax Code.
5. On the other hand, in the 2015 transfer pricing
report, the taxpayer reported transactions with related parties for
B/.210,629,305.00 (see table 2 at pages 265-266 of the background file).
6. According to the transfer pricing studies for the
periods 2014 and 2015, the transactions reported consist of purchases and sales
of inventory for distribution, interest in favor of deposits made, corporate
services received, logistics services rendered and interest on financing
received with related parties abroad.
7. In relation to the activity of the company, the
referred transfer pricing studies explain that the company was incorporated
under Panamanian law, operates in the Colon Free Zone since 2011, and is
dedicated to the distribution of pharmaceutical and consumer products of the
group in the region (oncological, over-the-counter and consumer vaccines),
including the management and control of the inventories it distributes,
acquired entirely from related parties abroad. The studies add that, in order
to carry out this activity, they receive corporate services from a related
Costa Rican entity for marketing, promotion, commercialization, accounts
receivable and payable management, administration, order placement, finance and
back-office. (Page 402
of the background file).
8. After summarizing the main aspects of the transfer
pricing studies, related to the functions, assets and risks used by the
taxpayer, as well as its search for comparables, and methods used for the
transfer pricing analysis of the taxpayer's operations (Pages 402-416 of the
background file), the Tax Administration detected certain inconsistencies
related to the methodology used for the valuation of the operations entered
into between the taxpayer and its related parties abroad, which it explained as
follows (Pages 417-438 of the background file):
a.
There are
discrepancies between the amounts reported in the income tax returns and the
transfer pricing report for income from sales and expenses for purchases from
related parties (Page 417 of the background file).
b.
Similarly,
there are discrepancies regarding the margins shown in the 2014 transfer
pricing report for the purchase of inventory for distribution, and interest
collected and paid by the taxpayer, with respect to the information contained
in the transfer pricing study for the same period, although the method used in
both documents coincides.
c.
In the same
vein, there are discrepancies between the operating margin reported in the Form
930 for the 2015 period and the information contained in the transfer pricing
study for the same fiscal year, for logistics services rendered separately
under the net margin method of the transaction (Page 418 of the background
file).
d.
In this sense,
the tax authorities consider that the asymmetries indicated, evidence a lack of
exhaustive analysis in the presentation of its transfer pricing report, thus
failing to comply with the provisions of article 762-J of the Tax Code.
e.
In addition to
the above, the tax authorities highlighted certain inaccuracies regarding the
information contained in the financial statements and in the supplementary
documentation provided by the taxpayer in response to the requests for
information made during the course of the audit, specifically in Note No.
202-DTI-01-007-2018, specifically the variations in costs and expenses between
the period 2014 and 2015, justified by the taxpayer, in differences in the
grouping of accounting accounts related to the item of inventories written off.
In this regard, it called the attention of the Tax Administration "the fact that the taxpayer reports
significantly high costs for destruction of products written off due to expired
validity in the 2014 and 2015 financial statements, even when the same taxpayer
in the 2014 and 2015 transfer pricing studies indicates that it has suppliers
belonging exclusively to the group which allows it to maintain a low product
risk, reducing possible losses and expediting the processes of claims for
defects", therefore, considering that the taxpayer recognized a loss
for inventory written off due to expired validity of B/. 13,368,742 (2014) and
write-offs for B/. 5,078,748 (2015), the taxpayer assumes more risks than it
points out (Pages 419-420 of the background file).
f.
On the other
hand, the Tax Administration requested explanations on the variation in the
cost of sales (55% from 2013 to 2014, and -34.25% from 2014 to 2015), which
were explained by the taxpayer, pointing out that, due to accounting
classification issues, the increase from 2013 to 2014 was 26.15%, a figure that
the Treasury considered reasonable, disagreeing, however, with the explanations
related to the 2014-2015 variation. In this regard, the taxpayer explained that
the inventories written off for 14.5 million in the period 2015, which were
taken as provision and inventories would have a cost reduction of -23.49%,
which would decrease the percentage between one period and the other, which was
refuted by the Tax Administration, considering that the amount indicated, does
not count as cost of sales, but represents an account of the balance sheet, and
only the amount denominated as write-off is reported within the cost of sales,
in view of which, the financial information of the income statement 2014 does
not include the provision of slow moving inventory and expired validity, but
only the 13.4 million reported as write-off. In addition to the foregoing, it
was noted that the amount of
5.1 million
for write-offs presented in note 6 of the 2015 audited financial statements are
already included within cost of sales, for that period, therefore, what the
taxpayer suggests would cause that amount to be doubled (Page 420 of the
background file).
g.
Similarly, the
challenged act noted that, according to the taxpayer's explanation,
changes/revaluations in the cost of sales of all products should influence the
selling prices. However, the analysis of the Tax Administration showed "that the alleged changes in the volumes of
products sold and the variations in the costs of sale are not reflected in the
amounts of total income received in the tax periods 2014 and 2015",
which is evidenced, in what it considered a disproportionate variation in
comparison with the total income of the same periods, as reflected in page 420
of the background file.
In this
regard, it added that the list of products presented in the transfer pricing
studies of both periods is the same, and that throughout the audit, the
taxpayer did not present arguments demonstrating changes in the composition of
the products compared to related parties abroad, and in the responses to the
requests for information from the tax authorities, "does not explain in detail how [sic] the reasons for the variation in
cost can be attributed to a variation in the composition of the products
sold," which, in the opinion of the Administration, "could indicate that the taxpayer has made use of its operations
with related parties abroad to erode the Panamanian tax base through the
transfer prices associated with these operations.
h.
In relation to
the segmentation of the purchase and sale operations net of non-produced
inventory, the tax authorities pointed out that, upon reviewing the
documentation submitted by the taxpayer (transfer pricing study and annexes),
no arguments were presented to determine that a segmented analysis is feasible,
since the segmented Income Statement was provided up to the gross level and not
the segmented Balance Sheet, emphasizing that the segmentation of the financial
data allows eliminating those non-comparable operations, excluding the income,
costs and/or expenses not related to the operation under analysis, however the
taxpayer did not present information that demonstrates that the segmentation
allows obtaining reliable comparables of the operation carried out (Page 421 of
the background file).
i.
On the other
hand, the Tax Administration observed that the operating expenses are
significantly high for the taxpayer's distribution activity, which makes it
necessary, the segmentation of the information related to operating expenses,
for an adequate analysis of the functions, assets and risks of the taxpayer,
according to the provisions of article 762-E of the Tax Code. By virtue of the
above, it considered that the explanations provided by the taxpayer, in
response to point 8 of note no. 201-01-2031-DGI.ฐ 201-01-2031-DGI, corresponds,
again, to the Income Statement segmented at gross level, not in its entirety,
which led him to conclude that "not
having sufficient information on the additional functions carried out by the
taxpayer for each segment in its distribution activity, it would not be
possible to make a search of comparable operations in order to validate the
principle of free competition in accordance with article 762-A in the analysis
of the operation of sale of inventory for distribution of the taxpayer" (Page
423 of the background file).
j.
In relation to
the method used by the taxpayer for the segment of sale of inventory for distribution, the Tax Administration rejected
the use of the resale price method, considering that, according to paragraph
2.21 of the OECD Guidelines, it can only be used in the analysis of operations
of products purchased from related parties and resold to independent third
parties, a fact that is not met in this case.
k.
In the same
line, the Treasury considered that the arguments used by the taxpayer in its
transfer pricing studies to support the application of the resale price method,
for the analysis of the transaction of purchase
of inventory for distribution are not supported by the analysis of the five
comparability factors, therefore, it is not sufficient to conclude that it is
the most appropriate method, emphasizing the provisions of paragraphs 2.21 to
2.21 of this report.
2.38 of the
OECD Guidelines, technical reference under Article 762-D of the Fiscal Code.
l.
On the other
hand, the Tax Administration considered that the amount of distribution and
sales expenses (2.63%) and general and administrative expenses (46.67%) is
disproportionate compared to the sales made from the Free Zone to Panama, which
represent 17.92% of the sales for the period 2014. Likewise, it was considered
that the amount of selling, general and administrative expenses (50.28%) is
disproportionate in comparison with the sales made from the Free Zone to
Panama, which represent 18.42% of the sales for the period 2015 (see analysis
on page 426 of the background file). In this regard, the 10-K reports of the
companies presented as comparable in the transfer pricing studies were
verified, observing that, in some cases, the operating expenses are not
material in proportion to sales, and in others, the reports do not present
information that would allow the comparability analysis to be performed
adequately.
m.
In addition to
the above, the Treasury highlighted certain inconsistencies between the amount
corresponding to the cost of sales used to calculate the gross margin, and the
one used in the financial statements "from
19.51% to 10.58% for 2014 and from 38.64% to 40.88 for 2015" considering
that this discrepancy detracts certainty to the compliance with the arm's length
analysis. In this sense, it was
highlighted that the explanations provided by the taxpayer when questioned in
this regard, justifying this variation in differences in the accounting
classification, evidences the sensitivity of the selected indicator in relation
to adjustments in accounting practices, and an insufficient analysis of the
components of operating expenses, relevant to its distribution operation, which
should have led the taxpayer to perform a new review of the applicability of
the method and the categories of costs and expenses contained in the taxpayer's
financial information, in accordance with the recommendation contained in
subsection 2.35 of the OECD Guidelines.
n.
The above
analysis led the Tax Administration to determine that the operating expenses
associated with the distribution activity, according to the Taxpayer's
Affidavit of Income and Audited Financial Statements, take its gross margin
from 10.58% to -29.83% for 2014 and from 40.88% to -9.40% in 2015, a fact that
is neither presented nor countered in the transfer pricing studies, despite its
importance, among other things, for the choice of the most appropriate method,
given its significant impact on the company's performance; nor is there
evidence of comparability adjustments to eliminate possible existing
differences due to the execution of additional functions (Page 427 of the
background file).
o.
By virtue of
these considerations, the Tax Administration considered that the most
appropriate method for this operation is the Net Transaction Margin, which
examines the profit of the operation obtained between related parties and
compares it with that obtained by independent parties in comparable operations,
provided that the functions, assets and risks are similar.
p.
In relation to
the comparables used by the taxpayer in its transfer pricing studies, the tax
authorities objected to the companies -----------------------.
and ------ ---------------., basing its decision on the existence of
important differences in terms of functions, assets and risks, according to
their 10-K reports, citing also the provisions of paragraphs 1.42 and 1.45 of
the OECD Guidelines, as detailed on pages 429-430 of the background file.
q.
In turn, the
Tax Administration did not agree with the rejection of the companies -------------. and ------------------. , by the taxpayer, for the purchase and sale
transactions of inventory in the 2014 and 2015 transfer pricing studies,
considering that, in the case of -----------------.
the taxpayer has not presented sufficient arguments regarding the existence
of "different products" in
relation to the taxpayer, recalling that, although this is a recommended
criterion, when evaluating comparables, the impact of these differences should
be taken into account, depending on the method used, recalling that the net
margin method, and in particular the operating margin, is less sensitive to
product differences, and emphasis is usually placed on the functional analysis;
in the case of -------------------.In the
case of , after comparing its financial information with that of the
comparables accepted by the taxpayer, the Treasury did not agree with the
criterion of discarding this company, arguing "Different Functions"
and therefore proceeded to include both companies in the calculation of the
arm's length range corresponding to the referred operation.
9. Based on the considerations summarized above, the
Treasury proceeded to form the arm's length range, corresponding to the
operation of purchase and sale of inventory for distribution, according to the
financial information of the other comparables used by the taxpayer in its
transfer pricing studies, starting with the 2014 tax period, using the average
operating margin 2011-2013, as shown in Table No. 3, reproduced below:
"Table 3. Interquartile range of operating
margin"
Comparable companies |
Average Operating Margin (2011-2013) |
------------------------------ |
1.11% |
---------------------------- |
1.81% |
----------------------------- |
4.12% |
-------------------- |
7.09% |
---------------------- |
6.97% |
|
|
------------------------- |
-29.88% |
|
|
Top Quartile |
1.81% |
Medium |
4.12% |
Lower Quartile |
6.97% |
(Page 432 of the background file).
10. Consequently, the operating margin was adjusted from
-29.83% to 4.12% (33.95 percentage points), through the deduction of
B/.51,020,750 in the item of cost of sales, based on article 762-B of the
Fiscal Code, as shown in table No. 4 below:
"Table No. 4. Adjustment of the median of the interquartile range
for the operation of purchase and sale of inventory for distribution for the
period 2014".
Concepts |
Audited Financial Statements |
Information Adjusted Financial |
Income |
150,283,428 |
150,283,428 |
Cost of Sales |
134,386,492 |
83,365,742 |
Gross
Profit |
15,896,936 |
66,917,686 |
Operating expenses |
60,726,009 |
60,726,009 |
Total Costs and Expenses |
195,112,501 |
144,091,751 |
Operating
profit |
B/. (44,829,073) |
B/. 6,191,677 |
Operating Margin |
-29.88% |
4.12% |
(Page 432 of
the background file).
The same
calculation was replicated in relation to the 2015 period, as shown in tables 5
and 6, visible on pages 432 and 433 of the background file, as described below:
Table 5. Interquartile range of operating margin.
Comparable companies |
Average Operating Margin (2013-2015) |
------------------------------ |
0.66% |
-------------------- |
1.78% |
-------------------- |
8.62% |
------------------- |
6.96% |
|
|
---------------------- |
-9.40% |
Top Quartile |
1.50% |
Medium |
4.37% |
Lower Quartile |
7.38% |
"Table
No. 6. Adjustment of the median of the interquartile range for the operation of
purchase and sale of inventory for distribution for the period 2015".
Concepts |
Audited Financial Statements |
Adjusted Financial Information |
Income |
149,469,109 |
149,469,109 |
Cost of Sales |
88,363,921 |
67,779,756 |
Gross
Profit |
61,105,188 |
81,689,353 |
Operating expenses |
75,157,553 |
75,157,553 |
Total Costs and Expenses |
163,521,474 |
142,937,800 |
Operating
profit |
B/. (14,052,365) |
B/. 6,531,800 |
Operating Margin |
-9.40% |
4.37% |
(Page 433 of
the background file).
10.
Next, we
proceeded to analyze the segment of services received by related parties,
specifically marketing, promotion, commercialization, management,
administration, order placement, finance and back-office services, by
-----------. -----------, billed by it, at the rate of 7.00% profit margin,
plus expenses.
11. In this regard, the Tax Administration objected to the
use of the related party as an analyzed party by the taxpayer, considering that
it contravenes the provisions of articles 694 and 762-F of the Tax Code, which
refer to the income taxpayer, and refer to it in the context of transfer
pricing information, respectively, indicating that the DGI cannot consider as a
taxpayer, according to the provisions of article 762-F, the related party
residing abroad.
12.
In addition to
the above, the Tax Administration considered that "the use of the operating margin over total costs obtained by-------------------------------------------------- .,
as an indicator of profit, does not allow to determine whether the taxpayer is
or is not within the range of full competition and it would not be possible for
the operation to be valued according to the provisions of article 762-A of the
Fiscal Code...nor would it be possible to make the corresponding adjustments
when this price does not correspond to those that independent parties would
have agreed, resulting in a lower taxation for the country" (Page 434
of the background file of the case). (Page 434 of the background file)
13.
On the other
hand, attention was drawn, in the contested act, to certain inconsistencies in
the Audited Financial Statements submitted by the taxpayer (2011-2015), which
could suggest the existence of transfer pricing manipulation, according to
sections D.2 and D.3.. of Chapter I of the OECD Transfer Pricing Guidelines
(see tables 7, 8 and 9 on pages 434 and 435 of the background file),
highlighting that, the decrease in the operating profit of the taxpayer, from
21.86% in 2011 to -14.86%, -10.87%, -29.83% and -9.40% in the periods 2012 to
2015 respectively, does not respond to the normal behavior of a business. In
this regard, the high cost of sales in the period 2012-2014 stood out, for
figures ranging between 70% and 90% of sales, in terms of cost of sales, and
above 37% in terms of general and administrative expenses (almost 45% in the period
2015).
14.
In the same
line, it was observed that the trend of sales growth does not correspond to the
trend of sales costs or general and administrative expenses, highlighting that,
from the 2012 period, the company's behavior was alarming, by increasing sales
costs by 65.60% and general and administrative expenses by 158.44%, to reach a
growth of 29.10% of sales.
15.
In relation to
the above, it was stated that general and administrative expenses are composed
between 65% and 70%, by expenses for services received from related parties, as
summarized in tables 10 and 11 (page 436 of the background file), within which
an increase of 217.77% in this concept from the period 2011 to 2012 was
highlighted, which contrasts with the referred increase in sales of 29.10%,
behavior difficult to sustain, in the opinion of the Tax Administration, if
they were independent parties.
16.
As a result of
the questioning made in this regard, reference was made to the taxpayer's
answers, specifically to the contracts and documentation related to the
transactions between -------------- Panama, -------. and -----------------. (Costa
Rica), on which the following findings were identified:
a.
Difference between
the amount declared in the report and transfer pricing studies (7%) as
remuneration for services rendered, with respect to the information contained
in the contract and addendum provided (5%);
b.
Failure to
respond to the request for additional documentation justifying the payments for
corporate services received by the taxpayer, including policies, procedures,
requirements, instructions, service orders, e-mails, technical reports, work
budgets, functions and activities performed by the personnel, description of
the services received, dates of service provision, quantification of the
economic benefit resulting from the provision of the service, and any other
detail that demonstrates the effective provision of the service. In this sense,
it is noted that the taxpayer "merely submitted a text with information
regarding tax, legal representation, financial and sales force services (see
page 437 of the background file), to which were attached, in digital format,
the minutes and financial statements of the company, as well as correspondence
between the external auditors and the taxpayer, authorizing the issuance of the
financial statements of the company; certification of review of the minutes of
shareholders and board of directors meetings, a board of directors minutes in
which an appointment is made, and an Excel file, in which the information does
not coincide with that described by the taxpayer.
17.
In the opinion
of the Administration, this lack of detailed and duly documented response
contravenes the provisions of article 762-G of the Tax Code, in accordance with
the provisions of paragraphs 7.5 and 7.6 of the OECD Guidelines, by virtue of
which, the determination was made to disregard the amount of B/.51,8722,483.00
(2014) and B/.59,846,318.00 (2015), corresponding to the expenses for services
received from its related party.
18.
Based on the
above considerations, the Income Tax payable for the referred periods was
calculated as follows:
Table 12.
Determination of Income Tax Payable 2014 and 2015
DETAIL |
2014 |
2015 |
Net Taxable Income from Domestic
Transactions declared |
(5,713,285.64) |
(1,380,138.87) |
More: Increase according to research |
17,619,432.31 |
13,962,776.82 |
New Net Taxable Income according to
research |
11,906,146.67 |
12,582,637.95 |
Tax Caused according to Investigation |
2,976,536.67 |
3,145,659.49 |
Less: Tax according to declaration |
315,561.70 |
322,369.18 |
Income
Tax Payable |
2,660,974.97 |
2,823,290.31 |
(Page 439 of the background file).
19.
Then, the
complementary tax derived from the increase in taxable income was calculated,
as detailed in Table 13, which is reproduced below:
Table 13: Determination of Complementary Tax payable 2014 and 2015
DETAIL |
2014 |
2015 |
Net Taxable Income from Reported Domestic
Transactions |
(5,713,285.64) |
(1,380,138.87) |
More: Increase according to Research |
17,619,432.31 |
13,962,776.82 |
New Net Taxable Income according to
research |
11,906,146.67 |
12,582,637.95 |
Tax Caused according to Investigation |
2,976,536.67 |
3,145,659.49 |
Balance Resulting from Domestic
Transactions |
8,929,610.00 |
9,436,978.46 |
20% of the Resulting Balance for Declared Domestic
Transactions |
1,785,922.00 |
1,887,395.69 |
Taxable Income from Foreign Operations declared |
-35,230,767.01 |
-17,060,342.70 |
More: Increase according to PT Research |
85,273,800.93 |
66,467,706.24 |
New Determined Net Taxable Income |
50,043,033.92 |
49,407,363.54 |
20% of the resulting balance of exempt and foreign Taxable
Income |
10,008,606.78 |
9,881,472.71 |
Total
Resulting Balance |
B/.11,794,528.78 |
B/.11,768,868.40 |
10% of Complementary Tax |
1,179,452.88 |
1,176,886.84 |
Tax according to Declaration |
- |
- |
Complementary Tax Payable |
1,179,452.88 |
1,176,886.84 |
Total Complementary
Tax Payable |
B/.1,179,452.88 |
B/.1,176,886.84 |
(Page 439 of the background file).
20. The aforementioned sums result in the amount fixed in
the operative part of the contested act, which is transcribed below:
DETAIL |
2014 |
2015 |
Net Taxable
Income Declared |
(5,713,285.64) |
(1,380,138.87) |
More: Increase according to Research |
17,619,432.31 |
13,962,776.82 |
New Taxable Income |
11,906,146.67 |
12,582,637.95 |
Tax Accrued According to Investigation
25% Tax Accrued According to Investigation 25% Tax Accrued According to
Investigation 25% Tax Accrued |
2,976,536.67 |
3,145,659.49 |
Less: Tax according to Declaration |
315,561.70 |
322,369.18 |
Difference Payable |
2,660,974.97 |
2,823,290.31 |
More: Complementary Tax |
1,179,452.88 |
1,176,886.84 |
Total
Tax |
B/.3,840,427.85 |
B/.4,000.177.15 |
Surcharge 10% (Article 1072-A of the Tax
Code) |
384,042.78 |
400,017.71 |
Total
Tax Payable |
B/.4,224,470.63 |
B/.4,400,194.86 |
(Page 440 of the background file)
Once notified
of the resolution containing the additional assessment, the taxpayer filed,
through a duly constituted legal representative, an Appeal for Reconsideration,
visible on pages 441-481 of the background file, in which he requested the
revocation of Resolution No. 201-5891 of September 4, 2018, based on the
following arguments:
1.
From the
procedural point of view, the appellant referred to certain actions that, in
his opinion, violate due process, since a substantive resolution was issued
(for the 2013 period), and yet the audit continued, which he considered to be
res judicata. He also referred to the absence of an audit closure act and of
prior communication of the adjustments to the taxpayer's profit, who only found
out about them when the appealed resolution was issued, without giving the
opportunity to present arguments or provide evidence.
2.
In relation to
the transfer price adjustments, the appellant pointed out that they are
incompatible, since the median operating profit margin of the comparables
(4.12% and 4.37%, respectively) is about ten times lower than the one that is
intended to be adjusted to the taxpayer (38.64% and 44.41% respectively),
leading it to an unreal situation with respect to the market, which is far
away, precisely, from the principle of full competition.
By virtue of
the foregoing, it considered that it is not correct to make two separate
adjustments (an adjustment to the cost to bring the average net margin and then
an adjustment to the expenses for the services received from its related
party), especially when the challenged resolution used a method that compares
the net profit. In addition to the above, it emphasized that the challenged
expenses were necessary for the distribution and marketing activity by the
taxpayer, which is contrary to the commercial nature of the business.
3.
In relation to
the use of the resale price method, he defended the analysis performed in the
transfer pricing studies, specifically the comparability analysis, taking into
account the factors developed in Article 762-F of the Tax Code and the Transfer
Pricing Guidelines of the OECD, which led him to choose the referred
method, considering that it allows to analyze the subject operations in a more
direct way than a transactional method, such as the net margin of the
transaction, used by the Tax Administration. In addition to the above, he
pointed out that the operations under analysis correspond to the purchase and
sale of inventories to related entities abroad, whose impact can be evaluated
in the gross margin, through the resale price method, also citing paragraphs
2.21 and 2.5 of the OECD Guidelines.
4.
In relation to
the rejection of the comparables --------------.
and-------- --., stressed that transfer pricing
analysis is not an exact science (as recognized in paragraph 1.13 of the OECD
Guidelines), pointing out the difficulty of identifying potentially comparable
companies, which present the same combination of functions, assets and risks as
the analyzed party, defending, however, the analysis performed in the transfer
pricing studies.
a.
In relation to
the comparable ------------------. In
opposition to the Tax Administration's argument, based on functional
differences, he pointed out that according to the 10-K reports for the periods
2014 and 2015, this company is mainly engaged in distribution activities.
b.
In relation to
the ownership of retail pharmaceutical franchises by the comparable, the
appellant pointed out that the preponderant segment of the company is the one
corresponding to pharmaceutical products (about 88% in both periods), while the
medical equipment segment represents only 12% of its revenues, emphasizing that
the other functions, pointed out by the Tax Administration, have a
complementary nature.
c.
In the same
vein, the 10-K reports note that the company's main competitors are in the
wholesale distribution sector, which reinforces their similarity to the
company's primary function.
d.
In relation to
the comparable -----------------, he stressed that the service activities, used
as a basis for the rejection of the same, are of a complementary nature,
highlighting that, according to the 10-K reports, the company is mainly engaged
in the distribution of health care products.
e.
It also noted
that the ratio of inventories to total assets is consistent with those of the
selected comparables (including those accepted by the Tax Administration),
being the third most comparable with that obtained by the taxpayer.
f.
Likewise, it
was noted that, according to page 11 of the company's 10-K report for the 2014
period, it indicates, when comparing the performance of the company's common
stock, a number of companies listed as "pharmaceutical distributors,"
a category that was also the one used for the selection of comparables, by the
taxpayer.
g.
In general,
the taxpayer expressed its disagreement with the grounds for rejection raised
by the tax authorities, as they did not relate to the existing facts, adding
that the rejected companies are no less comparable, functionally speaking, than
the other companies that were accepted.
5.
On the other
hand, the appellant objected to the inclusion of the comparables ---------------. and -- -------------., pointing out, first
of all, that the tax authorities did not question or request any clarification
regarding the rejection of those comparables, so it proceeded to explain the
reasons that led to the rejection of those comparables:
a.
First,
reference was made to the difference in products between the company and the
taxpayer.------------------------------------------------------------------------------------- And
the taxpayer, explaining that, according to the company's 10-K reports, the
company has three business segments:
i.
Pharmaceutical
ingredients (34.6% and 27.3% of net sales, respectively);
ii.
Performance
chemicals, which accounted for 34% and 31.5% of net sales, respectively;
iii.
Human health
(31.4% and 41.2% of net sales, respectively).
In analyzing
the marketed products corresponding to the first two elements, the following
are detailed in the resource: "chemical components used as a semi-finished
product or raw material in the pharmaceutical, nutraceutical, agricultural and
chemical industry, as well as active ingredients and intermediates (chemical
compounds) used as inputs for the manufacture of pharmaceutical products."
(Page 461 of the background file).
In the
appellant's view, the products described differ significantly from the products
marketed by the taxpayer (finished pharmaceutical, oncological, vaccines, or
over-the-counter and consumer products), which do not undergo any modification
and are aimed at the pharmaceutical industry. This also indicates an important
difference with respect to the industry in which they operate.
b.
In relation to
the characteristics of the goods and services, it referred to paragraphs 1.39
and 1.40 of the OECD Guidelines, concluding that, by virtue of the differences
at the product level, it operates in a different link in the value chain than
the taxpayer, performing different functions, using different assets and
assuming different risks than the taxpayer, ... operates in a different link in the
value chain than the taxpayer, performing different functions, using different
assets and assuming different risks than the taxpayer (Page 462 of the record).
c.
Regarding the
argument used by the DGI for the inclusion of this comparable (attenuating the
application of product differences as a criterion for discarding comparables),
he indicated that, although it is true that the NGM is more tolerant to
differences at the product level, the comparable included operates at a
different step in the value chain, which implies functional differences, This
implies functional, asset and risk differences with respect to the company it
represents, highlighting the presence of intangible assets associated with the
products distributed, which play an important role in determining product
prices, as well as the provision of regulatory support and quality control
services to its customers, functions that are significantly different from
those of the company analyzed.
d.
Regarding the
inclusion of the comparable --------------.
the appellant's counsel indicated that the Directorate General of Revenue
did not make any indication or explanation, beyond indicating that when
comparing the 10-K reports of this company and those accepted as comparable, it
does not agree with the taxpayer's rejection under the criterion of
"different functions", which it considered an absence of motivation,
and a breach of the provisions of article 1193 of the Tax Code. In addition to
the above, it explained that this company is not only dedicated to the
distribution of medical and health care products, but also offers exclusive and
innovative technological solutions to its clients, including software and
hardware, and other value added services, financial, electronic and continuing
education services for medical practitioners, concluding that it performs functions
and assumes risks significantly different from the taxpayer (Page 463 of the
background file).
e.
Likewise, it
pointed out that, according to the 10-K report of the referred company, it
recognizes that it is not necessarily comparable to other distribution entities
in terms of gross profitability, due to the fact that it obtains a higher gross
margin in its segment of technological services and high added value, in
comparison with its segment of distribution of health care products, making
special reference to the companies dedicated to the software industry (Pages
463 and 464 of the background file).
f.
At the product
level, he stressed that the market to which the production of the comparable
discarded product is directed, differs significantly from that distributed by
the taxpayer, being mostly inputs aimed at dental health care, noting that,
according to the company's financial information, this segment accounted for
about 50% of sales in the period 2013-2015, and that this type of product
generates a higher level of profit than the pharmaceuticals distributed by the
taxpayer, this segment represented around 50% of the company's sales in the
period 2013-2015, and that this type of product generates a higher level of
profit than the pharmaceutical products distributed by the taxpayer, adding the
presence of intangibles associated with the products distributed by the former
(Pages 464 and 465 of the background file).
6.
On the other
hand, allusion was made to the comparative ratio of inventory to total assets,
concluding that it is much lower than those of the companies used as
comparables in the transfer pricing study, censuring, also, the lack of
consistency by the tax administration, when evaluating the acceptance and
rejection of comparables made by the taxpayer. In this sense, the rejection of
the comparable , for carrying out
functions different from those of the taxpayer, proceeding then to include -----------. and -----------. and---------------------------------------- --. despite the fact that their
functions, assets and risks differ (Page 465 of the background file).
7.
In this sense,
the appellant emphasized that "the
rejection of the comparables that present low profitability indicators and the
inclusion of new comparables, unduly raise the rank and its median",
proceeding to reflect the impact of the same in the calculation of the arm's
length rank (tables 8 and 9 at page 466 of the background file), concluding
that the two companies incorporated by the Tax Administration, raise the median
by more than double, in both periods, which it qualified as "cherry picking".
8.
In the same
vein, the taxpayer carried out the hypothetical exercise (reiterating its
opposition to the same) of measuring the impact of the application of the TNMM
for the distribution operation, using the operating margins of the comparables
chosen by the taxpayer, as summarized in Tables 10-19 (Pages 467-469 of the
background file), showing that the margins calculated by the DGI are much
higher than those that would result from using the comparables selected by the
taxpayer.
9.
Regarding the
expenses paid to------------------------------- .,
he reiterated his disagreement with the adjustment to the taxpayer's operating
income to reflect a margin after costs and expenses according to the median of
the universe of identified comparables, and then readjusting the taxpayer's
expenses, which he characterized as inconsistent, proceeding to clarify the
doubts regarding the services rendered:
a.
In the first
place, it objected to the DGI's interpretation that the application of the
MMNT1 can only be made to the taxpayer and not to its counterpart, indicating
that numeral 2 of literal B of article 762-F of the Tax Code refers to
"the operations", not to the Panamanian taxpayer. Likewise, he
pointed out that the same rule refers to the net margin of the taxpayer,
"or in its absence, third parties" (Page 472 of the background file),
adding that form 930 v.2 itself. leaves open the possibility to determine
whether the taxpayer or its related party will be taken as a related party,
supporting its argument in paragraphs 2.59, 3.18 and 3.19 of the OECD
Guidelines, concluding that the decision on the analyzed party is of a
technical nature, depending on the reliability and simplicity of the analysis
to be performed, emphasizing that, according to the procedural evidence, the
activities of the taxpayer are much more complex than those of its related
party.
b.
Regarding the
related party ------------------------. (Costa Rica), indicated that the
reasons for choosing it as the party under analysis were as follows:
i.
It is the
entity providing the service;
ii.
It is possible
to directly identify the functions, assets and risks of the operation, which
allows to apply the MMNT in a reliable way, measuring the profit margin that it
charged to the taxpayer.
iii.
The available
information allows a direct analysis of the operation of rendering of services
by the related party, which was considered more advisable than an indirect
analysis, carried out from the perspective of the Panamanian taxpayer (Page 473
of the background file).
iv.
In relation to
the method used for the analysis of this operation, the appellant reproduced
the arguments for the discarding of the methods established in article 762-F of
the Tax Code, as they were embodied in pages 36-37 and 45-46 of the transfer
pricing studies corresponding to the periods 2014 and 2015, respectively,
concluding that "it would be
reliable the application of the MMNT, but it would not be applicable on the
segmented information of the Taxpayer related only to the receipt of such
services, since the same is necessary to carry out its distribution activity;
in such sense, it would be necessary to measure the total profitability of the
Taxpayer which in turn is impacted by the costs recorded for the inventory
purchase operations carried out with its related parties. (Page
475 of the background file)
By virtue of
the foregoing, it was argued that the interpretation of article 762-F made in
the challenged act focuses exclusively on the margin of the taxpayer,
forgetting that the referred provision also refers to the prices, which can be
both paid and received by the taxpayer, supporting its argument in paragraph
7.2 of the OECD Guidelines, and considering that, since no objections were made
regarding the comparables and methodology used for the analysis of the value of
the services received, they are understood to be admitted.
v.
In relation to
the need for the services provided by the aforementioned company, it pointed
out that the taxpayer operates as a regional distributor, which performs its
functions supported from a service center located in Costa Rica, as documented
in the service contract provided (together with its respective addendum), which
fixes the remuneration at 7% of the operating expenses incurred in the
provision of the service to the taxpayer, taking advantage of the experience
and administrative structure that the related party had in the performance of
such activities, prior to the restructuring carried out by the economic group,
whereby the taxpayer outsourced the performance of these activities, as
explained in the taxpayer's financial statements (Page 476 of the background
file).
vi.
In relation to
the burden of proof alleged by the Tax Administration, he referred to
paragraphs 4.14 to 4.16 of the OECD Guidelines, which highlight the evidentiary
difficulties in transfer pricing matters, to which he added the impossibility
of complying with the 15-day term established by law, from the notification of
the challenged act, in which the disagreement or insufficiency of the evidence
provided is manifested, which, he reiterated, proves the provision of the
service.
vii.
In this sense,
he referred to the information contained in the income tax return, and the
financial statements of the taxpayer, which explain the validity of the
argument, by verifying the proportion of local and foreign source income (about
80%), and the composition of the expenses line, which is composed, mainly, of
expenses with foreign related parties (and amount 0, or very low in concept of
salaries, labor benefits, depreciation, services, insurance premiums, fuel and
lubricants, maintenance and operations, surveillance and security), which
demonstrates that it would be impossible to make sales abroad in excess of 150
million dollars, without having a team dedicated to the above mentioned
functions, which are carried out by the related party, which are carried out by
a team dedicated to the above mentioned functions, surveillance and security),
which shows that it would be impossible to make sales abroad of more than 150
million dollars, without having a team dedicated to the aforementioned
functions, which are carried out by the aforementioned related party,
reiterating that, in case of doubts, the pertinent information and
clarifications should have been requested, before issuing the administrative
act object of the presented appeal, and sustaining the established margin,
which is in accordance with the market range, and which was not objected.
viii.
Finally, the
appellant considered that, if the objection to the expenses incurred against
Pfizer Costa Rica were upheld, it would be appropriate to adjust the costs of
the distribution activity and also in the operation of providing logistics
services, to reduce the income in such a way that the results of both
operations of the taxpayer were at the median value of the identified
comparables, especially considering the method used, which takes into account
the taxpayer's expenses (Page 479 of the background file).
ix.
The appellant
concluded his appeal by requesting the following:
1.
The taking of
expert evidence;
2.
Declaration
that the contested act is null and void, and that the audit process be reversed
to the time prior to the issuance of the contested act, in view of the
violations of due process explained in the appeal;
3.
That the
applicability of the resale price method used by the taxpayer in its transfer
pricing studies be reconsidered;
4.
The viability
of the selected comparables and the expenses incurred in favor of (Costa Rica).
Once the term
established in article 1185 of the Tax Code had elapsed, the taxpayer's
attorney chose to apply the administrative silence, and filed a formal Appeal Appeal before the Administrative Tax Court, in which, after
sustaining the applicability of the procedural figure of administrative
silence, the arguments made in the Appeal for Reconsideration were generally
reiterated, which are divided, as noted in the preceding paragraphs, into
procedural aspects and substantive arguments, which will be evaluated in due
course.
By Resolution
No. TAT-ADM-157 of May 21, 2019, visible on pages 102-104 of the Court file,
the Appeal filed by the taxpayer's attorney was admitted, and the Tax
Administration was notified so that within said term it could file a formal
opposition brief, which was effectively filed by the tax authorities' attorneys
(visible on pages 106-147 of the Court file), who requested the confirmation,
in all its parts, of Resolution No. 201-5891 of September 4, 2018, based on the
following arguments: "The Tax Administration has filed a formal opposition
brief, which was effectively filed by the tax authorities' attorneys (visible
on pages 106-147 of the Court file), who requested the confirmation, in all its
parts, of Resolution No. 201-5891 of September 4, 2018, based on the following
arguments: "The Tax Administration has filed a formal opposition brief,
which was effectively filed by the tax authorities' attorneys.ฐ 201-5891
of September 4, 2018, based on the arguments set forth below:
1.
In relation to
the configuration of administrative silence, the attorney of the Treasury
accepted it, recognizing that it was not possible to respond to the appeal
filed within the two-month term established in article 1185 of the Tax Code
(Page 106 of the Court file).
2.
Regarding the
procedural irregularities alleged by the appellant, it was explained that the
taxpayer's rights have not been violated, as they are audits corresponding to
different periods, a situation known to the taxpayer, and which is clearly
expressed in Article 155 of Law 8 of 2010, which in his opinion has not been
interpreted correctly by his counterpart (Page 108 of the Court file).
3.
In this sense,
he described as contradictory, that in one incident, the taxpayer requested the
accumulation of the processes, and in the other one indicated that it was a
single process, and that it had already been ruled, thus concluding the audit.
In this regard, he explained that "the
main reason why the DGI carries out auditing processes of different periods is
precisely to expedite the investigation processes contemplating the provisions
of article 34 of Law 38 of 2000 and the faculties contemplated in articles 719
and 720 of the Tax Code", highlighting the three (3) year term that
the tax authorities have to issue additional liquidations. Likewise, he pointed
out that there has not been double judgment, since the audits were carried out
in different periods, which led to the rejection of the incidents presented by
the taxpayer's attorney (Pages 109-114 of the Court file).
4.
In the same line,
it opposed the arguments related to the contravention of Article 32 of the
Constitution, defending that the taxpayer was advised at all times, had access
to the reports and actions carried out by the Tax Administration, which is
reflected in the proceedings, records of proceedings and exchange of
communications between the tax authorities and the taxpayer, as stated in the
background file (Pages 114-116 of the Court file).
5.
Regarding the
absence of an Audit Closing Statement, he stated that the tax administrative
procedure does not establish it as a mandatory requirement, prior to the
issuance of the resolutions containing additional assessments, reiterating that
the taxpayer was assisted at all times by his trusted advisor, who at all times
had access to the file (Page 116 of the Court file).
6.
In relation to
the substantive arguments, it defended the verification of the arm's length
principle, through the methodology developed in Chapter IX of Title I of (Book
IV) of the Tax Code, acting in accordance with the provisions of Article 762-B,
which empowers the Tax Administration to make transfer pricing adjustments,
after analyzing the taxpayer's returns and reports, and verifying the
comparability analysis, contained in article 762-E of the Tax Code, and the
application of the methods developed in article 762-F of the same regulation,
as duly motivated in the challenged act.
7.
In this sense,
it pointed out that the grouping of the purchase and sale operations of
inventories for distribution was produced based on the information provided by
the taxpayer, which led to consider that these operations are closely linked
and it is not possible to make an adequate evaluation separately.
8.
Next, it
reiterated the criteria expressed in the contested act, with respect to the
convenience of using the transactional net margin method, based on the specific
circumstances of this operation.
9.
In the case of
intra-group services, the objection was based on the disproportionate increase
in payments for services with related parties, in relation to the increase in
sales, in a sustained manner in the periods 2011-2015, highlighting that in the
periods 2014-2015, operating expenses exceeded the gross profit of the
taxpayer, which led to request complementary information in relation to the
effective provision of services paid to related parties, however, the same was
not provided during the audit, supporting this objection in Article 762-G of
the Tax Code (Pages 122-123 of the Court file).
10.
In relation to
the arguments made in the appeals filed by the appellant, he made the following
clarifications:
a.
In the case of
inventory purchase and sale transactions, an adjustment was made to improve comparability,
applied to the cost of sales, based on the methodology described in article
762-F of the Tax Code.
b.
In relation to
the disregard of the expenses paid to related parties for intra-group services,
it clarified that this is not a comparability adjustment, but a scope resulting
from the transfer pricing investigation, and the non-compliance with article
762-G of the Tax Code, as previously detailed.
c.
In addition to
the above, it defended the reclassification of costs and expenses presented in
the transfer pricing studies as one of the reasons for objecting to the use of
the resale price method used by the taxpayer, noting that it was the taxpayer
itself that classified the inventories written off expired inventories as a
cost in its audited financial statements, while in the transfer pricing study
it reclassified them as expenses, which compromises the use of the MPR, and
affects comparability, citing paragraph 2.62 of the OECD Guidelines.
d.
In this
regard, it clarified that the taxpayer only referred to one of the grounds for
rejection of the referred method, pointing out that,
in the first place, the resale price method, by definition, applies to
operations in which inventory is acquired from related parties and sold to
independent parties, contrary to the situation of the taxpayer, who sells to
its related parties.
Likewise, it
pointed out that, in supporting the choice of this method in its transfer
pricing studies, a comparability analysis was not performed, which must be
applied to the financial information of both the selected comparables and the
taxpayer itself, indicating that in performing this analysis, the Tax
Administration observed that the taxpayer has incurred significant operating
expenses and that it reflects promotional functions, marketing and
administration functions performed by the taxpayer, defending the analysis
performed in Tables 1, 2 and 3 of the challenged act, concluding that "the amount of distribution and selling expenses
and general and administrative expenses is significant and closely related to
the taxpayer's operation", however, it opted to use a method that uses
the gross margin, excluding the referred expenses from the analysis, citing the
provisions of paragraphs 2.2 and 2.35 of the OECD Guidelines and the analysis
raised in the contested act, which led to consider that, in view of such
difference between the taxpayer's operating expenses, and in the classification
of the same by the companies selected as comparable, it must be concluded that
their gross margins are not comparable, proceeding the rejection of the referred method (Pages 127-130 of the Tribunal's file).
e.
In relation to
the rejection of the comparables --------------
and---------------------- . pointed
out that, contrary to what was stated by the appellant, the 10-K report of the
company ------------. does not
establish the proportion of its pharmaceutical segment dedicated to the
distribution of pharmaceutical products and other services, such as marketing,
distribution and payment of special pharmaceutical products, highlighting the
presence of nuclear pharmacies, and cyclotron facilities, which differ from the
products distributed by the taxpayer, in addition to having assets that are not
comparable to those of the taxpayer.
f.
In addition to
the foregoing, it pointed out that, although the medical segment of ,
---. Approximates 11% or 12% of its total revenues in the audited periods,
this percentage may significantly influence the determination of the taxpayer's
net margin, considering that this segment is engaged in the manufacture of
goods, an activity that is not performed by the taxpayer and from which a
higher return is expected than distribution.
g.
In the same
vein, it reiterated the differences at the level of the functional analysis of
the company --. The company's functional analysis, highlighting differences in
products, and particularly at the level of risks, in view of its fixed margin
compensation scheme on fixed costs and expenses, being a distributor of limited
risk, unlike the taxpayer, which assumes all the marketing risks (full-fledged distributor), as developed
on pages 132-133 of the Tribunal's file.
h.
In relation to
the inclusion of the comparables ----------
and---------- ., it emphasized
that the decision to include them is based on the comparability analysis
carried out, considering, in addition, the particularities of the method to be
used. In addition to the above, it indicated that the rejection of the referred
comparables by the taxpayer, was due to the noncompliance of 1 of the 5
qualitative criteria (significantly different products in the case of----------------- --. and significantly different functions, in the case of---------------------------------------------------- --. ).
i.
In this
regard, it emphasized that the taxpayer should not have discarded the --.
The taxpayer, since it has a line of products in the segment of Human
Health, which is the one that presents more similarities with respect to the
taxpayer, clarifying that if only this segment had been used, it would have
represented a greater scope, given the greater operation margin (9.51%) instead
of the total margin of 5.63% taken as reference, considering that the MMNT
offers greater flexibility as to the characteristics of the products and
services.
j.
In relation to
----------------., it reiterated the analysis set out in the contested
resolution, adding that the distribution segment in health care is similar to
that of the taxpayer, and even to that of other companies selected as
comparable, for example, ------------ and
--------------. Likewise, it pointed out that in the other line of
distribution of the referred comparable (global technology), it presents
important similarities with the comparables -----------.
and ---------------, which were accepted.
k.
In the same
vein, he stressed that the technology solutions segment of -----------------,
includes health solutions, comparable to those of------------------------------------------- --. The
technology segment only represents 3% of its revenues.
l.
By virtue of
the above, it argued that the rejection of the comparables was due to the
functional differences and the lack of information on its financial segments,
for which it reaffirmed on this point, and rejected the exercise carried out by
the taxpayer to calculate the TNMM, considering that this method is not
appropriate, for the reasons stated, as well as the rejected/included
comparables according to the analysis of the Treasury (Page 139 of the Court's
file).
m.
In relation to
the appellant's arguments, related to the realization of a double adjustment at
the operating profit level and at the cost level, he considered that the
taxpayer's attorney confuses "two
things that are completely different", explaining that one issue is
that the taxpayer is adjusted to the median for being outside the range of full
competence (Article 762-F of the Tax Code), and another that the taxpayer is
disallowed the deductions of expenses for services received from a related
party, because it has not demonstrated that the services rendered are effective
and produce or may produce a sale or profit to its recipient, which constitutes
an additional obligation for the taxpayer, according to the provisions of
Article 762-G of the Tax Code (Page 139 of the Court file).
n.
Similarly, the
opponent considered that the appellant confuses two different concepts, when
interpreting numeral 2 of literal B of article 762-F, since the reference
"to the taxpayer, or in its absence,
third parties", refers to the use of internal or external comparables,
therefore, it does not imply, in any way, that a third party can be chosen as
the analyzed party. In this sense, he referred to paragraph 3.18 of the OECD
Guidelines, according to which, the related party must be chosen as the one
that complies with the consistency requirements, and whose functional analysis
is less complex, not indicating, however, if it must be the taxpayer or its
related party abroad. This part of the Guidelines also points out "that it is necessary to choose the party
with respect to which a financial indicator is analyzed", adding to
its analysis, the provisions of paragraph B of article 762-F of the Fiscal
Code, which refers to the profit margins of the taxpayer, and that the
adjustment is made on the information of the taxpayer, not that of its related
party, therefore, it concluded that the taxpayer located in Panama should be
the party under test.
o.
On the other
hand, it considered that the necessity of the expenses incurred has not been
proven with respect to ----------------------. (Costa Rica), since, despite
having provided the contract and addendum, in response to a request for
documentation by the Tax Administration, no evidence was provided to justify
the payments for the corporate services received, including policies,
procedures, requirements, instructions, service orders, e-mails, technical
reports, work budgets, functions and activities performed by the person,
description of the services received, dates of provision of the services,
quantification of the economic benefit resulting from the receipt of the
services and any other detail that demonstrates that the services were actually
received, quantification of the economic benefit resulting from the receipt of
the services and any other detail that demonstrates that the services were
actually rendered, despite having been expressly requested, noting that only
minutes of changes in the board of directors were provided, reiterating the
observations made previously and in the contested act, regarding the proportion
between the increase in sales and the increase in costs and expenses (Pages
143-144 of the Tribunal's file).
p.
In this sense,
it considered, after summarizing some of the arguments and explanations and
evidence provided in this regard, that the nature of the contractually agreed
obligations, requires that there be a close and constant communication between
the parties, and that the contract, by itself, does not represent a
substitution of the service orders, mainly because they must be billed monthly.
q.
In relation to
the taxpayer's argument regarding the short time available for the search and
provision of evidence in the governmental channel (15 days), the opponent
considered that such documentation should have been provided together with the
respective transfer pricing studies, in accordance with the provisions of
Articles 762-G of the Tax Code and 7 of Executive Decree 958 of 2013, in
addition to having been requested during the audit stage, without the relevant
documentation being submitted, neither at that stage, nor together with the
Appeal for Reconsideration.
r.
Finally, the
Tax Administration's attorney opposed the appellant's request that, if the
objection of the expenses is maintained, the objection of the taxpayer's cost
be reduced, reiterating the difference between the adjustment to the taxpayer's
financial margins, to bring it to the median of the free competition range, and
the objections of expenses due to lack of support, according to the provisions
of the referred article 762-G of the Tax Code. In addition to the above, he
indicated that it is not correct to include the disregard of expenses, within
the calculation of the operating margin, noting that this adjustment is made
based on financial information, not the information contained in its income tax
return.
Together with
its Appeal for Reconsideration, the taxpayer's attorney requested the practice
of an expert evidence, tending to evaluate the application of the transfer
pricing adjustments raised, which was not practiced in the first instance, so
it was admitted by Resolution n.ฐ TAT-PR-091 of August 26, 2019 (Pages 150-155
of the Court's file), setting September 11, 2019 for the delivery of the expert
reports (visible at pages 181-538 of the Court's file), based on the
questionnaire proposed by the plaintiff, as set forth below, together with the
main conclusions of the experts who acted in the process:
a. Review the
Appealed Resolution, the income tax returns and transfer pricing studies for
the 2014 and 2015 tax periods. Calculate and reflect in the Expert's report the
Operating Margin of the Taxpayer's distribution activity after applying all the
adjustments set forth in the Appealed Resolution.
In this regard, the taxpayer's expert
calculated the operating margin as follows, citing as a source the Revenue Affidavit
and Resolution No. 201-5891:
Concepts |
2014 |
2015 |
Total Revenues |
150,646,650.75 |
149,505,896.36 |
Total Costs |
130,856,038.78 |
91,734,678.54 |
Gross Margin |
19,790,611.97 |
57,771,217.82 |
Total Expenses |
8,987,903.95 |
1,014,068.95 |
Operating
Margin |
10,802,708.02 |
56,757,148.87 |
MO/Sales |
7.2% |
38.0% |
(Emphasis supplied. Page 183 of the
record).
For its part,
the expert appointed by the Tribunal conducted its own analysis in the Bureau
Van Dyk database, which showed differences between the financial information of
the comparables contained in the contested act, which is based on the 10-K
reports (see pages 273-275 of the Tribunal's file). It also made a series of
capital adjustments, which are explained on pages 292-294 of the background
file, and Exhibit 15 attached to the expert report (see pages 534-538 of the
Tribunal's file), summarizing, however, in Table 50 of its report, the results
without comparability adjustments, as follows:
Table 50:
Interquartile Range of Comparable Companies without comparability adjustments
for 2014 and 2015.
Comparable
companies |
Operating
Margin |
|
2014 |
2015 |
|
------------------------ |
1.00% |
0.66% |
---------------------- |
1.58% |
1.72% |
-------------------- |
1.82% |
1.79% |
--------------------- |
4.12% |
- |
------------------- |
2.03% |
1.97% |
|
|
|
Interquartile range of the Operating
Margin of the comparables. |
||
Minimum
value |
1.00% |
0.66% |
Lower
quartile |
1.58% |
1.46% |
Medium |
1.82% |
1.76% |
Top
quartile |
2.03% |
1.84% |
Maximum
value |
4.12% |
1.97% |
Operating Margin (OM) of the company
under analysis |
||
-------------------------------- |
-29.83% |
-9.40% |
(Page 316 of the Court file)
b. Compare the
Operating Margin calculated in the previous point with the operating margin of
the comparables that the Taxpayer selected in its 2014 and 2015 transfer
pricing studies; then compare the margin calculated above with the margins of
the comparable companies reflected in the Recurred Determination. Conclude in
his report in which range the operating margin according to the total adjustments
of the Recurred Determination versus the series of comparables selected by the
Taxpayer and by the Recurred Determination and whether such result would be
consistent with the arm's length principle.
In response to
this question, the taxpayer's expert indicated that "if we compare the operating margin calculated in the previous point
with the operating margin of the comparables that PFZP selected in its 2014 and
2015 transfer pricing studies, it is observed that the calculated operating
margins are higher than those reflected by the selected comparable companies
for both fiscal years...they are above the interquartile range", which
he developed by means of the following exercise:
Average Operating Margin of Comparable Companies from
the Transfer Pricing Study (sic) - fiscal year 2014 and 2015.
Comparable companies |
2014 |
2015 |
----------------------- |
1.11% |
0.66% |
---------------- |
1.59% |
1.48% |
------------------ |
1.81% |
1.78% |
------------------- |
4.12% |
-- |
------------------ |
1.97% |
2.03% |
|
|
|
MO PFZP calculated -adjusted Resolution No.21-5891 [sic]. |
7.20% |
38.00% |
|
|
|
Third Quartile |
1.97% |
1.84% |
Medium |
1.81% |
1.63% |
First Quartile |
1.59% |
1.27% |
(Page 184 of the background file)
Likewise, it
indicated that, when comparing the operating margin calculated in the previous point with the margins of the comparable
companies selected in the Recurred Resolution, it is observed that for the year
2015, the calculated operating margin is substantially higher than those
reflected by the selected purchasable [sic] companies in its operation...In
both cases, the operating margins calculated in the previous point are above
the interquartile range". (Page 184 of the Court's file)
In this
regard, the taxpayer's expert drew up the following comparative table:
Average Operating Margin of the comparable companies
in Resolution No. 201-5891.
Comparable companies |
2014 |
2015 |
------------------------ |
1.11% |
0.66% |
--------------------- |
1.81% |
1.78% |
------------------ |
4.12% |
-- |
--------------- |
7.09% |
8.62% |
--------------------- |
6.97% |
6.96% |
|
|
|
MO PFZP calculated -adjusted Resolution No.21-5891 |
7.20% |
38.00% |
|
|
|
Third Quartile |
6.97% |
7.38% |
Medium |
4.12% |
4.37% |
First Quartile |
1.81% |
1.50% |
(Page 185 of
the background file)
By virtue of
the foregoing, the taxpayer's expert concluded that the result of the
adjustment raised in the previous question generates an operating margin that
is much higher than the average result observed for comparable companies.
For his part,
the expert appointed by the Tribunal prepared tables 51 and 52 (Pages 317-318
of the Tribunal's file), in which he also included a column considering the
suggested capital adjustments (referred to in the answer to question 1), and
another without them; however, only the amounts without capital adjustments are
reproduced below, for the reasons that will be explained in the appraisal stage
of the reports:
Tables 51 and 52: Comparative analysis of
the interquartile range of the comparable companies chosen by the taxpayer for
2014 and 2015.
Comparable
companies |
Operating
Margin |
|
2014 |
2015 |
|
--------------------------- |
1.04% |
0.61% |
---------------------------- |
1.56% |
1.71% |
-------------------------- |
1.81% |
1.77% |
----------------------- |
2.02% |
1.97% |
--------------------------- |
4.10% |
- |
|
|
|
Interquartile range of the Operating Margin (OM) of the
comparables. |
||
Minimum
value |
1.04% |
0.61% |
Lower
quartile |
1.56% |
1.44% |
Medium |
1.81% |
1.74% |
Top
quartile |
2.02% |
1.82% |
Maximum
value |
4.10% |
1.97% |
Operating margin of the company under
analysis |
||
-------------------------------------- |
-29.83% |
-9.40% |
(Pages 316-317
of the Court's file).
In this
regard, the expert appointed by the Tribunal pointed out that "from the technical point of view of Transfer
Pricing, the aforementioned ranges are not consistent with the arm's length
principle applied to the present case", reiterating that the operating
margins consistent with the said principle are those that include the
comparables chosen according to his analysis, and that include the capital
adjustments described in his report (Page 321 of the Tribunal's file).
c.
The expert reviews the supporting documentation of the
services received by the Taxpayer from --------- ------------- for the fiscal
periods 2014 and 2015. Review the accounting and financial statements of the
Taxpayer and conclude in his report if ----------------------------------------
provided services to the Taxpayer during 2014 and 2015.
The taxpayer's expert concluded that, based on the
taxpayer's financial information, supporting documents, the OECD Guidelines,
and the interviews conducted, that the company------------------------------ did
indeed provide corporate services to the local company ------. In this regard,
it cited paragraphs 7.2, 7.5 and 7.14 of the OECD Guidelines, and the service
agreement signed between the taxpayer and its related party in Costa Rica,
explaining that the Panamanian company does not have its own personnel
dedicated to commercial management, marketing and product promotion activities,
nor personnel at the managerial level in financial matters, and proceeded to
detail the form of operation of ---------------------, as well as the financial
information of both companies, in which the expense/revenue for the services
rendered is reported, concluding that, in comparable circumstances, it is
reasonable to consider that an independent company, dedicated to the
distribution of medicines that does not have personnel dedicated to sales,
marketing and promotion tasks, would have been willing to pay another company
for the performance of these services.
On the other hand, the expert appointed by the Tribunal, after analyzing the
information in the file, and the information provided by the taxpayer,
concluded that, "the Taxpayer has
not met its burden of proof in order to demonstrate the reliability of the
service, so the expert concludes that there is accounting and documentary
documentation that the service in question was provided, but the undersigned
cannot [sic] attest that they were performed in a substantial and effective
manner".
In this
regard, the expert noted that, despite having received the working papers of
the tax years 2014 and 2015, information is obtained grosso modo, so it required more revealing information on the reliability
of the services received by the taxpayer from its related domiciled in Costa
Rica, within which it highlighted the invoices related to the services
received, the detail of the payments made, the accounts that compose box 44 in
the Affidavit of Income, and the ledgers that compose the account of services
received, which was requested by mail, but was not provided. (Page
322 of the Tribunal's file).
d. Please respond
in your report whether any method for analyzing the provision of services
provided by ----------------------------. to the Taxpayer, using the Taxpayer
as the tested party, would be more reliable than the methodology selected by
the Taxpayer in its transfer pricing studies for the 2014 and 2015 tax periods.
In this
regard, the taxpayer's expert considered that it would not be more reliable to
use another method to analyze the provision of corporate services provided by
--------- to -----, in fiscal years 2014-2015, considering that the absence of
internal and external comparables prevents the application of the MPCN; that
the nature of the services analyzed and the fact that they are not tangible
goods subject to resale prevents the application of the MPR; that the sensitive
accounting differences for the analysis of the costs of services hinders the
application of the AC method, which led it to defend the application of the
TNMM, as it is less sensitive to price differences and at the level of
functions.
In addition to the above, it pointed out that the
choice of the analyzed party must be consistent with the functional analysis of
the transaction, and whose analysis is more reliable, and less complex, which
depends largely on the information available, citing paragraph 3.18 of the OECD
Guidelines, concluding that it is more reliable the choice of as analyzed
party, interpreting that according to the local regulations, and the referred
Guidelines, the selection of the analyzed party in the application of the TNMM
should not be limited exclusively to the local taxpayer, stating that "In this specific case, it cannot be
considered preferable to use ----- as analyzed party, since it is reasonable to
foresee that it would be more complex its functional analysis in the related
transaction of corporate services under similar conditions". (Page 189
of the background file).
For its part,
the expert appointed by the Tribunal considered that "the method used by the Taxpayer is technically adequate to analyze a
provision of services such as the service provided in this case. However, he
considers that in the aforementioned studies there is no supporting technical
documentation to prove that the method has been applied correctly.
Specifically, the way in which the costs were determined in order to be able to
evaluate whether the indicator in question is technically correct is not
detailed. Thus, the direct and indirect costs incurred by the service provider
are not detailed, nor the way in which the indirect costs have been
distributed, if any. Therefore, the undersigned considers that the method
applied by the taxpayer is technically correct and adequate, from the point of
view of Transfer Pricing, however, there is no information that would allow
[sic] to conclude if said method was applied correctly". (Page
324 of the Tribunal's file)
e. Analyze the
supports of the services provided by--- .,
determine in your report if the Operating Margin received by--------------------------------------------------------- .,
is consistent with that established in the Taxpayer's 2014 and 2015 transfer
pricing studies.
The taxpayer's
expert alluded to the use, in the transfer pricing studies, of a remuneration
for services rendered, consisting of the expenses incurred, plus an operating
margin of 7%, in accordance with the service agreement signed between the
taxpayer and its related party in Costa Rica, and its respective addendum,
explaining that, according to the information available, when applying the
referred 7% to the amounts paid, for B/. 51,872,483.23 (2014) and B/.
59,883,105.24 (2015), the expenses generated would be B/.48,478,956.29 and
B/.55,965,518.92, respectively.
Next, he
points out that, according to the supports provided, it is possible to estimate
the cost declared in its audited financial statements for selling and
distribution, marketing, research and development and general administrative
expenses, the margins applied to reach the amounts applied to the related
corporate support transactions are 5.26% (2014) and 3.76% (2015), amounts that
in the expert's opinion, are not consistent with those established in the
transfer pricing study, having generated a lower payment, which does not cause
any prejudice at the time of calculating the Panamanian taxpayer's taxable
income, in addition to being within the arm's length range established in
Resolution No. 201-5891 of September 4, 2018.
In turn, the
expert appointed by the Court stated that "the technically necessary supports regarding the services provided by ------------
have not been shown, in order to determine whether the Operating Margin
received by such company is technically correct, so it cannot conclude whether
this margin is consistent with those established in the transfer pricing
studies". In addition to the above, it reiterated the points made in
the previous questions, with respect to its request for information, which was
not answered. (Pages 324-325 of the Tribunal's file).
f.
Assume hypothetically that the expenses for services
provided by ------------------ ------ ---------. were rejected, and calculate
in your report the profit at market value for the Taxpayer's product activity
that is consistent with the principle of free competition established in the
Tax Code.
The taxpayer's
expert indicated that, if the expenses corresponding to the services indicated
above were eliminated, the taxpayer's operating profit would be impacted by
eliminating the main item of expenses in its financial results, generating a
profit higher than that recorded for the audited fiscal periods, going from
-27.3% to 7.2% in 2014, and from -14.1% to 26.0% in 2015, an amount that he
considered well above the arm's length range, that is, that would not be in
line with the market range.
However, it
clarified that the rejection of the referred expenses would not have an effect
at the gross margin level, therefore, the conclusions of the transfer pricing
studies would be maintained. If the transactional net margin method is
maintained, it would have an effect on the operating margin and a higher
taxable base. (Page 192 of the Tribunal's file)
On the other
hand, the expert appointed by the Tribunal answered this question indicating
that "If the services provided by
-------------------------. were to be rejected as deductible expenses for
Income Tax purposes, the profit at market value for the activity carried out by
the Taxpayer, which is consistent with the principle of free competition, would
be the one that allows the Taxpayer's Operating Margin to be within the
following interquartile range", as summarized in table 60 of the
report, the content of which is summarized below:
Table 1. Table
60 expert report of the TAH
Concepts |
Financial Information 2014 |
Information Adjusted
Financial 2014 |
Financial
Information 2015 |
Information Adjusted
Financial 2015 |
Sales |
150,283,428 |
150,283,428 |
149,469,109 |
149,469,109 |
Cost of
Sales |
(134,386,492) |
(134,386,492) |
(88,363,921) |
(88,363,921) |
Gross Profit |
15,896,936 |
15,896,936 |
61,105,188 |
61,105,188 |
ExpensesAdmin . and Sales |
(60,726,009) |
(8,853,526)* |
(75,157,553) |
(15,311,235)** |
Operating profit |
(44,829,073) |
7,043,410 |
(14,052,365) |
45,793,953 |
Operating
margin |
-29.83% |
4.69% |
-9.40% |
30.64% |
Prepared
by the Tribunal, based on the tables set out in pages 325-326 of the Tribunal's file.
The amount resulting from subtracting the
amount objected to for administrative services (B/.51,872,483).
The amount resulting from subtracting the
amount objected to for administrative services (B/.59,846,318).
CLOSING ARGUMENTS:
Once the
evidentiary stage was completed, the parties were granted a common term of five
(5) working days for the parties to submit their final arguments in writing. In
this regard, the briefs submitted by the taxpayer's attorney (Pages 571-590 of
the Court file), and by the Treasury's attorney (Pages 591-604 of the Court
file), in which both reiterated the statements made throughout the process,
therefore, we will summarize in this section, the comments made in relation to
the proceedings in the second instance, specifically those related to the
evidence.
In this
regard, the taxpayer's counsel stated that, contrary to the tax authorities'
assertion, the "disallowance" of costs and expenses, resulting from
the adjustment to the arm's length median, and the adjustment related to
Article 762-G, are still the same, to the point that the challenged resolution
refers in both cases to disallowance (Pages 35, 36 and 41), not to
non-deductibility, and accumulates all adjustments in the lines "Plus increase according to investigation and
Plus increase PT investigation" in Tables 12 and 13. By virtue of the
above, it concluded that all adjustments should be considered equal, as
recognized by both experts, and based on the arm's length principle, bringing
the taxpayer to an amount 9 times the median arm's length amount.
In this
regard, he pointed out that, arbitrarily, the Tax Administration charged the
entire transfer pricing adjustment to costs, despite using the Transactional
Net Margin Method, which is based on the operating margin, i.e., considering
operating costs and expenses, which leads him to conclude that:
-
In applying a
net margin adjustment, there is no basis to then make adjustments to
administrative expenses.
-
Based on the
taxpayer's gross margins reflected in the transfer pricing studies, the
Taxpayer's costs are higher than the median, so the adjustment cannot be
applied to the cost, but to the expense, and by doing so, it would be adjusting
the related party expenses, including the administrative expenses of the Costa
Rican related party, therefore, it is not possible to disregard them again.
In relation to
the comparables added by the DGI, he reiterated the discarding of such
companies, as was done in the transfer pricing studies presented, when
considering the product differences, adding, in addition, that the segmentation
made by the Tax Administration was not correct, as indicated by the Tribunal's
expert, by using only the human health segment, discarding the segments of
chemical ingredients. Likewise, he pointed out that, according to the 10-K
report of the company ------, it includes a substantial proportion of expenses
incurred by the company, which have not been included in the segmentation,
i.e., it does not discriminate according to business lines. On the other hand,
he pointed out that the note to the segmentation on page 79 of the 10-K report
clearly indicates that ------. does
not segment the assets in its lines of business, therefore, it is not possible
to use it as comparable, referring to paragraph 2.65 of the OECD Guidelines.
In relation to
the report presented by the Tribunal's expert witness, he stated that despite
considering said company as comparable, his explanations confirm the contrary,
by referring not only to the differences in functions and products, but also in
terms of risks and the presence of intangibles, which, by themselves, rule out
the comparability of this company, citing pages 4 and 6 of the Minutes of
delivery of the expert report (Page 581 of the Tribunal's file).
In the same
line, he pronounced on the differences of the company ------------. at the level of products and functions, a company
that reports an exponentially higher operating margin than the rest of the
comparable companies, which represents an indication against its comparability,
to which he added the analysis made by the Tribunal's expert, who pointed to
differences in levels of distribution, risk and presence of intangibles (Page
582 of the Tribunal's file).
Similarly, it
reiterated that the Tax Administration ruled out the companies ---------------- and --------------- (considered
as comparable by the Tribunal's expert), being much stricter in its analysis
than it was with the companies included, inferring that the motivation is based
on the margins presented by the companies included/discarded by the DGI,
recognizing that, although there are certain differences between the companies
mentioned at the beginning of this paragraph and the analyzed party, these are
much smaller than those existing with respect to the companies included by the
tax authorities.
In relation to
the objection to the administrative expenses for the services received from
Costa Rica, he pointed out that the same documentation was presented for the
period 2013, without being object of objection by the Treasury, therefore, to
make an objection later, goes against the principle of good faith. On the other
hand, he stressed that the Treasury contradicts itself by indicating that the
contract was not presented, since in the audit phase not only the contract was
presented, but also the financial statements in which it is indicated in note 1
that the Panamanian company is managed by the Costa Rican company, whose
payroll and list of workers was presented, and who serve as administrators,
officers and attorneys-in-fact of the taxpayer.
In relation to
the benefit obtained, he pointed out that, having a percentage of 80% of sales abroad,
it is necessary to have sales personnel outside Panama, as well as
administrative assistance which the Panamanian company does not have, and it
uses outsourced administrative services in this way, as evidenced by the
expenses incurred with related parties. Regarding the analysis of the court's
expert witness, he stated that he was given all the information requested, and
that he was offered a videoconference, but the expert did not agree to it.
Similarly, he highlighted the analysis carried out by his expert, according to
which the company complies with the profit test, incorporated in the OECD
Guidelines 2017 (despite the fact that the same did not exist in previous
versions), concluding that the company complies with 8 of these indicators.
Finally, he
defended the valuation and selection of the analyzed part, reiterating the
previous arguments and pointing out that the experts agreed in endorsing this
choice; and highlighted that the disregard of the expenses, based on transfer
pricing rules, considering the method used, only allows to take the profit of
the distribution activity to the median transfer pricing, without being able to
lead to a higher result.
For its part,
the tax attorney also reiterated the arguments expressed in the contested act and
in its opposition brief, highlighting the inconsistencies in the information
declared by the taxpayer (income tax returns, reports and transfer pricing
studies), at the level of income and costs, which led to the request for
information and eventually, to the adjustments made. In addition to the above,
he reiterated the differences between the adjustment to the financial
information, product of the transfer pricing adjustment, of the objection to
the administrative expenses, since it has not been demonstrated that the same
were effective and produce or could produce an advantage or profit for its
recipient, highlighting that article 762-G of the Tax Code, consists of an
additional obligation for the taxpayer. In relation to this adjustment, it
highlighted that the increase in taxable income is based on the proportion
corresponding to domestic operations (Costs: 17% in 2014 and 16.41% in
2015/Expenses:17.25% in 2014 and 17.69% in 2015), both for costs and expenses,
as detailed in Tables 1 and 2 on page 596 of the Court file, in view of which
it concluded that at no time has an adjustment been made above the arm's length
median.
In relation to
the expert evidence, he objected to the use of the information contained in the
income tax return, for the purpose of calculating the taxpayer's operating
margin, despite the explanations of the taxpayer's expert, who, when
questioned, replied that there were slight differences, but that the
rationality and principles were maintained, to which the taxpayer's attorney argued
that, although it is true, the use of the information contained in the income
tax return or the financial statements does not affect the conclusions
regarding the taxpayer's location within or outside the full range of
competence, the tax authority's attorney argued that, although it is true that
the use of the income tax return or the financial statements does not affect
the conclusions regarding the taxpayer's location within or outside of the full
competence range, it does affect the results regarding the calculation of the
adjustment and the additional assessment, which would be much lower if the
information from the income tax return is used.
In relation to
the effective rendering of the services received from the Costa Rican related
party, it agreed with the analysis made by the Tribunal's expert, since the
effective rendering of the service had not been reliably demonstrated;
disagreeing, however, with the use of the rejection of the expenses for
administrative services, for the calculation of the interquartile range, as
both experts did.
In this sense,
he pointed out, in relation to one of the questions asked to the experts in the
delivery diligence, that "if the
non-deducted expenses are part of the financial information in accordance with
the International Financial Reporting Standards, it is necessary that they are
included within the operating margin. A different matter is the
non-deductibility in the event that the evidence established in article 762-G
of the Fiscal Code is not demonstrated". (Page 604 of the Court file).
Similarly, it
referred to the proportion corresponding to expenses of domestic and foreign
operations, according to box 69 of the income tax return, concluding that, of
the expenses that were rejected, only B/. 10,495,411.70 (2014) and
B/.13,942,625.42 (2015) corresponded to deductible expenses for domestic
operations, therefore, it would be an error to subtract from the operating
margin the totality of the expenses unknown by the DGI, even though only a
percentage of them were deductible.
Once the
corresponding procedural stages have been exhausted, we proceed to issue our
considerations with respect to the disputed aspects, taking into account the
arguments and evidence presented by both parties, we will analyze them
individually, as follows:
Throughout the
process, the taxpayer's attorney expressed the existence of situations that
leave his represented party in a state of defenselessness, specifically the
fact that the audit had not been properly closed, not having a formal closing
act, as well as the configuration of the procedural phenomenon of res judicata,
considering that, with the issuance of Resolution No. 201-1437 of March 16,
2018, any subsequent pronouncement would become a double judgment, which is
expressly prohibited by Article 32 of the Political Constitution of the
Republic of Panama.
In this sense,
it is observed in the background file, that the taxpayer has had the procedural
opportunities established in the law, to refute the arguments of the Tax
Administration, not only by activating the governmental channels, but also by
filing two incidents, defending the arguments indicated above, which were the
object of a pronouncement by the Tax Administration, therefore, we do not
consider that there is defenselessness, or that the taxpayer has not been
heard.
Upon analyzing
the positions expressed by the parties, and carefully weighing the arguments
and the legal basis invoked, we can conclude that there has not been double
jeopardy, nor has the legal phenomenon of res judicata been configured, since
the referred Resolution No. 201-1437 of March 16, 2018, refers specifically and
only to the 2013 tax period. At this point, it is pertinent to note that
numeral 8 of Article 155 of Law 8 of 2010 (which enshrines the minimum rights
of the taxpayer), refers specifically to the prohibition to review or audit
twice the same taxpayer, for the same tax, in the same period.
In this case,
although it is the same taxpayer, the audit carried out, covered the periods
2013, 2014 and 2015, issuing a resolution for the period 2013, and another for
the periods 2014 and 2015, without this implying, according to the criteria of
this Court, that the aforementioned prohibition has been violated.
In the same
sense, this Court has pronounced in Resolution No. TAT-RF-002 of January 10,
2020, stating the following:
"Similarly, the taxpayer has argued in its
appeals that the procedural principle prohibiting double jeopardy has been
violated, alluding to the Latin aphorism "non bis in idem", to which
we must comment that this principle is specifically stated in paragraph 8 of
article 155 ut supra, establishing that the same taxpayer
may not be audited twice for the same tax (with the exception of situations in
which it acts as a withholding agent), subjecting such limitation, expressly,
to the same tax period.
For this reason, we agree with the Tax Administration
that precisely based on the principle of procedural economy, and seeking that
the actions of the Tax Administration are carried out in the manner that is
least burdensome for the taxpayer, as provided in Article 155, paragraph 3 of
Law 8 of 2010, and there is no impediment to issue two additional liquidations
corresponding to two different tax periods, as long as the deadline established
in Article 720 outlined in the preceding paragraphs is respected".
On the other
hand, it also appears in the file, that during the course of the audit, there
were several requests for information (as evidenced in the minutes of the
process that appear in the background file), and that the taxpayer has been
assisted at all times, by his trusted advisors, as indicated in the referred
article 155, numeral 4 of Law 8 of 2010, and that, subsequently, a response has
been given to all the incidents presented, so we reiterate that there is no
defenselessness in this case.
In relation to
the obligation to have an audit closing act, before issuing the administrative
act containing the additional liquidation, this Court has indeed pronounced, as
indicated by the taxpayer's attorney, censuring the issuance of the resolution
containing the additional liquidation, before issuing the closing act, considering
that this "could be violating
guarantees of due process in the exercise of the public function, that is to
say, within the tax authority-taxpayer relationship, by issuing an
administrative act demanding an additional liquidation to the taxpayer without
disclosing the preliminary results of the findings of the tax auditors....2
In this
regard, it should be noted that the conclusion of the Court on that occasion
was based on doctrinal positions and a vision of the taxpayer's rights,
previously mentioned, remembering, however, that beyond the warning, the
analysis of the merits of the controversy was carried out, which was due to
normative and practical reasons, which we will review below.
From the
normative point of view, we have that the rules for the issuance of additional
liquidations in income tax matters are developed in articles 718 to 720 of the
Tax Code, as follows:
"The Directorate General of Revenue, in view of
the taxpayer's returns and reports, shall assess the tax on the taxable income
declared by the taxpayer and shall make the collections thereof within the
corresponding periods, except for the adjustment referred to in Article 710,
which shall be made by the taxpayer.
After the assessment of the tax has been made, the officials
in charge of its application shall thoroughly examine the taxpayer's
declarations and reports.
If, by reason of examinations, it is considered that
the returns are not clear, true or accurate, or that they have been made in
contravention of the provisions of this Title, all such investigations or
proceedings as may be considered necessary and useful for establishing the true
amount of taxable income shall be carried out.
Whenever, by reason of the investigations or
proceedings referred to in the preceding Article, the amount of tax payable by
the taxpayer is greater than that resulting from the assessment referred to in
Article 718, and without prejudice to any penalties that may be applicable, a
resolution shall be issued containing the additional assessment for the part of
the tax that has not been assessed. The aforementioned resolution shall contain
the details of the facts investigated, the amounts on which the tax is to be
assessed, the amount of the additional assessment, and the annexes, legal
grounds and other details that the investigating officer deems appropriate.
The resolution referred to in the preceding paragraph,
which shall contain the corresponding additional liquidation, shall be issued
within three (3) years following the date of filing the return and shall be
notified to the interested party in person or, if this is not possible, by
means of the corresponding edict, without prejudice to the investigations that
may be required in case of fraud.
Resolutions issued after three (3) years following the
date of filing shall be null and void, and consequently, the taxpayer shall not
be obliged to pay the amount of the additional liquidation contained in such
resolution.
The taxpayer has the right to request an exact and
detailed account of the object on which the resolution has been issued and the
respective official is obliged to give it within fifteen (15) days following
such request".
In addition to
the foregoing, Article 762-B of the Tax Code establishes the powers of the Tax
Administration to analyze compliance with the principle of full competence, in
the following terms:
"Article 762-B. Powers of the Directorate General
of Revenue. The Directorate General of Revenue may verify that the
operations carried out between related parties have been valued in accordance
with the provisions of the preceding article and shall make the corresponding
adjustments when the price or amount stipulated does not correspond to what
would have been agreed between independent parties in comparable operations,
resulting in a lower taxation in the country or a deferral of taxation, as the
case may be."
On the other
hand, it should be recalled that, within the returns and reports filed by the
taxpayer, there are, in addition to the income tax return, the transfer pricing
report and the transfer pricing study, established in articles 762-I and 762-J
of the Tax Code, in the following terms:
"Article
762-I. Transfer Pricing Report. Taxpayers must submit, annually, a
report of the operations carried out with related parties, within the six
months following the closing date of the corresponding fiscal period, under the
terms set forth in the regulations prepared for such purpose.
Data regarding transactions with related parties, as
well as their nature or other relevant information, shall be included in the
sworn income tax return, in the terms provided therein.
Article 762-J.
Transfer pricing study. The persons required to file the report referred to
in the preceding Article must have, at the time of filing, a transfer pricing
study, which shall contain the information and analysis that allow for the
valuation and documentation of their operations with related parties, in accordance
with the provisions set forth in this Chapter. However, the taxpayer shall only
be required to submit this study at the request of the Directorate General of
Revenue, within a period of forty-five (45) days, counted as of the
notification of the request. Said obligation is established without
prejudice to the power of the Directorate General of Revenue to request such
additional information as it deems necessary in the course of the audit
proceedings for the exercise of its functions.
On the other hand,
the aforementioned Article 155 of Law 8 of 2020 establishes the following
rights of the taxpayer, especially related to the audit processes:
"Article 155. The rights of taxpayers
include, among others, the following:
1.
The right to be treated with due respect and
consideration by all officials of the Tax Administration.
2.
The right to be considered and treated as a taxpayer
in compliance with its obligations until conclusive proof to the contrary is
provided.
3.
The right to have the actions of the Tax
Administration carried out in a manner that is less burdensome and distorting
to the taxpayer's normal business, without affecting the priority power of the
General Directorate of Revenue to carry out the audit and the guarantee of
collection of the resulting taxes, if applicable.
4.
The right to be assisted by their trusted advisors
from the beginning of the review or audit procedure initiated by the Tax
Administration and to observe throughout its extension, including the practice
of the respective tests.
5.
The right to know that he/she is being reviewed or
audited by the Tax Administration and to know the identity of the officials in
charge of the review or audit process, as well as to know the identity of
his/her immediate superiors.
6.
The right to have access to the reports and actions
carried out in the file of the review or audit to which the taxpayer is
subject.
7.
The right for the information provided to the Tax
Administration to be kept confidential throughout the administrative and
judicial proceedings, except for the exceptions expressly established by law.
8.
Right not to be reviewed or audited two (2) times for
the same tax in the same period. Exceptions are taxes where the taxpayer acts
as a withholding agent.
9.
The right not to have equipment or parts of computer
equipment seized during the review or audit process, when it is easy to provide
the General Directorate of Revenue with the necessary information. The Tax
Administration may only copy electronic documentation with fiscal relevance.
It must be guaranteed that the electronic information
copied will not be altered or modified at a later date under penalty of nullity
of the proceedings.
The rights set out in this article are without
prejudice to other rights recognised to taxpayers by the legal system in
force".
From the
foregoing, it follows that the Directorate General of Revenue is fully
empowered to carry out the corresponding inquiries and analysis in accordance
with the obligations established in the law, a fact that has not been refuted
by the appellant, and there is, however, no express mandate in the regulations
related to the prior issuance of a closing act.
In fact, it is
not until the issuance of the Tax Procedure Code, which expressly alludes, in
its article 208, to the issuance of a closing act, prior to the issuance of a
regularization resolution, when the audit process of noncompliance with formal
obligations generates a tax debt, however, this rule was issued after the audit
performed, which leads us to consider that the absence of this document,
despite its importance, is a good practice by the Tax Administration, in line
with the taxpayer's rights, and to comply with the principles of transparency
and good faith of the Administration's actions, especially when the taxpayer
has the right to a good faith and transparency in the tax administration's
actions, and of being considered a good practice by the Tax Administration, in
line with the taxpayer's rights, and of complying with the principles of
transparency and good faith of the Administration's actions, especially when
the taxpayer has deadlines for the filing of his appeals, does not represent,
in this process, a regulatory noncompliance by the tax authorities, or implies
that it has exceeded its functions, according to the legal basis analyzed.
In addition to
the foregoing, we consider that, from a practical perspective, backtracking the
process to the stage prior to the issuance of the challenged act, a natural
consequence of a declaration of nullity for breach of due process (also
expressly requested by the taxpayer's defense), could have been an option in
the initial stages of the process, but not after two appeals have been filed, and
after a series of tests have been carried out, which have represented an
important investment of time and resources for all the parties involved,
therefore, we consider that it would not be a viable solution, at the stage we
are at, since it would potentially generate a duplication of all the actions
carried out so far, therefore, we proceed with the analysis of the merits.
Once the
proceedings and positions of the parties have been summarized, as well as the
procedural aspects developed in the previous section, we enter into the
substantive analysis, in light of the provisions of Articles 762-A and
subsequent articles of the Tax Code, and its regulation, by means of Executive
Decree 958 of 2013.
As a starting
point, we consider it relevant to highlight the main characteristics of the
taxpayer, according to the transfer pricing studies, which are summarized
below:
Table 2. General information about the taxpayer
Sector: |
Pharmacist. |
Function: |
Distribution of Group pharmaceuticals and consumer
products (exclusively
in the region). |
Operations with analyzed parts: |
-
Purchase and
sale of inventory for distribution. -
Interest payable on deposits made. -
Corporate
services received from your related party in Costa Rica (Marketing,
promotion, commercialization, management, administration, order placement,
finance and back office). -
Interest
payable on financing received. -
Logistics services provided (2015). |
Elaboration: TAT
In the same
way, we also list the inconsistencies detected according to the challenged act:
-
Asymmetries in
the information declared by the taxpayer. EF/DJR/930/EPT
-
Disproportionate
increase in cost of sales, in relation to revenues, without changes in the list
of products purchased from related parties.
-
Impossibility
of performing a segmented analysis of purchase and sale transactions of
non-produced inventories.
-
Objection to
the resale price method for the sale of inventory for distribution transaction.
-
Objection of
comparables used by the taxpayer.
-
Inclusion of
comparables discarded by the taxpayer.
-
Objection of
administrative service charges, pursuant to section 762-G of the Tax Code.
On the other
hand, the taxpayer's counsel summarized, in his brief of final arguments, the
disputed points related to the substantive analysis on transfer pricing, as
follows (Page 571 of the Court's file):
a)
b)
The Respondent Resolution purports to make two
mutually inconsistent transfer pricing adjustments.
c)
The Appealed Determination does not share the transfer
pricing analysis method selected by the Taxpayer.
d)
The Appealed Determination uses comparables other than
those selected by the Taxpayer to apply the transfer pricing method.
e)
The Appealed Resolution disregards the administrative
expenses incurred by the Taxpayer with--., a
foreign company that provided services to him during
the disputed periods.
For logical
reasons, we proceed to the separate analysis of each of the aspects mentioned
above, in order to then arrive at the final decision of the case.
1.
Asymmetries in
the information declared by the taxpayer.
In the
challenged act, the differences in the information reported by the taxpayer in
its income tax returns, reports and transfer pricing studies are highlighted,
therefore, the information was validated with the documentation in the file, as
summarized below:
Table 3. Information reported by the taxpayer
Related party transactions |
2014 |
2015 |
Income
Tax Returns |
|
|
Income
(Box 12) |
B/.195,348.00 |
- |
Costs
(Box 28) |
- |
- |
Expenses
(Box 44) |
B/. 51,872,483.23 |
B/.59,883,105.24 |
Forms 930 and Transfer Pricing Studies |
B/.181,709,403.00 |
B/.210,629,305.00 |
Income |
B/.38,321.00 |
B/.1,415,712 |
Expenses |
B/. 181,671,082.00 |
B/. 209,203,593 |
Elaboration: TAT.
Source: Income Tax Returns, Transfer
Pricing Report and Studies.
Likewise,
differences were observed between the information contained in the transfer
pricing studies and the Financial Statements, as will be analyzed below, when
verifying the analysis of the operations.
In this sense,
it is necessary to emphasize the importance that the information provided by
the taxpayer, in all its returns and reports, is congruent and consistent with
its financial and tax information, which influences the reliability of the
transfer pricing analysis, being this, precisely, one of the elements that
draws the attention of the Tax Administration, at the time of opting for the
performance of a transfer pricing audit.
On the other
hand, we must state our dissent with respect to the use, by the taxpayer's
expert, of the information from the taxpayer's income tax return for purposes
of calculating the taxpayer's operating margins.
In this sense,
this Court has already pronounced in Resolution No. TAT-RF-002 of January 10,
2020, in which it indicated the difference between financial and accounting
information, for purposes of the transfer pricing analysis, in the following
terms:
"For its part, the Tax Administration argued that the taxpayer
itself declared an operating margin corresponding to ----% for the operations
of sales net of inventories not produced, advertising services received,
administrative services received, both in its transfer pricing report 2014, as
well as in its transfer pricing study, and financial statements, explaining
that according to Article 762-F of the Tax Code for the calculation of the
profitability indicator, the audited financial statements of the taxpayer must
be used, in accordance with International Financial Reporting Standards, and
not the taxpayer's income tax return, which serves tax purposes.
On this occasion, we must agree with the Tax
Administration, to the extent that the law clearly separates financial
information from tax information, which makes sense, if we consider that it is
information whose purpose and rules differ. In addition to the above, we
consider that, although the Tax Administration must make its transfer pricing
adjustment in accordance with the tax regulations and income tax return, it is
based, in this case, on a profitability indicator which is calculated according
to the financial information, not the tax information.
For these reasons, the request to use the operating
margin of% contained in its 2014 income affidavit is dismissed, and the use of
the margin indicated in the 2014 transfer pricing study (---------- %) is reaffirmed , subject to verification of the composition
thereof."
Based on the same reasoning, the
taxpayer's financial information will be considered for purposes of the
transfer pricing analysis.
2.
Segmented or
grouped analysis of the purchase and sale operations of inventories for
distribution.
As indicated
in summarizing the disputed facts, the Tax Administration objected to the
separate analysis of the purchase and sale transactions of non-produced
inventory, having presented only the segmented income statement up to the gross
level and not the segmented balance sheet at the gross level; that the taxpayer
did not present information that demonstrates that the segmentation allows
obtaining reliable comparables of the analyzed operation, and that the lack of
sufficient information on the additional functions carried out by the taxpayer
for each segment in its distribution activity, does not allow a search for
comparable operations in order to validate the arm's length principle in the
operation of sale of inventory for distribution.
In addition to
the foregoing, the challenged act adds that the information presented in
response to item 8 of note No. 201-01-2031-DGI (Segmented income statement
according to the operations observed in the transfer pricing studies and the
operations carried out with unrelated companies, indicating the criteria used
for the segmentation) corresponds to the segmented income statement at the
gross level, but not in its entirety (Pages 422-423 of the background file).
In this regard,
we must begin our analysis by indicating that, according to transfer pricing
regulations, there are certain minimum information and documentation
requirements with which transfer pricing studies must comply. In this regard,
Article 762-J of the Tax Code states the following:
"Article
762-J. Transfer pricing study. The persons required to file the report
referred to in the preceding Article must have, at the time of filing, a
transfer pricing study, which shall contain the information and analysis that
allow valuing and documenting their operations with related parties, in
accordance with the provisions set forth in this Chapter. However, the taxpayer
shall only be required to submit this study at the request of the Directorate
General of Revenue, within a period of forty-five (45) days, counted as of the
notification of the request. Said obligation is established without
prejudice to the power of the Directorate General of Revenue to request such
additional information as it deems necessary in the course of the audit
proceedings for the exercise of its functions.
The study referred to in this Article shall be drawn up taking into
account the complexity and volume of the operations.
This study shall include, as a minimum, the following information and documentation:
1.
Complete identification of the taxpayer and the
various parties related to the taxpayer.
2.
Information relating to the business group to which
the taxpayer belongs.
3.
Information used to determine the valuation of related
party transactions, including a detailed description of the nature,
characteristics and amount of its related party transactions with an indication
of the valuation method(s) used.
4.
Detailed comparability analysis in accordance with the
provisions of Article 762-E.
5.
Reasons for the choice of the method, as well as its
application procedure and the specification of the value or range of values
that the taxpayer has used to determine the price or amount of its
operations." (Emphasis
supplied)
In this case,
it is observed that, although the transfer pricing studies comply with the
minimum requirements established by law, the requests for additional
information made by the Tax Administration and the answers provided by the
taxpayer to such requests, also form an integral part of the analysis of this
type of controversies, a natural consequence of the complexity of the same,
remembering that, the OECD Guidelines themselves recognize that the transfer
pricing analysis "is not an exact
science."
In this
regard, it is observed in the background file, that the Tax Administration,
after the request and delivery of the transfer pricing studies, and the opening
of the audit, by Note n.ฐ 201-01-2031 -DGI of July 27, 2017 (Fojas 33-34 of the background file), requested a large amount
of information to the taxpayer, as evidenced in the requirement notes n.ฐ
202-DTI- 01-001-2018 (Page 320 of the background file); and the process minutes
n.ฐ 0054, 0055, 0056, 0058, 0060 and 0062, all attended by the taxpayer, in
physical and digital format (compact disc), as observed in pages 320-389 of the
background file, which denotes the effort of both parties, in performing an
exhaustive analysis of the documentation and financial information of the
taxpayer, which should be taken into account.
We now proceed
to analyze this element of the dispute, based on the applicable law and the
documentation in the record.
First, we must
turn to Article 762-E of the Tax Code, which provides that "If the taxpayer performs several
transactions of identical nature and in the same circumstances, it may group
them together to perform the comparability analysis provided that such grouping
respects the arm's length principle. Two or more distinct transactions may also
be grouped together when they are so closely interrelated, or so continuous,
that they cannot be properly assessed independently."
For its part,
Article 1 of Executive Decree 958 of 2013, which regulates that provision,
states in this regard, as follows:
"Article 1. Analysis of transactions. The
determination of the arm's length principle referred to in Article 762-A shall
be carried out separately, that is, for each type of operation, in accordance
with the method that is most appropriate for each one.
Notwithstanding the foregoing, in cases where
transactions are so closely linked or so continuous that it is not possible to
make a proper assessment of each transaction separately, the analysis shall be
carried out on a grouped basis."
From the
transcribed rules, it is inferred that, in principle, the analysis of the
operations shall be made separately, as presented by the taxpayer in its
transfer pricing studies, in the case of purchase/sale operations of
non-produced inventories, therefore, it is necessary to determine whether both
operations are so closely linked or so continuous that it is not possible to
analyze them separately.
By virtue of
the foregoing, we proceeded to verify the functional analysis performed in the
transfer pricing studies 2014 and 2015 (Pages 98, 102, 288 and 292 of the
background file), in which, it is explained that, in the operation of purchase
of inventories for distribution, the taxpayer "can be characterized as a wholesale distributor of pharmaceutical and
consumer products of the brands of in which case the determination of a range
of effective independence should focus on the search and selection of companies
whose object is the distribution of this type of goods....The Company assumes
all risks related to the market in which it operates (except when selling to
related entities) as well as the risks associated with inventory; at the same
time it maintains control of its operations by employing corporate services
provided by to carry out its activities" (Pages 98 and 288 of the
background file).
With respect to the operation of sale of inventories for distribution,
it is indicated that "Due to the
functions, assets and risks that the Company employs in carrying out its export
operations of finished products, it can
be characterized as an entity that performs sales of pharmaceutical and
consumer products, but without carrying out marketing and promotion functions
of the product, since such functions as well as the associated risks are
assumed by its related parties in the operation under analysis" (Pages
102 and 292 of the background file).
The transfer pricing studies submitted by the taxpayer
separate the two activities (purchase/sale of inventory for distribution),
using the following financial information:
Table 4. Segmentation of inventory purchase and sale
operations for distribution
Description |
Purchase of inventory for distribution |
Sale of inventory for distribution |
||
Period |
2014 |
2015 |
2014 |
2015 |
Net
sales (a) |
150,283,428 |
149,469,109 |
36,276 |
94,859 |
Cost of
Sales (b) |
120,965,515 |
91,719,136 |
24,436 |
34,206 |
Gross profit (c) = (a)/(b) |
29,317,913 |
57,749,972 |
11,480 |
60,654 |
MB =
(c)/(a) |
19.51% |
38.64% |
32.64% |
63.94% |
Elaboration: TAT.
Source: Transfer Pricing Studies 2014 and
2015 submitted by the taxpayer (Reverse side of pages 100, 103, 290 and 293 of
the background file).
However, this
information contrasts with the response provided by the taxpayer to requirement
No. 8, which indicates that the segmentation criterion used was the direct
allocation, using the information obtained directly from the Company's
accounting for the periods indicated, in which it is observed that the sales
operations to local and foreign independent third parties (defined in the EPT3
as purchase of inventory for distribution) and the sale to foreign related
parties (defined in the EPT as sale of inventory for distribution) were
separated, as follows:
Period 2014
Source: Response to Injunction 8,
reproduced at page 423 of the case file.
Period 2015
Source: Response to Injunction 8,
reproduced at page 423 of the case file.
However, upon
consulting the information contained in the Financial Statements 2014-2015
(Page 244 of the background file), the following is observed:
Table 5. Taxpayer's Gross Profit according to Financial Statements
Description |
Periods |
|
|
2014 |
2015 |
Net
sales (a) |
150,283,428 |
149,469,109 |
Cost of
Sales (b) |
134,386,492 |
88,363,921 |
Gross profit (c) = (a)/(b) |
15,896,936 |
61,105,188 |
Gross
margin |
10.58% |
40.88% |
Source: 2015
audited financial statements of the taxpayer.
According to
this information, the Tax Administration is correct in indicating that there
are significant differences in the taxpayer's cost line item, in the
financial statements and in the transfer pricing documentation, which take the
gross margin (pooled) of the taxpayer, from 19.51% (2014) and 38.64 (2015)
according to the EPTs, to 10.58% (2014) and 40.88% (2015), according to the
audited financial statements, as indicated by the Tax Administration in the
contested act (Page 427 of the background file), which compromises, to a
certain extent, the reliability of the analysis presented by the taxpayer.
When comparing
the information shown in tables 3 and 4 above, it is observed that the amounts
of B/.150,283,428 (2014) and B/. 149,469,921 (2015) corresponding to net sales
reported in the Financial Statements, include, according to the answer
given to the Tax Administration, the amounts corresponding to sales to related
parties, identified as sale of inventories for distribution in the transfer
pricing studies, broken down as follows:
Segmented taxpayer information according
to TAT analysis.
Description |
Purchase of inventory for distribution |
Sale of inventory for distribution |
||
Period |
2014 |
2015 |
2014 |
2015 |
Net
sales (a) |
150,247,152 |
149,374,250 |
36,276 |
94,859 |
Cost of
Sales (b) |
120,941,079 |
91,684,931 |
24,436 |
34,206 |
Gross profit (c) = (a)/(b) |
29,306,073 |
57,689,319 |
11,480 |
60,654 |
MB =
(c)/(a) |
19.51% |
38.62% |
32.64% |
63.94% |
As can be
seen, the existing differences do not have a significant impact on the gross
margins of the taxpayer, percentage-wise, however, one of the main objections
of the Tax Administration was that the taxpayer only presented the segmented
Income Statement up to gross level and not the segmented Balance Sheet, which
is evidenced in the audited financial statements (Pages 217 and 244 of the
background file, in which, it is observed that the information is presented in
a grouped form. Likewise, it is observed that the selected comparables do not
present the segmentation criteria proposed by the taxpayer, therefore,
maintaining the segmented analysis could affect comparability, as highlighted
by the Tax Administration.
On the other
hand, the analysis of the transfer pricing studies shows that the taxpayer used
the same method and the same comparables for the analysis of both operations,
which imply, in both cases, the purchase of inventory from related parties
abroad, taking as a segregation criterion, the sale to related parties and
independent parties, but only at a gross level, while such segregation is not
observed in the audited financial statements.
In view of the
implications that these differences may have for the transfer pricing analysis,
particularly, the choice of the most appropriate method, we consider that the
information presented is insufficient to perform a segmented analysis,
therefore, the Tax Administration's decision in this regard will be upheld.
3.
Method used.
Continuing
with the analysis of the objections made by the Tax Administration, it
corresponds in this section to corroborate whether the resale price method
(RPM), used in the transfer pricing studies submitted by the taxpayer, for the
analysis of the purchase and sale transactions of inventory for distribution,
is the most appropriate, or whether, on the contrary, the application of the
transactional net margin method (TNMM), as determined by the Tax
Administration, is appropriate.
In this
regard, this Court considers it necessary to recall that, according to Article
762-E of the Tax Code, "The
comparability analysis...and the information on the comparable operations
constitute the factors that, in accordance with the provisions of Article
762-F, shall determine the most appropriate method in each specific case".
In this sense,
Article 762-F of the Tax Code incorporates into our legislation the methods to
apply the arm's length principle, indicating that, in principle, one of the
methods known in the doctrine as traditional methods will be used (comparable
uncontrolled price, added cost, or resale price), developed in literal A of
this norm, and that in case its application is not possible "due to the complexity of the operations or
the lack of information", one of the methods described in literal B
(that is, the non-traditional methods) will be applied.
In relation to
the resale price method, the same article provides in paragraph A, numeral 3,
the following:
"Resale price method. It consists of
subtracting from the sale price of a good or service, the margin applied by the
reseller itself in identical or similar operations with independent persons or
entities or, failing that, the margin that independent persons or entities
apply to comparable operations, making, if necessary, the necessary corrections
to obtain the equivalence, considering the particularities of the operation.
The usual margin is considered to be the percentage that the gross profit
represents with respect to net sales".
Paragraphs
2.21 and 2.22 of the OECD Transfer Pricing Guidelines, a technical reference on
the subject according to Article 762-D of the Tax Code, explain the following
in this regard:
"2.21 The resale price method starts with the
price at which a product is purchased from an associated enterprise and then
sold to an independent enterprise. This price (the resale price) is reduced
by an appropriate gross margin (the "resale price margin")
representative of the amount by which the reseller intends to cover its selling
costs and operating expenses and, depending on the functions performed
(considering the assets used and the risks assumed), to earn an appropriate
profit. What remains after subtracting the gross margin can be understood to
constitute, after adjustments for other costs associated with the acquisition
of the product (e.g. customs duties), an arm's length price for the initial
transfer of goods between the associated enterprises. This method is most
useful when applied to marketing activities.
2.22 The resale price margin of the reseller in the
controlled transaction may be calculated on the basis of the resale price
margin obtained by the same reseller on items bought and sold in comparable
uncontrolled transactions ("internal comparable"). The resale price
margin obtained by an independent firm on comparable unrelated transactions
("external comparable") may also be used as a guideline. Where
the reseller engages in brokerage activities, the resale price margin may refer
to a brokerage commission, which is normally calculated as a percentage of the
selling price of the product disposed of. In that case, the calculation of the
resale price margin must take into account whether the intermediary is acting
on behalf of others or in its own name." (Emphasis supplied)
In this
regard, the Practical Transfer Pricing
Manual for Developing Countries4 explains in Figure 4.D.2 the application
of this method graphically, as follows:
4 Practical Manual on Transfer Pricing for
Developing Countries. United Nations,
third edition (2021).
Figure 4.D.2. Resale price method
Price arm's length?
Resale price
Where:
Resale price: US$100
Resale margin
(25%): US$25
Arm's length transfer price: US$75
5
Precisely, the
main objection of the Tax Administration, with respect to the segment of sale of inventory for distribution, lies
in the fact that the assumption contemplated at the beginning of paragraph 2.21
of the OECD Guidelines is not met, therefore, it is necessary to analyze the
documentation in the file, in order to validate the veracity of this statement.
In this sense,
the transfer pricing studies are clear in distinguishing that during fiscal
years 2014 and 2015, the Company sold inventory for distribution to related
parties abroad (Pages 101 and 291 and of the background file), which
coincides with what was reported in the transfer pricing reports corresponding
to the periods covered in the challenged act (Pages 5 and 31 of the background
file), in which income from net sales of non-produced inventories was reported,
for B/.36,276.00 (2014) and B/. 94,860.00 (2015), respectively, and the
financial information provided by the taxpayer when answering the information
requests of the Treasury (Pages 422 and 423 of the background file).
As can be
seen, the sale of inventory for distribution, does not correspond to the
routine course of activities of the company, which focuses on the distribution
of its products to independent third parties in Central America and the
Caribbean, being, in addition little significant for the taxpayer, representing
only 0.02% and 0.06% of the net sales of the company in the periods 2014 and
2015 respectively, explaining that the same are due to sporadic and specific
inventory needs by the related entities of ------------ to supply their
inventory needs (Pages 101 and 291 of the background file).
In this sense, the referred studies clarify that "the sales of inventories made by its related parties abroad
differ with respect to the sales of inventories made by the Company to both its
foreign and local third party customers. This is due to the fact that first,
the products sold to related parties are not in all cases exactly the same
types of products and presentations sold to independent third parties. On the
other hand, the economic circumstances under which such sales are made are
different.
Likewise, the functions and risks assumed by the
Company in the sales operations to foreign related parties are lower with
respect to the activity of distribution to third parties, since in this type of
sales (to related parties) the Company is at another level of the chain and,
therefore, does not assume commercialization, marketing and promotion risk when
carrying out such activities, since the latter are the ones who assume it in
their sales to third party clients (Pages 101-102; 291-292 of the background file).
Likewise, the
transfer pricing studies indicate that "Since the operation under analysis is related to goods distribution
activities, it was concluded that the RP is the appropriate method to determine
a range of profit or profitability that allows to assess compliance with the
principle of effective independence in the operation subject to analysis"
(Pages 103 and 293 of the background file). (Pages 103 and 293 of the
background file).
Beyond the
reasonableness of this statement, in accordance with our regulations and the
provisions of the OECD Guidelines, the studies ignore the fact that the sales
reported in this operation are made exclusively to related parties, which
compromises the applicability of this method, according to the regulatory and
doctrinal analysis developed so far.
By virtue of
the foregoing, we believe that the Tax Administration's statement on this point
is correct, remembering that the resale price method focuses, precisely, on the
margin obtained by the analyzed party, when reselling the inventories acquired
from related parties, to independent companies, under the premise that
this operation would be, in theory, the most difficult to manipulate, since
there is no link between buyer and seller in this aspect of the transaction, a
situation that is not observed in this case, This situation is not observed in
this case and does not allow to evaluate with sufficient levels of reliability
the inventory sale transaction, since it is a transaction between related
parties. For this reason, we agree with the approach of the Tax Administration,
for purposes of the inventory sale transaction
for distribution, since the
application of the traditional methods is compromised by the presence of
transactions with related parties on both sides of the inventory sale
transaction for distribution.
In relation to
the purchase of inventory for
distribution, the Tax Administration referred to the absence of a
comparability analysis for the choice of the method for the transfer pricing
analysis, reiterating that there was no comparability analysis of the
additional functions attached to the distribution activity between it and the
operations it selected as comparable in the transfer pricing studies, which
would demonstrate that the selected method was the appropriate one (Page 428 of
the background file), which was refuted by the taxpayer, by indicating that the
same consists on pages 19 and subsequent pages and Annex B of its transfer
pricing studies 2014 and 2015, as well as pages 26 and 19 of the respective
studies, in which the five comparability factors (characteristics of goods and
services, functional analysis, contractual terms, economic circumstances and
business strategies) described in the OECD Guidelines and Article 762-E of the
Tax Code are developed.
The analysis
of the procedural documents shows that, indeed, the taxpayer carried out the
comparability analysis, based on the five factors indicated in article 762-E of
the Tax Code, as evidenced in pages 98, 118, 119, 288, 304 and 305 of the
background file.
In addition to
the above, it should be remembered that, from the legal-conceptual level
established in Article 762-F of the Tax Code, which in turn is based on
paragraphs 2.21 and 2.22 of the Transfer Pricing Guidelines cited above, the
application of the resale price method would be the most advisable for
transactions in which products are acquired from related parties and
distributed to independent parties, provided that there is sufficient
information and it is duly supported by the comparability analysis.
On the other
hand, the inconsistencies alluded to by the Tax Administration at the level of
operating expenses, specifically a disproportionate increase thereof, which
lead the taxpayer's profit, from a gross margin of 10.58% (according to the
financial statements) to an operating margin of - 29.83% in 2014, and from
40.88% to -9.40% in the 2015 period, respectively, which justifies the concerns
of the Tax Administration, regarding the use of a method based on the gross
margins of the taxpayer, and the proportion of operating expenses, with respect
to local sales, which affects the choice of the most appropriate method, as
provided in the Panamanian regulations.
In this
regard, the contested measure notes (see page 427 of the case file) that the
taxpayer itself explained that these differences were due to "changes in the grouping of accounting
accounts", which was considered by the Treasury as evidence of the
sensitivity of the indicator selected by the taxpayer in relation to
adjustments in accounting practices, concluding that a change of such magnitude
in the financial information used in the calculation of the profitability
indicator should lead to a further review of the applicability of the method
and a review of the categories of costs and expenses contained in the financial
information used in the calculation of the profitability indicator of the
selected comparables, citing paragraph 2 of the Guidelines, which emphasizes
the need for a review of the applicability of the method and a review of the categories
of costs and expenses contained in the financial information used in the
calculation of the profitability indicator of the selected comparables, citing
paragraph 2.35 of the Guidelines, which emphasizes accounting differences,
noting the following:
"2.35 When accounting practices differ between
the related and unrelated transactions, appropriate adjustments should be made
to the data used to calculate the resale price margin to ensure that the same
categories of costs are used in each case to arrive at the gross margin. For
example, research and development costs may be reflected in operating expenses
or selling expenses. The respective gross margins would not be comparable
without appropriate adjustments."
For its part,
section 2.46 of the same document states the following:
"2.46 Another important aspect of comparability
is consistency of accounting. Where the accounting practices used in the
controlled and uncontrolled transaction differ, the data used should be
appropriately adjusted to ensure, for consistency, that the costs used are of
the same type. Gross profit margins should be quantified in a way that allows
comparison between the affiliated undertaking and the independent undertaking.
In addition, undertakings may treat differently the costs affecting gross
profit margins which should be taken into account in order to achieve reliable
comparability...".
In addition to
the foregoing, the contested act states that distribution, sales, general and
administrative expenses represent about 50% of total sales, which it considers
excessive, especially when local sales represented about 18% of the total sales
of the taxpayer, which qualified as a possible incursion, by the taxpayer, in
expenses directly associated with the distribution function, largely on behalf
of other entities of the business group and for this reason, it should expect
to obtain an adequate margin for this function (Page 426 of the background
file).
Similarly, the
Tax Administration highlighted, in the taxpayer's answers, the existence of
changes/revaluations in the costs of all products, changes in factory costs and
changes in volumes and composition of products sold, without influencing,
adequately, the sales prices, to the point that sales decreased (albeit less
than 1%) in the periods 2013-2014 and 2014-2015, while the costs of sales
increased 25.15% in the 2014 period, and decreased 34.25% in 2015, without any
record, in the transfer pricing studies and answers provided by the taxpayer,
of changes in the lists of products purchased from related parties abroad,
which could indicate that the taxpayer has made use of its operations with
related parties abroad, to erode the Panamanian tax base through the transfer
prices associated with these operations.
On the other
hand, the vertical analysis of the taxpayer's financial information (Tables 8
and 9 on page 435 of the background file) shows that the taxpayer went from an
operating margin of 21.86% in 2011, to a sustained loss situation, around -10%,
even reaching -29.83% in the 2014 period, mainly as a result of the items of
cost of sales (89.42% with respect to total sales in 2014) and general and
administrative expenses, which exceed 35% of sales in the indicated periods.
Similarly, the
horizontal analysis showed that the trend of sales growth does not respond to
the trend of sales costs and general and administrative expenses, which
explains the Treasury, noting that "from
2013, general and administrative expenses reflected a high amount similar to
2012, despite the fact that sales contracted. Subsequently, in 2015, general
and administrative expenses increased again by 18.09%, without this increase
can be explained by a rise in distribution activities reflected through
variations in sales and cost of sales."
In relation to
these items, the challenged act highlighted that, the general and
administrative expenses are composed between 65% and 70% by the expenses for
services received from related parties, which went from 19.68 million in
2011(13.94% of sales) to exceed 50 million in all subsequent periods
(2012-2015), which represents more than 34% of sales in all cases, highlighting
that during the period 2015 a significant increase was observed in this item
(15.37%), despite the fact that sales decreased, which is not compatible,
according to the tax attorney, with a proportion and a trend of expenses that a
company that only carries out transactions with independent parties, could
sustain over time.
Given this
scenario, we agree with the Tax Administration, in the difficulties posed, in
this case, by the use of the resale price method, to which are added the
reasons provided by the taxpayer itself in the transfer pricing studies, to
discard the other traditional methods.
If we add to
this the implicit difficulty involved in the application of a bilateral method
such as profit splitting, we conclude that the most appropriate decision, in
this case, is the use of the transactional net margin method, carried out by
the Tax Administration (Pages 428-429 of the background file).
In relation to
this analysis, we have that the challenged act highlighted that "the taxpayer should have looked for
comparables that incurred in similar measure in distribution and sales expenses
and general and administrative expenses that would allow the adequate
application of the Resale Price Method" (Page 428 of the background
file), issue that will be analyzed below.
4.
Inclusion and
exclusion of comparables.
Before
starting our analysis on the process of selection of comparables, we consider
it relevant to note that, in the framework of the expert test ordered by
Resolution n.ฐ TAT-PR-091 of August 26, 2019, the expert appointed by the
Tribunal, when answering question 1, which asked to calculate the taxpayer's
operating margin, based on the challenged resolution, income tax returns and
transfer pricing studies, devoted much of his report, to make comparability adjustments,
and even to search for new comparables, thus exceeding the scope of the ordered
test, and the questionnaire approved in the referred resolution.
In this
regard, it should be recalled that, according to the provisions of Article 966
of the Judicial Code, the express purpose of expert evidence is "to know, appreciate or evaluate some data or
fact of influence in the process, of scientific, technical, artistic or
practical nature, which does not belong to the common experience or the
specific training required of the judge". Given the technical and
complex nature of the subject matter, it is natural that, frequently, the
practice of expert evidence is carried out, in these cases, in order to provide
greater clarity to some technical aspect within the process.
However, it
should also be recalled that, according to the provisions of Article 968 of the
same law, the judge must specify the points on which the expertise will fall,
which is evident, in this case, in the questions set out in the first point of
Resolution No. TAT-PR-091 of August 26, 2019, which denotes that the work of
the experts is subject to the work expressly entrusted by the Court that orders
the test.
Precisely, the
delimitation of the points on which the evidence will fall is directly related
to the form and content of the expert opinion, which must be presented,
according to the provisions of article 974 of the Judicial Code, in a clear and
precise manner, always seeking to provide greater clarity to the file, not
being possible, at this stage, to incorporate new controversial facts,
objections or arguments that have not been aired by the parties.
From a
technical point of view, a distinction should be made between transfer pricing
adjustments, made by the Tax Administration to taxpayers' income, based on
article 762-B of the Tax Code, and comparability adjustments, which seek to
eliminate (or reduce) the effects of existing differences between the tested
party and the comparable companies, as part of the comparability analysis
developed in article 762-E of the Tax Code (see also paragraph 1.33 of the OECD
Guidelines).
By virtue of
the foregoing, we must clarify that the expert evidence did not reach, in this
case, the process of selection of comparables, so we proceed with the analysis
of this aspect of the dispute, based on the documentation in the record, and
the comparability adjustments made by the Tribunal-appointed expert will not be
taken into account.
In this case,
the Tax Administration objected, on the one hand, to the comparability of the
companies --------------. and ----------------
and, on the other hand, to the exclusion of the
companies ------------. and
------------------., as summarized in pages 7 and 8 of this resolution
[paragraph 8 (p) and (q)].
Before
beginning our analysis of this point, it is necessary to focus on the legal
framework that regulates it, specifically Article 762-E of the Fiscal Code,
which stipulates the following:
"Article
762-E. Comparability analysis. For purposes of determining
the price or amount that would have been agreed to by independent parties in
like circumstances under arm's length conditions referred to in Article 762-A,
the terms of transactions between related persons shall be compared to
comparable transactions between independent parties.
Two or more transactions are comparable when there are
no differences between them that significantly affect the price or amount, and
when such differences can be eliminated by reasonable adjustments.
In determining whether two or more
transactions are comparable, the following elements shall be taken into account
to the extent that they are economically relevant:
1.
The specific characteristics of the operations...
2.
The significant economic functions or activities
undertaken by the parties in relation to the transactions under analysis,
including the risks assumed and weighting, where appropriate, the assets used.
3.
The actual contractual terms from which, as the case
may be, the operations derive, taking into account the responsibilities, risks
and benefits assumed by each contracting party.
4.
The characteristics of the markets or other economic
factors that may affect operations.
5.
Commercial and business strategies, such as market
penetration, permanence or expansion policies, as well as any other
circumstance that may be relevant in each case".
For its part,
Executive Decree No. 958 of 2013, states in Article 4 as follows:
"Search for comparable transactions. The
comparability analysis, which shall include the search for information on
comparable transactions, shall be aimed at determining and finding the most
reliable comparable transactions, as part of the process of selecting the most
appropriate method and its application".
As can be
seen, the search for comparables is an essential element of the transfer
pricing analysis, therefore, its correct application is of vital importance to
determine compliance with the arm's length principle.
In this
regard, the OECD Guidelines, 2010 version, specify in section 3.46 the
following:
3.46. The process followed to identify potential
comparables is one of the most critical aspects of the comparability analysis
and should be transparent, systematic and verifiable. In particular, the choice
of selection criteria has a significant bearing on the outcome of the analysis
and should reflect the most significant economic characteristics of the
transactions being compared. It may not be possible to completely eliminate
subjective judgements in the selection of comparables, but much can be done to
increase objectivity and ensure transparency in the application of those
subjective judgements. The optimal degree of transparency of the process will
depend on the extent to which the criteria used to select potential comparables
can be disclosed, as well as the ability to explain the reasons for eliminating
certain potential comparables. Enhancing the objectivity and ensuring the
transparency of the process may also depend on the extent to which the person
reviewing the process (the taxpayer or the tax administration) has access to
information about the process followed and to the same data sources."
As indicated
in the aforementioned extract, the process of selecting and discarding
comparables must be adequately documented and based on the analysis of the
financial information of the selected companies, and the precision of the
discarding criteria applied in the transfer pricing studies, which must follow
the provisions of the regulations, is especially relevant.
At this point,
it is necessary to refer to the appellant's assertions, regarding the alleged
lack of consistency in the analysis of the comparables selection process
carried out by the Tax Administration, by discarding and incorporating to the
interquartile range, companies that, according to the financial information
contained in the transfer pricing studies, have very similar characteristics,
considering that the reason behind this decision, is the impact on the
taxpayer's interquartile range.
In this
regard, this Court has expressed itself on previous occasions, with respect to
the possible manipulation of comparables (also known by the Anglo-Saxon
expression "cherry picking"),
in the following terms:
"...just as the disregard criteria must be
applied uniformly by the taxpayer, they must also be applied uniformly by the
Tax Administration, regardless of whether the results of the analysis are in
favor of or against the Treasury (The three companies objected to by the Tax
Administration were those that presented the lowest operating margins: 1.00%;
-0.03% and -23.64% respectively), concluding that "it is incongruous to object to comparables that are in similar
circumstances with others that have been accepted, that is to say, that have a
reasonable level of comparability with the examined party "7.
Under this
prism, we begin with the quantitative analysis of this important controversial
fact, in order to determine whether the impact on the interquartile range was
decisive in the decision of the Tax Administration.
For this purpose, we will compare the
operating margins of the companies selected by the taxpayer, highlighting, in
bold, the companies included and in italics, those excluded by the Tax
Administration, for clarity:
Comparable
companies |
Operating
Margin |
|
2014 |
2015 |
|
------------------------ |
1.11% |
0.66% |
--------------------- |
1.58% |
1.72% |
-------------- |
1.82% |
1.79% |
------------------ |
4.12% |
- |
-------------------- |
2.03% |
1.97% |
----------------- |
7.09% |
8.62% |
------------------------------- |
6.97% |
6.96% |
The above information allows us to conclude that, indeed, the
incorporated companies present operating margins markedly higher than those
included by the taxpayer, while, in the case of the challenged/excluded companies,
it is not observed that those with lower operating margins have been
eliminated. To illustrate this case, we have that --. presented the second
highest average operating margin in the 2014 period and the highest in the 2015
period, so it would not make sense to disregard it, under the premise assayed
by the appellant.
Notwithstanding the foregoing, we consider that to
conclude that the Tax Administration's decision to include/exclude companies
from the arm's length range is based solely on their operating margins would be
the same as concluding, prima facie,
that the taxpayer excluded ------------ and
-- precisely for the same reason.-------------- -- for
precisely the same reason.
For this
reason, we proceed to evaluate the comparables selection process carried out by
both parties, based on the information in the record, and the substantive
arguments proposed by them, in order to determine whether the comparables
selection process was indeed carried out properly, or whether, on the contrary,
the measures taken by the Tax Administration are justified, based on the
comparability analysis developed in the rules set forth above.
In this
regard, we have that, in this case, the taxpayer used external comparables,
located abroad, not having information on the companies operating in the
Panamanian market, using international databases, a decision that has not been
objected by the Tax Administration, which bases its objections to the
inclusion/exclusion of certain companies, in the own criteria of discard and
acceptance used by the taxpayer, as well as the companies that resulted from
the search made by it, according to the transfer pricing studies.
In this regard, the taxpayer used the
following exclusion/acceptance criteria:
"Industry: According to the SIC Codes detailed in
the Standard Industrial Classification Manual of the U.S. Department of
Commerce.
2. Geographic
market: United States and Canada.
3. Financial:
Financial information for at least two years from 2012-2014.
4. Manual
discard: Different functions, products, market levels; potential intercompany
transactions and duplicate entities."
In this case, the objections of the Tax Administration were based on the
fact that two of the selected companies (-------------------.
and--------------------------------- .)
should not have passed the "different
functions" filter, since they had important differences in their
functional analysis (functions, assets and risks), as summarized below:
4.1. .
-
It has retail
pharmacy franchises;
-
It operates
nuclear pharmacies and cyclotron facilities and radiopharmaceuticals for use in
nuclear imaging, through a specific division.
-
Manufactures,
creates and develops its own line of private label medical and surgical
products (drapes, single-use surgical gowns).
In this
regard, the taxpayer's counsel clarified that the aforementioned activities
represent a minor part of the company's operations (12% and 11% respectively),
whose pharmaceutical segment constitutes over 87% of the company's revenues in
the periods under study, highlighting that the main function carried out by the
referred company is the distribution of branded and generic drugs, as well as
OTC (over-the-counter) products for
health care and consumption through retail health divisions.
Counsel also
stated that this company, according to its 10-K report, operates in a highly
competitive market, where its main competitors are wholesale distributors.
In this sense,
we consider that, although it is true that this company presents certain
differences with respect to some very specific lines of business, it is also
true that these do not represent a significant percentage of the revenues, nor
the activities of the company, whose main activity is, clearly, the
distribution of pharmaceutical products, as indicated in its financial
information (10-K report), even reporting, in a segmented manner, its
operations corresponding to the pharmaceutical sector and the medical sector.
Likewise, when verifying the description of the operations of the other
selected companies, which were not objected to by the tax authorities, similar
differences are found. Such is the case of---------------------------- --. which, in addition to its
pharmaceutical distribution segment, provides pharmacy management, personnel
and other consulting services. In the same vein, -------------------. , has a distribution segment and a technology
segment, in addition to distributing medical-surgical supplies and equipment,
specialty pharmaceutical solutions to biotechnology manufacturers, practice
management solutions, technology, clinical and business support, as well as
financial, operational, clinical to retail, etc., in addition to technology
solutions and clinical management software. For its part, ------------------------------------------------------------------------------------------------------------------- it
distributes animal health products to veterinarians in the United States and
the United Kingdom (Pages 308-309 of the background file). It should be
clarified that these differences are pointed out to illustrate the comparables
objection criterion used by the tax authorities, not to add new objections,
remembering that this procedural stage would not be suitable to add objections
to those already raised by the Tax Administration.
For the
aforementioned reasons, this Court considers that the differences argued by the
Tax Administration are not sufficient to rule it out as comparable, therefore,
it will be considered within the interquartile range.
4.2. .
-
The company is
dedicated to the logistics of personal care and medical products, offering
procurement, inventory management, delivery and sourcing services to the
healthcare market, hospitals and health systems, organizations and the U.S.
Federal Government.
-
According to
its financial information, most of its distribution agreements provide for a
fixed margin compensation on costs and expenses (cost-plus), under which a negotiated percentage distribution fee is
added to the cost of the contract agreed to by the customer and the provider,
depending on the range, level or complexity of the service.
In this case,
the taxpayer's counsel noted that, likewise, the principal activity of this
company is the distribution of health care products, and that the service
activities are complementary.
To reinforce
its point, the appellant alleged the similarity in the proportion of
inventories over total assets of this company, with that of the taxpayer and
the other companies selected as comparable (see table 5 of the Appeal at page
24 of the file of the TAH), adding that in the referred report, the company
compares the performance of its common stock, with those of other companies
"distributors of pharmaceutical
products" (according to the report itself), within which it cites,
precisely 3 of the companies selected as comparable ( ,, . y ).
When analyzing the financial information of this company, it can be seen
that, despite being closely linked to the health sector, it cannot be
classified as a distributor of pharmaceutical products (unlike, for example,
the company-------------------------------------------- --. This leads us to agree, in
principle, with the approach of the Tax Administration, with respect to the
functional difference, and even at the product level, if we consider that it is
a company that provides logistic services in the health sector.
In this sense,
when delving into the distribution segment of the company, it is observed that
the products distributed by the company are medical equipment, surgical
products, and products for use by medical personnel and patients, instead of
pharmaceuticals, which represent the main product of the analyzed part.
This leads us
to conclude that two elements of the comparability analysis are compromised, both
at the level of functions and at the level of products. In addition to the
above, the taxpayer's counsel did not comment on the way this company operates,
based on fixed margins, which may indicate important differences with respect
to contractual terms and economic strategies, which are also part of the
comparability analysis.
In light of
the foregoing, we must agree with the Tax Administration's objection to this
comparable.
Next, we
proceed to the analysis of the companies added by the Tax Administration, based
on the discard criteria used by the taxpayer in its transfer pricing studies.
4.3. .
In this case,
the rejection of the company occurred because it did not pass the filter called
"different products",
clarifying, in this case, that although it is considered a good practice,
commonly used in the selection of comparables, the degree of difference allowed
varies, depending on the method and profitability indicator used, so it
recommended caution in its use, citing the provisions of paragraphs 1.41, 2.62
and 2.69 of the Transfer Pricing Guidelines, extracts of which are set out
below:
1.41. It has been observed in practice that
comparability analysis for methods based on net or gross profit indicators
tends to emphasize function similarities more than product similarities.
2.69. Prices are likely to be affected by differences
in outputs and gross margins are likely to be affected by differences in
functions.
In this
regard, it added that according to the company's 10-K report, the company is
engaged in the marketing, sale and distribution of products focused on three
main segments: human health, pharmaceutical ingredients and performance
chemicals, alleging that the taxpayer did not present sufficient arguments to
conclude that the company markets products significantly different from those
marketed by the company and the companies selected as comparable according to
Annex D of the transfer pricing studies.
On the other
hand, the taxpayer's counsel stated that the main difference, which motivated
the dismissal of this company, was at the product level, to the extent that
68.6% and 58.8% of the company's sales correspond to the sale of pharmaceutical
ingredients and chemical performance products, which differ from the products
distributed by the taxpayer, which, although they are pharmaceutical and
consumer products, are finished products, that is, they do not undergo any
modification by the taxpayer, in addition to having, among their components,
elements directly associated with intangible goods (such as the brand), which
play a preponderant role in the pricing of the products.
In relation to
the functions, it highlighted value-added services provided by the regional
managers of this company, which distinguishes them from those carried out by
the taxpayer in its business of buying and selling inventory for distribution.
After
carefully analyzing the arguments of the parties, the evidence in the record
and the publicly available information, we must emphasize that the consistency
in the criteria for the selection of comparables applies both to the Tax
Administration and to the taxpayer. In this sense, it is observed that, in both
cases, broad criteria have been used to select certain companies as
comparables, and in other cases, it seems that even the smallest detail has
been sought to discard them.
As we pointed
out previously, it is important that this analysis is carried out in a
consistent manner, and that the same parameters are used when analyzing the
companies that result from the database searches, which depend, to a large
extent, not only on the information available, but also on the definition of
the manual criteria for discarding. Although it is understood that this aspect
is perhaps the one that implies a higher level of subjectivity, the reliability
of the analysis rests on the consistent application of the referred criteria.
By virtue of
the foregoing, and reiterating the criteria stated in section 4.1. above, we
consider that this comparable meets similar criteria to those of the other
comparables accepted by the taxpayer, and therefore, should not have been
discarded by the taxpayer.
4.4. .
In this case, the Tax Administration stated that this
company is engaged in the distribution of dental, animal health, and medical
health care products, limiting itself to explaining, succinctly, that "upon comparing the company's 10-K report
with those of the companies selected as comparable by the taxpayer, it does not
agree with the exclusion of------------------------------------------------------------------------------------------------------- .
as a comparable company under the 'Different Functions' criterion."
In this
regard, the taxpayer's attorney emphasized the lack of motivation regarding the
reasons that led the Treasury to add this company, which, in his opinion,
violates due process, the taxpayer's rights, and the provisions of Article 1193
of the Tax Code.
In this case,
we agree with the taxpayer's position, to the extent that the tax authorities,
when taking such a sensitive measure as including (or rejecting) a comparable,
must be more exhaustive in their analysis and motivation, not only to safeguard
the taxpayer's right of defense, but also so that their decisions are covered
with the technical arguments that such a technical matter requires.
In this light,
it does not seem appropriate to us to support the measure taken in the
contested act, limiting itself to pointing out that the taxpayer did not
justify the rejection, and making a brief comment on the descriptive part of
the operations of the comparable company, when with the rest of the rejected
companies it did not act in the same way and seems to impose a kind of burden
of proof that is more extensive than that indicated in the rule, in addition to
not applying it consistently. If the problem were the inadequate application of
the rejection criteria, or the lack of explanations in this regard by the
taxpayer (beyond the rejection matrix), it would not have covered only this
company, but all the others that were not selected.
In addition to
the foregoing, we consider that the arguments made by the taxpayer's counsel
offer sufficient evidence to justify the taxpayer's rejection of this company,
and therefore, the rejection will be upheld.
5. Objection of administrative expenses - Application of
section 762-G of the Tax Code.
The analysis
of this aspect of the dispute is limited to three main aspects. First, it is
debated whether it is correct to use the related party in Costa Rica as an
analysed party for purposes of the transaction "administrative services received", instead of the taxpayer.
Second, the
deductibility of the expenses incurred by the taxpayer against the related
party abroad was discussed, based on the elements defined in article 762-G of
the Tax Code and third, the scope and impact of such objection for purposes of
the taxpayer's operating margin and income was discussed, with special emphasis
on the existence of a "double adjustment", which was considered
incorrect by the taxpayer's counsel. The analysis of these issues follows.
5.1.
Analyzed part.
In relation to
this point, the taxpayer's counsel has defended, throughout the process, the
use of the tested party in Costa Rica, as tested party or party in evidence,
pointing out that, both in the OECD Guidelines, as well as in the Panamanian
legislation, and the Form 930, the possibility that the tested party or party
in evidence may be the Panamanian company or the related party abroad, is
contemplated.
For its part,
the Treasury highlights the specific allusion to "taxpayer" embodied
in Article 762-F of the Tax Code, according to which "If the prices or profit margins of the taxpayer are within these
ranges, they shall be considered adjusted to the prices or amounts of
transactions between independent parties. In the event that the taxpayer is outside the adjusted range, the price or
profit margin in transactions between independent parties shall be considered
to be the median of such range", which, together with the definition
of taxpayer provided in Article 694 of the Tax Code, leads to the conclusion
that "------- --------------. cannot
be considered a taxpayer, since it is not a taxpayer. as a taxpayer, since it
is not a person that produces taxable income within the territory of the
Republic of Panama and, therefore, it cannot be the party in evidence in
accordance with the provisions of the Fiscal Code" adding that "the use of the operating margin on total
costs obtained by-- . as an
indicator of profit, does not allow to determine whether or not the taxpayer is
within the range of full competence, and it would not be possible for the
operation to be valued according to the provisions of article 762-A of the
Fiscal Code...Consequently, it would not be possible to make the corresponding
adjustments when this price does not correspond to those that would have been
agreed upon by independent parties, resulting in a lower taxation for the
country according to article 762-B of the Fiscal Code." (Page 434 of
the background file)
In this sense,
it is true that neither Chapter IX of Title I of the Tax Code, nor in Executive
Decree 958 of 2013, expressly refer to the choice of the analyzed party,
despite being a fundamental aspect of the transfer pricing methodology,
developed in the Transfer Pricing Guidelines (technical reference according to
Panamanian regulations), and in the practice of the elaboration of transfer
pricing studies.
Notwithstanding
the foregoing, it is a notorious fact, as indicated by the taxpayer's attorney,
that in Form 930, approved by Resolution No. 201-6845 of June 15, 2012, and
even in its subsequent amendments, the taxpayer is given the option to
determine which will be the analyzed party for purposes of the declared
operation. In the same line, the instructions of the referred report are clear
when indicating that in the section "ANALYZED
PARTY", it is necessary to "Indicate
the entity that was selected as the analyzed party for the determination of the
arm's length principle", alluding to the existence of two boxes,
namely:
Please select:
Related Party
By virtue of
the foregoing, it would be contradictory that the Tax Administration adopts
such a restrictive position, when the public documentation itself prepared for
the compliance of the formal obligations derived from the transfer pricing
regime, allows the use of the related party as an analyzed party. Had it been
the legislator's intention to limit the analysis of the operations to local
taxpayers, the regulation would have directly stated it, and the administration
itself would not have included this possibility in its form, which has been
maintained, even in subsequent versions.
Without
prejudice to the foregoing, we must refer to the taxpayer's interpretation of
the expression "the net margin of
the taxpayer, or, in its absence, third parties" contained in numeral
2 of literal B of the referred article 762-F of the Fiscal Code, confirms the
possibility of using a third party as an analyzed party.
When verifying
the complete paragraph, however, it is observed that it establishes that the
transactional net margin method "Consists
of attributing to the operations carried out with a related person the net
margin that the taxpayer or, in its absence, third parties, would have obtained
in identical or similar operations carried out between independent parties".
By virtue of
the foregoing, we must agree with the position expressed by the counsel for the
Treasury, to the extent that the rule invoked refers specifically to the use of
internal or external comparables, not to the use of a third party as an
analyzed party, therefore, the interpretation tested by the appellant, would
not be correct, since it would imply the application of the rule outside its
context, contravening, even, the literal wording of the same.
Continuing
with our analysis of the analyzed party, it is pertinent to refer to Resolution
No. TAT-RF-105 of December 12, 2019, in which a similar issue was discussed,
specifically the use of a related party, also located in Costa Rica, as an
analyzed party, noting the following in this regard:
"One of the main controversial issues in this
case, as we have seen, is the use of --- ---- COSTA RICA as a party in evidence
for purposes of the transfer pricing analysis. In this sense, the tax
authorities objected to the use of the Costa Rican company for purposes of the
transfer pricing determination of --------- PANAMA, S.A.; for their part, the
taxpayer's attorneys defend this decision, based on two main arguments:
1.
The absence of comparables in the case ofPANAMA , S.A.;
2.
The relationship betweenCOSTA
RICA 's profitability, financial and fiscal performance
ofPANAMA .
Indeed, both parties base their position on paragraph
3.18 of the OECD Guidelines...which provides as follows:
A.3.3 Selection of the part to be analysed
3.18 When applying the cost plus, resale price or net
operating margin methods described in Chapter II, it is necessary to choose the
part of the transaction for which a financial indicator (cost margin, gross
margin or net profit indicator) is analysed. The selection of the part under
analysis must be consistent with the functional analysis of the transaction.
As a general rule, the tested party is the party to
which the transfer pricing method can be applied most reliably and for which
there are the most robust comparables, i.e. it will normally be the party for
which the functional analysis is the least complex.
From the above text, we rescue the need for the
selection of the part under analysis to be consistent with the functional
analysis of the transaction, and that the criteria set out below have the
character of recommendation, by using the expressions "as a general
rule" and "normally", give it a connotation that responds to the
good practices and parameters recommended by the OECD on transfer pricing.
At the doctrinal level, Delgado Perea
(2016) points out the following:
"The tested party is usually the company that has
the most reliable information on the basis of which independent comparables can
be identified more easily; in other words, the word that allows a more reliable
analysis to be made. It is usually more convenient to take as the tested party
the enterprise located in the State for whose tax administration the transfer
pricing analysis is being documented, although this is not to say that this is
the general rule."
In relation to the particular case of the formal
obligations regarding transfer pricing, it must be taken into account that the
purpose of this regime is precisely to verify compliance with the arm's length
principle by the taxpayer, by virtue of which the Panamanian taxpayer is
requested to include, in its income tax return, the information on transactions
with related parties, in order to determine their income, costs and expenses,
have been set in accordance with the aforementioned principle. In addition to
the above, the Panamanian law establishes the obligation to file the Transfer
Pricing Report, which details in a more comprehensive manner the transactions
carried out, including amounts, percentages and methods used in this type of
transactions.
When analyzing such rules9 , in light of the
provisions of article 694 of the Tax Code, which defines an income taxpayer as
"the natural or legal person, national or foreign, that receives the
taxable income subject to tax", we conclude that, although the OECD
Guidelines recognize the possibility of using both the local and foreign
taxpayer as a party in evidence, the decisive factor will be the reliability of
the analysis performed, in order to determine compliance with the arm's length
principle in the transactions entered into by the local taxpayer with its
related parties abroad.
In this regard, we agree with the position of the Tax
Administration, when pointing out that the mere fact that COSTA RICA is below
the established range according to its transfer pricing analysis, does not
provide a sufficient level of reliability, with respect to the operations of
--------- PANAMA, given the existence of other related parties with which COSTA RICA
frequently conducts transactions with....
Consequently, we agree with the position of the Tax Administration with
respect to paragraph 3.18 of the OECD Guidelines, considering that the
functions, assets and risks ofCOSTA RICA are more
complex than those ofPANAMA , for which reason we do not find solid arguments in the
regulations, the OECD Guidelines, or in the record, to justify that the
analyzed party is not, in this case, PANAMA".
From the
normative and jurisprudential analysis carried out so far, we conclude that it
is possible to use the related party as the analyzed party, however, this
choice must be adequately justified, having as an objective, to guarantee the
reliability of the analysis, taking into account the provisions of paragraph 3.18
of the Guidelines, that is, that the analyzed party is the one with the least
complex functions, therefore, we proceed to the analysis of the documentation
on file in this context.
In this sense, the taxpayer's expert considered, in his report, that since
Costa Rica is the party involved in the transaction, and the functions, assets
and risks involved in the operation are clearly identifiable, there are
elements of analysis that allow identifying more reliable external comparables,
whose profitability indicators can be evaluated in a more direct way (Page 189
of the Tribunal's file).
On the other
hand, when questioned by the attorney of the Treasury, the taxpayer's expert
confirmed that ----------- Panama ------., is not the only company to which
------------le provides services, without adding further information in this
regard, beyond stating that the financial statements are presumed valid (Page
566-567 of the Court file).
This element
is important if we consider that, according to Article 762-G of the Tax Code,
"In the case of services rendered
jointly in favor of several related persons, and provided that it is possible
to individualize the service received or quantify the elements determining its
remuneration, the charge shall be directly imputed to the recipient"
and that if it is not possible to individualize it, "the total consideration shall be distributed among the beneficiaries in
accordance with apportionment rules. This criterion shall be deemed to be met
when the method of distribution is based on a variable that takes into account
the nature of the service, the circumstances in which it is provided, as well
as the benefits obtained or likely to be obtained by the recipients", so that
this type of operation, beyond being frequent within multinational groups, must
be duly documented in accordance with the rules established in this article.
When analyzing
the transfer pricing studies, it is explained that ---------------------------
(Costa Rica), in addition to the distribution of pharmaceutical and consumer
products, acts as a corporate and financial services center in the region (Page
93 of the background file). Likewise, it is explained that "the examined party is generally the party
that provides the good or service, to which a transfer pricing method can be
applied and for which more reliable comparables can be found whose results can
be evaluated in the most direct way", citing, as a reference,
paragraph 3.18 of the OECD Guidelines, reproduced in previous paragraphs.
Regarding the
supporting information provided in the course of the audit, as well as the
governmental channels, it has been possible to verify the existence of the
agreement for the provision of services (Pages 344-345 of the background file),
signed between -----------------. (Costa Rica), as supplier, and the taxpayer,
-------- ------------, who agreed to pay, originally, a compensation of 5% on
the total operating expenses, and its respective addendum, effective as of
October 24, 2011, which amended clause IV of the Contract, which increased this
compensation to 7%, which coincides with the amount reported in the 930 reports
and the transfer pricing studies.
Given the
nature of the contract, what must be verified in this operation is whether the
amount fixed for this compensation is in line with the market value, for which
a comparability analysis and the application of the methods10 established in
Articles 762-E (emphasizing the analysis of the nature of the service and
whether it involves experience or specialized technical knowledge) and 762-F of
the Fiscal Code, respectively, must be carried out, This can be done, in
principle, from the perspective of either party, i.e., by comparing whether
similar companies would be willing to pay a similar amount for the services
received, or, from the perspective of the provider, whether the compensation
received would be what would be expected if the same services were provided to
an independent party by an independent service provider. This decision, as we
have seen, depends on which party has the less complex functions, and about
which more information is available.
In this case,
the transfer pricing studies indicate that the analyzed party (Costa Rica),
carries out all the marketing functions and administrative services arising
from the referred contract, as well as the use of tangible and intangible
assets, indicating, however, that the market, credit and inventory risks are
assumed by the Panamanian counterpart (Page 295 of the background file).
From the
analysis of the inherent characteristics of the contract, and the normative and
jurisprudential analysis made in previous paragraphs, we can conclude that, in
this case, the service provider can be used as a party in evidence, since it is
precisely the service provider who performs the functions described above, in
such a way that it allows to identify the specific conditions of the operation.
It should be
noted, however, that one of the important factors to be taken into account
within the comparability analysis, developed in Article 762-E of the Tax Code,
is the analysis of the "actual contractual
terms from which, as the case may be, the operations derive, taking into
account the responsibilities, risks and benefits assumed by each contracting party."
The use of the
expression "actual" to define the contractual terms should be
highlighted, since, precisely, the transfer pricing analysis, although it takes
into account the contractual forms, this is only one of the comparability
factors, together with the characteristics of the products or services, the
functional analysis (whether the compensation assigned is commensurate with the
functions assumed, the assets involved and the risks assumed by the parties
involved), the characteristics of the markets or other economic factors that
may affect the operations and the commercial and business strategies, which is
checked by verifying the conduct of the parties, in the execution of the
referred contract, which leads us to the next point, which is the effective
rendering of the contracted services.
5.2.
Deductibility
of expenses incurred in relation to related parties.
Within the framework of the analysis made in the
previous section, we proceed to the analysis of the deductibility of the
expenses paid by ------------------ to
Costa Rica. Costa Rica, in accordance with the provisions of Article 762-G of
the Tax Code, "Expenses for services
received from a related person, such as management, legal or accounting,
financial, technical or any other services, shall be valued in accordance with
the criteria established in this Chapter. The deduction of such expenses
shall be conditioned to the services rendered being effective and producing or
likely to produce an advantage or utility to the recipient.
It follows
from the foregoing, that the first element to consider, in the matter of
expenses for services received from related parties, is the valuation of the
payments made, in accordance with the arm's length principle and the transfer
pricing methodology, a subject exhausted in the previous section, in which the
Tax Administration relied on the analyzed party, without making objections
regarding the amount of the compensation, the comparability of the companies
selected by the analyzed party, or the method used for its valuation.
The second
element to be considered, according to the second paragraph of the referred
provision, is the deductibility of the expenses incurred, which is conditioned
to the verification of two essential elements:
-
That the
services rendered are effective.
-
That they
produce or are likely to produce an advantage or utility to the addressee.
In relation to
the first point, it should be recalled that the main reason that led the Tax
Administration to disregard the amounts paid in this concept was the absence of
supporting documentation that would justify the effective rendering of the
services.
For its part,
the taxpayer's counsel defended the provision of the agreed services,
indicating that the expenses incurred were duly documented and proven
throughout the process, also complying with the deductibility criteria
established by law, explaining that the services provided by this company include
tax services, legal representation, financial services and sales force.
In addition to
the above, the expert appointed by the taxpayer explained the customary nature
of the rendering of services between entities of the same multinational group,
highlighting that the Panamanian company did not have its own personnel
dedicated to the functions of commercial management, marketing and promotion of
products, nor personnel at managerial level in financial matters in its
payroll, which implies that the rendering of those services, essential for the
business, are performed externally (Page 186 of the Court's file).
In relation to the documentary support, he explained that the files
PZF2014.xlsx and PZF2015.xlsx provided in digital format, in response to the
requests for information during the audit, detail the information of the
personnel working in Costa Rica, in charge of commercial and financial
management and administrative support, adding that the job profiles of the
positions described in the referred files, coincide with these functions.
He also stated
that "in conversation with
------------- staff to learn about intra-group services, I was referred to the
staff of those who handle the issues of these services. They explained how it
provides corporate services related to marketing, promotion and
commercialization, as well as product placement and back office support to the
operation of ------", explaining that it "authorizes and manages
the orders placed by customers of the company. authorizes and manages orders placed by
customers of -----, as well as the generation and management of marketing and
sales plans". (Page 187 of the Court's file).
It also
indicated that "within the
documentation reviewed, we were able to verify the payroll reports to the Costa
Rican Social Security Fund (CSSC), which included senior management staff in
sales, marketing and promotion, finance and distribution, such as -------------
(Financial Director), --------------- (Secretary), --------------------
(Comptroller) who were part of the officers of the company" (page 187
of the background file).
In this
regard, it is observed in Annex 6 of the expert report, the monthly
spreadsheets submitted by -------------------. to the Costa Rican Social
Security Fund, corresponding to the months of October 2014 and 2015, in which
the salaried personnel of said company is detailed.
In relation to
the financial information of the parties involved, it stated that in its
financial records ------------ recorded the expenses corresponding to the
services received by ----- -------, and the latter, in turn, recorded income
for technical and administrative services for services rendered to it (note 5
to the financial statements), referring to note 1 to the financial statements,
which explains that "as of 2011, it
focuses on providing global business support and administrative support
services, having transferred the distribution, logistics and warehousing
operation to , in order to consolidate all regional operations. A
reorganization of the operation is generated in which ----- provides corporate
support to --." (Page 187 of the Court's file).
In considering
these arguments, this Court considers that, indeed, it is common to find
companies, within multinational groups, dedicated to the provision of
accounting, legal, financial, administrative or similar services to group
companies, for commercial, administrative, strategic, organizational or other
reasons, which is precisely one of the reasons that led the legislator to refer
expressly to this type of intra-group services in the aforementioned article
762-G.
In this case,
the operational, administrative and personnel capacities of the Costa Rican
company are not in dispute, however, we must reiterate that what is being
analyzed in this case is not the suitability of the company, nor its condition
as a service provider within the group, but the effective provision of the
services described in the agreement signed with ------------------.
In this
regard, this Court has recently ruled, in Resolution No. TAT-RF-070 of 12
October 2020, on the concept of "effective provision of services" in
the context of Article 39 of the 1993 Executive Order, in a dispute relating to
the payment of fees to a local related party.
While this
type of transaction was not subject to the transfer pricing regime (which was
made clear to the taxpayer, who invoked the OECD Transfer Pricing Guidelines in
a case with no international implications), we consider the effect of this rule
and section 762-G to be substantially similar, using very similar language.
In the aforementioned resolution, the
following was clarified:
"...the crucial element in this case is the
actual rendering of services, and the relationship between the value of the
fees and the services received...the analysis of the file does not show either
the amounts paid or the actual rendering of services, and therefore, neither
does it allow to determine the relationship between one point and the other.
By virtue of the foregoing, we cannot agree with the position of the
taxpayer, who seeks to justify, through general comments such as the
relationship between income and expenses, which is not unknown, from a
conceptual point of view, but which, in this case, is not sufficient to support
an objection that falls, from the outset, on evidentiary issues... throughout
the entire process, the taxpayer has not provided evidence that demonstrates,
beyond his arguments, the actual provision of services by.
the determination
of the fees, responds to the formula established in the seventh clause, and
which, by its nature, requires that the borrower, in this case, given the
nature of his obligations, deducts from the amounts to be remitted to the
taxpayer, withholds the amounts corresponding to his fees, so that there is a
large amount that should have been contributed to support the payment of B/ , not because it was or was not valid,
or because it had no contractual support, but because for tax purposes, the
Treasury has no way of proving, in the first place, that the payments were
made, in the second place, that the amounts declared correspond, from a logical
and reasonable perspective, to the services rendered, or that causal nexus,
which the taxpayer's representatives invoke, and which, however, has not been
reliably proven in the file, which is striking, if we consider that this
information should be easily accessible to the taxpayer, especially when among
the obligations of the Administrator, according to the Administration Contract,
is that of keeping the general accounting of the business.
From the above
it is inferred that the verification of the effective provision of the service
will depend on the nature of the same, the contractual terms, and the way in
which it is executed.
In this
regard, the taxpayer's expert acknowledged that "the OECD Guides recognize that the transfer pricing analysis of
intra-group services raises the issue of whether the service has actually been
provided" (referring to para. 7.5), explaining that "recognizing that intra-group services have
actually been provided involves identifying whether the activity performed is
of economic or commercial interest to a member of the group that thereby
strengthens its commercial position and whether an independent company would
have been willing to pay another independent company to perform this activity
or whether it would have performed it directly", stating that
"The strategic and operational value
of the market and sales management and administrative support services received
by ------------- from its related party ----------- is undeniable. Without
these services, the business would not be feasible. "(Page 187 of the
background file).
In relation to
the activities carried out by the company, it further stated that "In comparable circumstances, it is
reasonable to consider that an independent company, dedicated to the
distribution of medicines, which does not have personnel dedicated to sales,
marketing and promotion tasks, would have been willing to pay another company
for the performance of these services", citing paragraph 7.14 of the
Transfer Pricing Guidelines, which expresses itself in the following terms in
this regard:
"Other activities, which may affect the group as
a whole, are those centralized in the parent company or in a group service centre (such as a regional head office) and made available
to the group (or a number of its members). The activities that are centralized
depend on the type of business and the organizational structure of the group
but, in general, usually include administrative services such as planning,
coordination, budgetary control, financial advice, accounting, auditing,
legal services, factoring, IT services; financial services... assistance in the
areas of production, purchasing, distribution and marketing; and human
resource management services, such as recruitment and training. Often, the
group's service centres carry out R&D work or
manage and protect the intangible assets of part or all of the multinational
group. In general, activities of this type are considered to be intra-group
services since they are the type of activities that an independent company
would be willing to pay for, or would execute on its own.
In this
regard, it concluded that, based on the financial information of the company
-------, the supporting documents presented in the DGI audit process, the OECD
Guidelines and the interviews conducted, the company --------------. did indeed
provide corporate services to the local company (Pages 187-188 of the
Tribunal's file).
On the
contrary, the Tribunal's expert witness stated, when answering question 3 of
the questionnaire approved by the Tribunal, that "the Taxpayer has not met its burden of proof in order to demonstrate
the reliability of the service, so the expert witness concludes that there is
accounting and documentary documentation that the service in question was
rendered, but the undersigned cannot [sic] attest that the same were performed
in a substantial and effective manner", adding that upon requesting
clarifying information, he was provided with the working papers of fiscal years
2014 and 2015, in which information was obtained grosso modo, for which reason the following was also requested, without
obtaining a response from the taxpayer:
-
Invoices in
digital format for services received from the Costa Rican affiliate.
-
Details of payments made.
-
Clear
definition of the accounts that make up box 44 in the 2014 and 2015 income tax
returns.
-
Show the
ledgers that make up the account of services received (Page 322 of the
Tribunal's file).
In the same
line, when answering question 5, the Tribunal's expert indicated that "the technically necessary supports have not
been shown with respect to the services rendered by--------------------- . in order to determine whether the
operating margin received by said company is technically correct...With respect
to the service received by the Taxpayer from----------------------------------------------------------- .
in the file there is no information in order to prove that the taxpayer has
complied with this burden of proof", despite having expressly
requested the information (Pages 324-325 of the Tribunal's file).
When
questioned about these answers, in the diligence of delivery of the report, the
expert stated that "According to
what was requested or required during the exercise of the expertise, I was
provided with copies of the invoices, invoices and contracts and with these
documents it can then be validated that there was a service between related
companies, however I could not prove the reliability of it, that is to say the
costs that its related company incurred versus the percentage for the service
it provided to its related company in Panama". Next, he confirmed
having received copies of the audited financial statements of the company
providing the service, as well as access to the transfer pricing study (Page
544 of the Court file).
In line with
the above, the second condition described in the regulations, for the purposes
of the deductibility of payments for intra-group services (that the services
rendered produce or may produce an advantage or utility to the recipient), both
experts referred to the benefit test, indicating, in the case of the court's
expert, that it consists of "knowing
the amount of hours invested by the personnel, an analysis of the functions, if
they would be fixed or variable costs, that is to say that the transaction to
be analyzed must reveal more data to then be compared [sic] with an independent
third party"; On the other hand, the taxpayer's expert agreed that the
benefit test has the objective of reviewing elements that allow to conclude
whether or not the agreed services were performed, stating that "The benefit test is the best tool we have"
(Page 567 of the background file).
However, when
asked by the attorney for the Treasury about the evidence in the file that the
administrative services received were actually rendered, he reiterated what was
stated in his report, i.e. that he observed documentation relating to financial
statements, human resources spreadsheets, financial administrative policies,
which made it possible to request information to document the provision of
services, stating, however, that he did not remember the exact documents in the
file or their depth. In the same vein, when asked if he had access to any
additional supporting documentation, he referred to a detail of expenses
incurred by --------.
.
By virtue of
the analysis made, this Court considers that, in this case, although it is
recognized, from a legal, administrative, business and commercial point of
view, that the rendering of services between entities of an economic group is
common and part of the regular operations of the same, the wording of article
762-G of the Tax Code is clear, by conditioning the deductibility of the
amounts corresponding to this type of operations, to the two requirements
indicated above, precisely because of the risk that represents, from the
perspective of the tax administrations, the valuation of this type of
transactions, both from the perspective of the principle of free competition,
as well as from the verification mechanisms that allow concluding that the
services have been effectively rendered.
A brief
grammatical interpretation of the adjective "effective" implies that
the services were really and truly rendered, so it is necessary to prove, by
means of the evidence permitted by law, that the services were really rendered
(as indicated in the regulations).
In this sense,
the analysis of the procedural evidence, especially the expert reports, leads
us to conclude that, in principle, from the contractual and operational point
of view, the principle of benefit would be complied with, insofar as the agreed
services are necessary for the operation of a company of such dimensions.
However, we must agree with the position expressed by the expert appointed by
the Tribunal, to whom no documentation was submitted that would allow us to
conclude, in an irrefutable or conclusive manner, the effective rendering of
the service.
While the
information contained in accounting records, financial statements and similar
documentation is valuable, the actual delivery of the service involves a more
detailed analysis of the execution of the contract, and the documentation
supporting such reports.
For this
reason, it is striking that, throughout the process, which includes the audit
phase, and all the governmental channels, and even the practice of an expert
evidence, no documents have been provided to support the amounts declared in
this item by the taxpayer. As indicated in the precedent cited in the previous
paragraphs, the lack of supporting information becomes more evident, when
considering that the company that, according to the contract, handles all the
administrative aspects of the local taxpayer, and, in the appellant's words,
has all the necessary information to act as the analyzed party, and in spite of
this, there is no tangible evidence of the execution of the contract, reports,
invoices or steps taken, beyond the spreadsheets and documents that support
that -------- ------------------, is a company that has hired personnel, that
is dedicated to the activity of rendering services and that has a contract, lacking,
however, elements that prove that the services were carried out, and therefore,
it is impossible to properly evaluate the existence of any benefit or the
deductibility of the amounts paid in this concept.
5.3.
Consequences
of not knowing the expenses incurred for intra-group services.
Once the
deductibility of the expense item has been analyzed, we must rule on the
subsidiary requests made by the taxpayer's attorney, in case the decision to
disregard the amounts corresponding to such operation is maintained:
-
That the
disregard of the expenses paid had as a limit the median of the interquartile
range, considering that it was a double adjustment, which it qualified as
incompatible, as it took the taxpayer's operating margin out of the arm's
length range, and consequently, the taxpayer's operating margin should be
adjusted in this sense;
-
That the
disallowance of expenses be pro-rated, according to the proportion of
local/foreign source expenses.
In the
following, we will proceed with the analysis of both points, separately, and
then we will draw our conclusions in this regard.
5.3.1.
Duplicity and
incompatibility of the adjustments made.
In relation to
this point, the taxpayer's counsel argued in his appeals, that the Tax
Administration makes two incompatible adjustments, by disregarding the costs
according to the adjustment made to the taxpayer's operating margin, and then
adjusting its profit again, by objecting to the administrative expenses paid to
its related party in Costa Rica, taking the profit to a margin much higher than
the arm's length margin.
For its part,
the Treasury defends its action, distinguishing between the adjustment to the
financial information, resulting from the transfer pricing analysis (in this
case, focused on the method and comparables used), and the objection to the
expenses paid under Article 762-G of the Tax Code.
In order to
determine which party is right, it is necessary to consult the applicable
regulations, starting with Article 762-F of the Tax Code, which develops the
methodology for the transfer pricing analysis, establishing five methods for
the verification of the arm's length principle (methods based on the price or
on the gross or net profits of the taxpayer), clarifying the following:
"Article 762-F. Methods of applying the principle of free
competition.
From the application of any of the methods indicated
in this article, a range of prices or amounts may be obtained, when there are
two or more comparable transactions. These ranges shall be adjusted through the
application of statistical methods.
If the taxpayer's prices or profit margins are within
these ranges, they will be considered adjusted to the prices or amounts of
transactions between independent parties.
In the event that the taxpayer is outside the adjusted
range, the price or profit margin in transactions between independent parties
shall be deemed to be the median of such range."
In accordance
with the foregoing, Article 762-B of the Tax Code empowers the General
Directorate of Revenue to make the corresponding adjustments in order to comply
with the principle of full competence, in the following terms:
"Article 762-B. Powers of the Directorate General
of Revenue. The Directorate General of Revenue may verify that the operations
carried out between related parties have been valued in accordance with the
provisions of the preceding article and shall make the corresponding
adjustments when the price or amount stipulated does not correspond to what was
agreed between independent parties.
in comparable transactions, resulting in lower
taxation in the country or a deferral of taxation, as the case may be."
(Emphasis supplied)
From the reading of the above rules, it is inferred
that the Tax Administration is empowered to make transfer pricing adjustments,
and that these adjustments, in case of concluding that the taxpayer's prices or
margins are outside the arm's length range, in accordance with the methodology
set forth in the aforementioned article 762-F, shall bring the taxpayer to the
median of the arm's length range (usually calculated by the interquartile
method).
In addition to
the above, the final part of the referred article 762-F, indicates that "For the effects of this article, the income,
costs, gross profit, net sales, expenses, operating profit, assets and
liabilities, shall be determined based on the principles established in the
International Financial Reporting Standards, accepted and recognized by the
Republic of Panama", which leans in favor of the position of the Tax
Administration, in the sense that the adjustments made refer to the financial
information of the taxpayer, contained in its Financial Statements.
On the other hand, article 762-G of the
Tax Code, as previously analyzed in section 5.2., contains two important
elements in the matter of services rendered between related parties:
1. The assessment of remuneration according to the arm's
length principle;
2.
The
conditioning of the deductions of this type of expenses, to the effective
provision and benefit (at least potential) by the recipient of the services.
This
distinction is important, to the extent that, in the first case, it refers to
the criteria for the valuation of the amounts paid (expenses), based on the
rules developed in Chapter IX of Title I of Book IV of the Tax Code, that is,
the methodology and analysis of transfer prices, which, as we have said, is
based on the financial information of the taxpayers, The second refers
specifically to a limitation to the deductions made as a result of this type of
services, to the effective rendering of these services, and to the verification
that the same produce or may produce an advantage to the recipient, which has
been identified by the experts as the principle of benefit.
On this point,
it is important to highlight, that in Resolution no. TAT-RF-083 of November 8,
2017, this Court ruled on the inclusion of the objections of costs and
expenses, made in the framework of a comprehensive audit, in the adjustment to
the financial information of the taxpayer, resulting from the transfer pricing
analysis, concluding, in this regard, the following:
"Having previously ruled on the authority of the
Tax Administration to make transfer pricing adjustments, based on Article 762-B
of the Tax Code, we will now refer to the incorporation of the amounts
resulting from the findings of the comprehensive audit for purposes of the
transfer pricing adjustment.
In this regard, the taxpayer's counsel pointed out
that such amounts, not being firm, should not have been used for such
calculation, while the Tax Administration's counsel defended this action on the
fact that such adjustment in fact suits the taxpayer and that to the extent
that the challenged costs and expenses were considered, they should be
recalculated, since this results in a decrease in the operating margin.
In our opinion, it would be contradictory to do a
whole audit work (both comprehensive and transfer pricing) and not use the
results for the calculation of the operating margin and the taxable income
of the taxpayer, remembering that the purpose of the transfer pricing
regime is precisely to make the necessary adjustments when the taxpayer's
income is impacted by transactions between related parties, which in turn is
related to the purpose of the additional liquidations, a mechanism historically
enshrined in our legislation to adjust the true amount of the taxpayer's
taxable income, when it is considered that the returns filed are not clear,
certain or accurate, is related to the purpose of the additional liquidations,
a mechanism historically established in our legislation to adjust the true
amount of the taxable income of the taxpayer, when it is considered that the
returns filed are not clear, certain or accurate, or that they have been filed
in contravention of the provisions of the Tax Code, specifically articles 718,
719 and 720, through the practice of all those investigations or proceedings
that are considered necessary and useful.
Although the transfer pricing regime goes even further
by considering the economic reality of the transactions, it should be noted
that the amounts of the transactions with related parties are part of the
income tax return, and any adjustment in the amounts declared (both in this and
in the 930 report) generates an impact (positive or negative) on the taxpayer's
taxable income.
By virtue of the foregoing, we consider the inclusion
of the findings of the integral audit to be correct, with the proviso that the
taxpayer has the resources contemplated in the governmental channels to enforce
its rights, as it has done in this case.
Having clarified the above, we have that since it has
been proven that the amounts objected to in the comprehensive audit were
partially supported, the taxpayer's operating margin should be adjusted again
based on the analysis performed in the second instance to 3.97% (median), in
order to determine the adjusted amount based on the amounts actually supported
by the taxpayer.
However, before proceeding, we must refer to the
adjustment made by the Tax Administration to the financial information of the
taxpayer's distribution segment ...in which the cost of sales presented by
the taxpayer is reduced from B/.3,786,498.41 to B/. 3,749,096.61 and within the
operating expenses, the line item of other expenses was reduced from
B/.676,258.76 to B/. 506,828.75, increasing the operating profit from -
B/.351,860.54 (-6.95%) to - B/.145,028.73 (-2.87%), to then make the adjustment
from -2.87% to 3.97% ...which has been sustained by the Tax
Administration's attorney as a way to avoid double taxation of the taxpayer and
that the discarding of costs and expenses in fact benefits it, by decreasing
the difference between the real operating margin vs. the one of full
competition.
In this regard, the challenged act details "That
as a result of the comprehensive audit deficiencies were found in the amounts
declared by the taxpayer under Other Costs and Other Expenses for the 2012
period, detailed in the first section of this resolution, the DGI proceeds to
adjust the financial information of the distribution segment submitted
by the taxpayer, detailed in Table 8 of this resolution, using the same
segmentation criteria of the taxpayer. This adjustment modifies the taxpayer's
profit indicator called operating margin for the 2012 tax period, as detailed
in Table 10." (Emphasis
supplied)
As can be
seen, in the cited case, the Treasury incorporated the objections made to the
costs and expenses items (partially revoked in the second instance), for
purposes of calculating the taxpayer's operating margin, which was endorsed by
the Court and considered when making the corresponding calculations.
By virtue of
the above, we consider that, although there is no legal impediment for the tax
authorities to adjust the taxpayer's financial information, resulting from the
transfer pricing analysis, and also to object to the deductibility of expenses
incurred for intra-group services, it would not be fair to the taxpayer that
both adjustments are applied divorced from each other, ignoring the impact that
the disregard of a cost/expense has, not only on the taxpayer's income, but
also on its profits, which may result in a result that is outside the arm's
length range, as the plaintiff argues.
In the same
line, it would be contradictory for the Tax Administration to consider, in the
cited precedent, the amounts objected to in the integral audit, for purposes of
calculating the taxpayer's operating margin, and in this case it refuses to do
so, alleging that these are two completely different things.
On the other
hand, it should be remembered that the purpose of the adjustment to the
financial information is that the indicator determined by the transfer pricing
analysis is aligned with the arm's length range, and otherwise, to bring it to
the median of such range. In the existing precedents in our country, the tax
authorities usually make the transfer pricing adjustments, by adjusting the
cost line (see resolutions n.TAT-RF-105 of December 12, 2019; TAT- RF-062 of
September 10, 2020), however, this adjustment must also take into account the
method used, which in this case, according to the analysis made by the Tax
Administration, is the transactional net margin, therefore, the observation made
by the taxpayer's attorney is relevant, in the sense that a double adjustment
is made, by deducting amounts from the cost line,
without considering that the objection to the expense line, for deductibility
reasons, affects its financial situation, in the same way that the transfer
pricing adjustment would do.
Without
prejudice to the foregoing, we must clarify that the adjustments to the
financial information must use, precisely, the financial information, which
leads us to disagree with the decision of the taxpayer's expert to use the
information of the income tax return, for the calculation of the operating
margin, knowing that there are quantitative and qualitative differences with
respect to the financial information (page 565 of the Tribunal's file), and
even with the information contained in the transfer pricing studies, which
makes his answers to questions 1 and 2 less reliable, since the information
used to determine the interquartile range is based on financial information
(not tax information) of the comparables.
This situation
leads to the fact that, beyond the fact that both experts agreed that the Tax
Administration's ignorance of the expenses has an impact on the taxpayer's
operating margin, there are differences as to the numerical value of the same,
in view of which, we must indicate that, for the purposes of calculating the
referred indicator, we agree with the calculation made by the Tribunal's
expert, who, in his Table 60 (Page 325 of the Tribunal's file) calculates the
operating margin, based on the taxpayer's financial information and the
objection to the expenses item made by the Tax Administration, giving as a
result, a 4.69% for the 2014 period and 30.64% for the 2015 period, as will be
seen below.
5.3.2.
Apportionment
of disputed amounts for expenses paid to Pfizer Zona Franca (Costa Rica).
In relation to
this point, it is necessary to indicate that the taxpayer is located in the
Colon Free Zone, and that, according to his income tax returns, his proportion
of local/foreign source income was as follows:
Period |
2014 |
% |
2015 |
% |
Deductible expenses for internal operations. |
10,495,411.70 |
17.25 |
13,942,625.42 |
17.69 |
Expendituresfrom foreign
source u external operations. |
50,352,350.93 |
82.75 |
64,880,871.80 |
82.31 |
Total
expenses |
60,860,386.95 |
100 |
78,823,497.22 |
100 |
Elaboration: TAT.
Source: 2014 and 2014 income tax returns (Fojas 3-4; 29-30 of the background file).
By virtue of
the foregoing, the taxpayer's attorney has requested that, if the
non-deductibility of the expenses paid to the related party in Costa Rica is
maintained, the proportion of expenses attributed to domestic operations be
taken into account, at the rate of 17.25% (2014) and 17.69% (2015).
On the other
hand, the attorney for the tax authorities clarified that, of the challenged
expenses, only B/.10,495,411.70 (2014) and B/.13,942,625.42 (2015), correspond
to deductible expenses for domestic operations, according to box 69 of their
income tax returns, which represents, according to the court's expert, 17.25%
and 17.69% respectively (Page 604 of the Court's file).
In this sense,
the analysis of the challenged act, evidences that the tax authorities do not
allude to this amount, but to the totality of the amounts paid for the services
paid, for B/.51,872,483.00 (2014) and B/.59,846,318.00 (2015), going directly
to determine the income tax to be paid, based on all the objections raised
(including those of transfer pricing).
In fact, it
was not until the presentation of the final pleadings that the attorney for the
tax authorities explained how the amounts used to calculate the tax payable
were calculated (Tables 12 and 13 of the contested act at page 439 of the
background file), summarizing the calculation of the transfer pricing
adjustments, applied to the line item of costs and the non-deduction of
expenses incurred, according to article 762-G of the Tax Code, as follows:
Table 2: Explanation of Increase in Taxpayer's Taxable Income due to
PT's Adjustment to Expense Deduction under 762-G CF (Adjustment 2)
Source |
Detail |
2014 |
2015 |
F=Note11States FinancialsSheet 259 file |
AdministrativeServices Inter-Company |
51,872,483.00 |
59,846,318.00 |
G= DJR Casillas 69/64 |
Expense
Ratio Total
Deductible Expenses for domestic operations. |
17.25% |
17.69% |
H=F*G |
Total Expenses to be added to Taxpayer's Taxable
Income (Adjustment 2) |
8,945,442.20 |
10,585,863.7 |
|
|
|
|
In this
regard, this Court has repeatedly indicated to the tax authorities that their
rulings should be as clear as possible, in order to safeguard the taxpayer's
right of defense (see Resolution No. TAT-RF-083 of November 8, 2017 and
Resolution No. TAT-RF-002 of January 10, 2020).
By virtue of
the foregoing, we have that, effectively, the objection made, for purposes of
calculating the additional Panamanian income tax liquidation, would be
delimited by the proportion corresponding to the costs and expenses related to
domestic operations, which was taken into account by the Tax Administration, as
explained by the tax authority's attorney.
6. Summary of the conclusions of the
substantive analysis carried out in the second instance.
The following is a summary of the main
conclusions of the second instance analysis for the benefit of the reader:
a)
The tax
authority's position regarding the segmentation of the taxpayer's distribution
activity was accepted, therefore, the analysis of the purchase and sale
transactions of inventory for distribution will be aggregated.
b)
Likewise, the
use of the transactional net margin for the purchase and sale transactions of
inventory for distribution is confirmed, for the reasons previously stated.
c)
For the
purposes of calculating the interquartile range, the companies - ---------------. and ------------. are
accepted as comparable, maintaining the discarding of the companies ------------ and -----------.
d)
With respect
to the operation of services received from the related party abroad, Costa Rica
is accepted as the analyzed party, and the analysis made in the transfer
pricing studies is considered valid, since there are no objections in this
respect.
e)
The
non-deductibility of the expenses paid in this concept is maintained, in the
terms set forth in the contested act and the documentation in the file, by
virtue of the documentary deficiencies related to the effective rendering of
the service, considering it, however, for the purposes of calculating the taxpayer's
operating margin.
7.
Calculation of
the interquartile range according to second instance analysis.
Based on the analysis carried out so far,
and summarized in the previous section, we proceed to calculate the interquartile
range, as follows:
Table 7.
Calculation of the interquartile range. Purchase and sale of inventory for
distribution.
Comparable
companies |
Operating
Margin |
|
2014 |
2015 |
|
----------------------- |
1.11% |
0.66% |
--------------------- |
1.57% |
1.72% |
-------------------- |
1.81% |
1.78% |
------------------------- |
4.12% |
- |
--------------- |
7.09% |
8.62% |
|
|
|
Interquartile range of the Operating
Margin of the comparables. |
||
|
|
|
Lower
quartile |
1.57% |
1.46% |
Medium |
1.82% |
1.76% |
Top
quartile |
4.12% |
3.50% |
|
|
|
Operating Margin (OM) of the company
under analysis |
||
-------------------------- |
-29.83% |
-9.40% |
Elaboration: TAT.
Source: Expert reports, Resolution No.
201-5891 of 4 September 2018, studies.
transfer pricing 2014 and 2015 and
financial statements submitted by the taxpayer.
8.
Transfer
pricing adjustment according to second instance analysis.
Based on the
above figures, and the analysis made in the preceding paragraphs (see section
5.3.1. above), we proceed to make the adjustments to the financial information
of the taxpayer, considering the aggregate amounts based on their
non-deductibility, corresponding to expenses incurred against its related party
in Costa Rica, at the rate of B/.51,872,483.00 (2014) and B/.59,846,318.00
(2015), in order to determine if it is within the interquartile range
corresponding to the 2014 and 2015 periods described in the previous section.
Adjustment to the taxpayer's 2014 financial
information, considering the objection to expenses based on Article 762-G of
the Tax Code.
Concepts |
Financial
Statements Auditees |
Setting
information 762-G |
Income |
150,283,428 |
150,283,428 |
Cost of
Sales |
134,386,492 |
134,386,492 |
Gross Profit |
15,896,936 |
15,896,936 |
Operating
expenses |
60,726,009 |
8,853,526 |
Total
Costs and Expenses |
195,112,501 |
143,240,018 |
Operating profit |
B/. (44,829,073) |
7,043,410 |
Operating
Margin |
-29.83% |
4.69% |
Table 9. Adjustment to the taxpayer's 2015 financial
information considering the objection to expenditures based on section 762-G of
the Tax Code.
Concepts |
Financial
Statements Auditees |
Financial
Information Adjusted |
Income |
149,469,109 |
149,469,109 |
Cost of
Sales |
88,363,921 |
88,363,921 |
Gross Profit |
61,105,188 |
61,105,188 |
Operating
expenses |
75,157,553 |
15,311,235 |
Total
Costs and Expenses |
163,521,474 |
103,675,156 |
Operating profit |
B/. (14,052,365) |
45,793,953 |
Operating
Margin |
-9.40% |
30.64% |
As can be
seen, when considering the objection made under Article 762- G of the Tax Code,
the taxpayer is, in both cases, above the interquartile range, as indicated by
the taxpayer and confirmed by the experts, therefore, it would not be necessary
to make an adjustment to the median in this case.
9.
Tax to be paid.
By virtue of
the analysis carried out, we proceed to verify the calculation of the income
tax payable by the taxpayer, as a result of the objection to the expense item,
taking as reference tables 12, 13 and 14 of the challenged act and the
complementary explanations provided by the tax authority's attorney, previously
mentioned in this resolution (see section 5.3.2.).
Table 10. Income tax payable according to
second instance analysis.
DETAIL |
2014 |
2015 |
Net Taxable Income from Reported Domestic
Transactions |
(5,713,285.64) |
(1,380,138.87) |
More: Increase according to research |
8,945,442.20 |
10,585,863.7 |
New Net Taxable Income according to research |
3,232,156.56 |
9,205,724.83 |
Tax Caused according to Investigation |
808,039.14 |
2,301,431.21 |
Less: Tax according to declaration |
315,561.70 |
322,369.18 |
Income Tax Payable |
492,477.44 |
1,979,062.03 |
Table 11. Determination of Complementary
Tax payable 2014 and 2015.
DETAIL |
2014 |
2015 |
TaxableTaxableIncomeFromOperations Domestic transactions declared (line 116
DJR) |
(5,713,285.64) |
(1,380,138.87) |
More: Increase according to Research (Int. Op. -
17.25%) |
8,945,442.20 |
10,585,863.7 |
New Net Taxable Income according to research |
3,232,156.56 |
9,205,724.83 |
Tax Caused according to Investigation |
808,039.14 |
2,301,431.21 |
Balance Resulting from Domestic Transactions |
2,424,117.42 |
6,904,293.62 |
20% of the Balance Resulting from Domestic
Transactions declared |
484,823.48 |
1,380,858.72 |
Taxable Income from Foreign Operations declared (line
117 DJR) |
-35,230,767.01 |
-17,060,342.70 |
Plus: Increase according to research (Ext. Op.
82.75%) |
42,927,040.80 |
49,260,454.30 |
New Determined Net Taxable Income |
7,696,273.79 |
32,200,111.60 |
20% of the resulting balance of exempt
and foreign Taxable Income |
1,539,254.76 |
6,440,022.32 |
Total Resulting Balance |
B/.2,024,078.24 |
B/.7,820,881.04 |
10% of
Complementary Tax |
202,407.82 |
782,088.10 |
Tax
according to Declaration |
- |
- |
Complementary Tax Payable |
B/. 202,407.82 |
B/. 782,088.10 |
10.
Substantive decision
By virtue of the analysis carried out thus
far, it is incumbent upon this Court to amend
the contested act, as described below.
In view of the
foregoing, the TAX ADMINISTRATIVE COURT, in Plenary Session, and in exercise of
the powers conferred by Law, resolves:
FIRST: MODIFY the first point of Resolution no. 201-5891 of
September 4, 2018, issued by the General Directorate of Revenue of the Ministry
of Economy and Finance, in the sense of ISSUING
additional liquidation in the name of the taxpayer.--------------------------------------------------------------------------------------------- --. , with RUC -------------------------, for the amount of FOUR
HUNDRED NINETY TWO THOUSAND FOUR HUNDRED SEVENTY SEVEN BALBOAS AND 44/100
(B/.492,477.44) nominal and FORTY
NINE THOUSAND TWO HUNDRED FORTY SEVEN BALBOAS AND 74/100 (B/. B/.49,247.74) surcharge for Income
Tax corresponding to the period 2014; the sum of TWO HUNDRED TWO THO THOUSAND FOUR HUNDRED SEVEN BALBOAS AND 82/100
(B/. 202,407.82) nominal, and TWENTY THO THOUSAND AND TWO HUNDRED FORTY BALBOAS
AND 78/100 (B/. 20,240.78) surcharge for
Income Tax corresponding to the period 2014; and TWO HUNDRED TWO THOUSAND FOUR HUNDRED FORTY BALBOAS AND 78/100 (B/. 20,240.78) surcharge for
Complementary Tax for the 2014 tax period; the sum of ONE MILLION NINE HUNDRED SEVENTY-NINE THOUSAND SIXTY-TWO BALBOAS AND
03/100 (B/. 1,979,062.03) nominal, and ONE
HUNDRED NINETY-SEVEN THOUSAND NINE HUNDRED SIX BALBOAS AND 20/100 (B/. B/.
197,906.20) surcharge for Income Tax corresponding to the 2015 period; the
sum of SEVEN HUNDRED EIGHTY TWO THO
THOUSAND EIGHTY EIGHT BALBOAS WITH 10/100 (B/. 782,088.10), plus SEVENTY EIGHT THOUSAND TWO HUNDRED EIGHT
BALBOAS WITH 81/100 (B/.78,208.81) surcharge for Complementary Tax for the
2015 fiscal period, as summarized below:
DETAIL |
2014 |
2015 |
Net
Taxable Income Declared |
-5,713,285.64 |
-1,380,138.87 |
More: Increase according to Research |
8,945,442.20 |
10,585,863.70 |
New Taxable Income |
3,232,156.56 |
9,205,724.83 |
Tax Accrued According to Investigation
25% Tax Accrued According to Investigation 25% Tax Accrued According to
Investigation 25% Tax Accrued |
808,039.14 |
2,301,431.21 |
Less: Tax according to Declaration |
315,561.70 |
322,369.18 |
Difference Payable |
492,477.44 |
1,979,062.03 |
More: Complementary Tax |
202,407.82 |
782,088.10 |
Total
Tax |
B/.694,885.26 |
B/.2,761,150.13 |
Surcharge 10% (Article 1072-A of the
Code) Prosecutor) |
69,488.53 |
276,115.01 |
Total
Tax Payable |
B/.764,373.79 |
B/.3,037,265.15 |
SECOND: NOTICE that this resolution is effective from the date of its notification and
that with it the governmental channels are exhausted, so that the taxpayer may
bring an action before the contentious-administrative jurisdiction of the Third
Chamber of the Supreme Court of Justice, according to the forms provided by
law.
THIRD: TO ORDER the closing and filing of the file, once the present resolution has been
executed and to return the background file, together with an authenticated copy
of the same to the General Directorate of Revenues of the Ministry of Economy
and Finance.
BASIS OF LAW: Articles 694, 695, 718, 719, 720, 762-A to 762-K, 1238, 1238- A of the
Tax Code; Article 156 of Law 8 of 2010; Article 67 of Executive Decree 170 of
October 27, 1993, Executive Decree 958 of 2013.
Notify and
comply,
Magistrate
Magistrate
Magistrate
Secretary General