On January 15, 2024, the Fifth Chamber of Constitutional and Social Transitory Law of the Supreme Court published its Cassation Appeal No. 19941-2023, which highlights that the discretionary powers of the Tax Administration should not be arbitrary in the case of the Transfer Pricing to be referenced.
Background
- When the taxpayer applies the Transactional Net Margin (TNM) methodology, this makes comparability adjustments to the financial statements of the companies selected as comparables in its Technical Transfer Pricing Study (TTPS) for the fiscal year 2019.
- The taxpayer indicated that the adjustments performed to the financial information of the comparables corresponded to the nature of the transactions performed in the reporting fiscal year, thus enhancing its comparability.
- Conversely, the Tax Administration rejected the comparability adjustments due to a lack of support and for not having proven that the results of the currency IFDs contracted by the comparables did not affect its operating results.
- It should be noted that the Tax Court, as SUNAT, rejected the comparability adjustments proposed by the taxpayer, given that the adjustments performed must eliminate the differences between the characteristics of the compared companies that significantly affect the profitability indicator and, in its opinion, none of the differences between the compared situations can substantially affect the analysis target (either the price or margin).
According to the previous issue, the financial information of Alconix Corporation, Empire Resources, Inc., Hanwa Co. Ltd., and Porn Prom Metal PCL, companies selected as comparable by the taxpayer, based on hedge accounting, does not explain the purpose or support the adjustments to the provisions for embedded derivative and fair value hedge performed to their audited financial statements.
Selection of Comparable Companies
- SUNAT accepts only 3 comparables out of the 7 proposed by the taxpayer, which the Supreme Court indicates to be unreasonable and disproportionate that the Tax Authority intends to compare the operating profit of the taxpayer, which includes the losses of the IFDs derived from the commercialization of commodities (hedge IFD’s), with the operating profit of those companies that do not record this type of losses for hedge IFD’s but for currency IFD’s (forwards), which is recorded after the operating profit.
- The Supreme Court points out that SUNAT cannot simply accept the companies proposed by the taxpayer and, in turn, object to the comparability adjustments proposed by the Company to enhance comparability. Therefore, it indicates that it should have maintained those comparability criteria to perform its repairs or find transactions or companies actually comparable within the framework of its obligation to find the material truth.
- According to the Supreme Court, although the taxpayer must mainly bear the burden of proof to support the study carried out, this cannot lead to support the adequacy of the adjustments or disregard thereof made by SUNAT, given that, in such situations, the burden of proof to support its actions would correspond thereto.
Functional Currency
- Finally, the Supreme Court points out that, according to paragraphs 4 and 6 of subsection e) of Article 32 -A of the Income Tax Law and Articles 111 and 113 of its Regulations, sufficient regulations are prescribing and supporting the provisions of the Superior Chamber when indicating that the financial statements used for the preparation of the Transfer Pricing reports must be expressed in their functional currency to determine the margins or ratios corresponding to the application of the transactional net margin method.
Adjustments Applied by the Taxpayer
- Exclusion of the results of hedges related to material in stock and transit to extract the cost or profit recognized in the results of the year and originated by the renewals of the hedging IFDs related to the mineral concentrates not sold at the balance sheet date.
- Adjustment in the provision of the embedded derivative made to reflect the value of business transactions using the international price of metals as a reference at year-end.
- Fair value hedge adjustments performed to reflect the fair value of the hedging IFDs at year-end that were outstanding settlements because their due date had not been verified.
