Comments on the Tax Court Resolution N°05562-1-2021

February 18, 2022

Tax Court Resolution N°05562-1-2021 stipulates documentation supporting that the transfers were as “assigned capital” to qualify an amount remitted from a foreign parent company to its Peruvian branch as “assigned capital” and not as a “loan.”

In this case, the taxpayer argues that the monetary deliveries by its Parent Company were as assigned capital. However, the accounting record and the respective affidavit indicated the existence of a mutual record in the liabilities as account payable. Management argues that this was a loan and not an assigned capital.

The taxpayer argued that the existence of loans cannot be asserted, because finally the Parent Company and its branch would be the same legal entity, whereas SUNAT and the Tax Court denied, due to article 14 of the Income Tax Law, which states that the Parent Company has its own tax personality, different from that of its branches.

Thus, since they are “economically related” companies, the rules of “transfer pricing” have been applied and are applicable. Since the loan was qualified as a loan with a rate below the interquartile range (a loan with rate 00, i.e., free of charge), it has been concluded that the non-domiciled taxpayer’s (Parent Company) income tax is due (via 30% withholding), applying it to the market interest rate on the value of the supposed loan delivered.

The Tax Court has concluded that “other relevant elements of the operation have not been considered to establish a financial transaction as ‘comparable’ and that may impact on the determination of the interest rate to be charged, such as the solvency of the debtor and the risk rating.”

Therefore, the Tax Administration is mishandling the setting of comparables in transfer pricing.

The debate is whether there can be loans (with all their tax consequences) between a parent company and its branch. In the analysis, the autonomy of the tax law must be superimposed on the corporate rules that state that a branch is only an “arm of the parent company” or an assigned capital of the parent company.

As it is recalled, Article 396° of the LGS states that:

“(…) a branch is any secondary establishment through which a company carries out, in a place other than its domicile, certain activities included in its corporate purpose. The branch has no legal personality independent from its principal. It is endowed with permanent legal representation and enjoys management autonomy within the scope of the activities assigned to it by the principal, according to the powers granted to its representatives”.

In contrast, there is the legal tax status of the branch, which is different from its parent company. Consequently, the economic transactions between a parent company and its branch would be considered to be carried out between two different entities. Indeed, article 14 of the Income Tax Law classifies branches as “taxpayers” of such tax, being taxed only for their Peruvian source income.

We must have the accounting and other additional documents clear if we want to prove that an amount sent by a parent company to its branch is a contribution. Otherwise, the contingency for reclassification as “loan granted” will be evident, and the transfer pricing rules of article 32°-A of the Income Tax Law will apply to the linkage of the parties, even with no interest collection.

Source: Tributación al Día 17/02/22