In April 2025, the Council of State of Colombia, the highest authority in contentious-administrative jurisdiction, issued a key ruling on Transfer Pricing, resolving the dispute in the case of Puerto Arturo S.A.S. vs DIAN (File No. 25000-23-37-000-2021-00357-01). The litigation revolved around the Transfer Pricing methodology employed by the company to demonstrate the income derived from the sale of emeralds to a related party abroad, and, particularly, the validity of using comparables with losses in the economic analysis.
Background and Opposing Positions
Puerto Arturo S.A.S., a mining company engaged in the export of emeralds, applied the Comparable Uncontrolled Price (CUP) method to demonstrate that the income obtained in its related party transactions complied with the Arm’s Length Principle. Therefore, it compared the average price per carat of the emeralds sold with the values determined by independent experts in the Colombian market.
The DIAN (Dirección de Impuestos y Aduanas Nacionales – National Directorate of Taxes and Customs) objected to both the method and its application. It argued that the emeralds were not sufficiently comparable in quality and condition to apply the CUP reliably. Consequently, it opted to apply the Transactional Net Margin Method (TNMM), using an MOCG profitability indicator of operating profit on costs as a reference. Based on this new methodology and an alternative benchmarking study, the administration adjusted the company’s reported income upward, using the median of the interquartile range as a reference.
Technical Debate: Can Comparables with Losses Be Used?
The debate focused on the operating losses of several companies selected in the DIAN study as comparables for the TNMM during the period analyzed. Management decided to exclude them without a detailed analysis, arguing that their inclusion distorted the range and affected the reliability of the result.
Puerto Arturo questioned this automatic exclusion, arguing that the losses of these companies were not persistent, nor did they reflect a lack of functional comparability. According to the OECD Transfer Pricing Guidelines, which apply in Colombia, entities with losses can be validly used as comparables if they meet functional criteria and are not affected by extraordinary circumstances.
Ruling Grounds: Substance over Formality
The State Council ruled in favor of Puerto Arturo S.A.S., establishing that the automatic exclusion of comparables with losses lacks technical grounds if it is not supported by a qualitative analysis demonstrating why such companies do not reflect similar market conditions. The court pointed out that the tax authority must technically and economically support why an entity with losses is not comparable, rather than simply assuming that negative results disqualify it.
This approach reinforces the substantive interpretation of the Arm’s Length Principle aligned with the court’s previous case law (e.g., Judgment No. 25000-23-37-000-2017-01997-01) and the international standard requiring a comprehensive examination of functions, assets, and risks, i.e., the comparability analysis should not focus exclusively on the margins obtained but on the economic structure of the tested companies.
Relevance for Transfer Pricing Practice in Colombia
The State Council’s ruling sets a significant precedent for future audits in Colombia. First, it confirms that non-traditional methods, such as the MTU, must be technically applied and not with generic assumptions. Second, it limits the possibility of excluding comparables simply because they show isolated losses, unless there is evidence that those losses distort comparability. Third, it underscores the need for both the DIAN and taxpayers to thoroughly document their economic analyses and support the inclusion or exclusion of comparables with objective criteria.
In addition, the ruling states that a technically defensible sample must support the use of the interquartile range, and that extreme results, whether positive or negative, cannot be arbitrarily excluded without affecting the analysis’s neutrality.
Conclusión
The ruling in the Puerto Arturo S.A.S. case reinforces a more technical and less discretionary approach to the application of Transfer Pricing rules in Colombia. By requiring the tax authorities to provide a higher consistent support and methods, taxpayers are protected from tax adjustments based on subjective criteria, promoting a more reasonable Arm’s Length Principle application. In a regional environment where Transfer Pricing disputes are increasing, this ruling enhances legal certainty and reinforces convergence towards consistent international standards.
Source: TPCases