Tax Court Resolution No. 02387-1-2023, published on March 29, 2023, addresses the case where, under the application of the Transfer Pricing regulations, the Administration orders to repair the (i) cost of sales and (ii) the free loan of the taxpayer. The observed cost of sales was composed of purchases of products from its related companies, while the observed loan was free of charge in favor of a company related to the taxpayer.
The Resolution addresses several points regarding the Transfer Pricing adjustment procedure, among which the following stand out:
Comparability Analysis
Regarding the first issue, the taxpayer proposed ten companies for the comparability analysis, of which the Administration rejected three due to the restructuring or loss process they were, thus discarding their comparability with the taxpayer.
The Tribunal concludes that the discarding of the three comparable companies was not based on a correct comparability analysis. Based on paragraphs 3.64 and 3.65 of the OECD Guidelines, the Court highlights that “the idea that transactions generating losses can never be comparable must be rejected.” Therefore, due to the partial wrongness of the analysis, it concludes that the Transfer Pricing analysis of the Administration could not be validated.
Free Loan. Presumptive Interest or Transfer Pricing?
Regarding the second issue, the taxpayer argued that the evidence to the presumption contrary of interest applied to the referred loan, regulated in Article 28 of the Income Tax Law. On the other hand, both the Administration and the Court agree that, due to the loan between related parties, it is subject to the Transfer Pricing regulations.
Necessity of Tax Loss
The taxpayer argued that the Transfer Pricing adjustment only applies when a lower income tax is determined, i.e., a tax loss, which, according to the Court, is correct due to the provision included in paragraph c) of Article 32-A of the Income Tax Law. Conversely, in this particular case, there was a tax loss.
Additional Income Tax Rate
Based on the aforementioned issues, the Administration determined that an indirect provision of income not subject to subsequent tax control was configured, applying the additional rate of 4.1% regulated in Article 55 of the Income Tax Law. Conversely, the Court considers that the Administration would have incorrectly applied the additional rate. It points out that “the mere formulation of a Transfer Pricing adjustment repair is not an indirect provision of income not subject to subsequent tax control,” indicating that the provisions of paragraph g) of Article 24-A of the Income Tax Law must be verified for this purpose.
By this Resolution, the Court develops relevant aspects to be considered by the Administration in its audits. The criteria established by the Tax Court are binding for the Administration, for which reason an available accounting and tax advisory service determine their taxes under the law.