Resolution No. 04508-9-2022 outlines the criteria for extraordinary expenses in the application of transfer pricing rules during an international economic crisis.
Below is a summary of the case:
Tax Court Ruling
Company: Importer and distributor of automobiles and auto parts
Fiscal Year: 2009
Transaction Under Review: Import of goods from related parties
Transaction Amount: S/ 970,488,239.00
Details of the 2009 Transfer Pricing Report (EPT) Submitted by the Company:
- Party under review: The Company
- Selection of the comparison period: Financial information covering a 3-year period for comparable independent companies was used (2007–2009).
- Method used: MNT with segmented financial information (analysis of the segment of sales exclusively to third parties, which does not include sales to related parties (Operating Income / Sales)).
- Determination of the interquartile range of market profitability: Lower quartile 3.24%, median 5.55%, and upper quartile 7.39%.
- Calculation of the operating margin for the company under review: To calculate the operating margin, an adjustment was made to exclude “extraordinary expenses” related to commissions and incentives in the amount of S/ 44,015,891.00
Management’s Position: Management disagrees with the adjustment to the operating margin that excludes “extraordinary expenses” for commissions and incentives, as it was verified that these were not atypical or extraordinary expenses. Calculating the Company’s new operating margin without considering the adjustment for “extraordinary expenses” resulted in a margin for 2009 of -0.98%, which fell below the lower quartile of the interquartile range of market returns. Furthermore, Management modified the comparison period, considering only the 2009 financial information of comparable companies against the Company’s financial information for the same fiscal year, which resulted in an adjustment to the 2009 taxable net income, due to the transfer pricing adjustment applied to cost of sales for vehicle import transactions totaling S/ 44,714,957.00
The Company’s Argument: The impact of the international crisis that affected the automotive industry in late fiscal year 2008 and part of 2009 forced the Company to launch a more aggressive campaign, substantially increasing its investment in promotional expenses aimed at improving sales and maintaining its market position. Although the Company maintained similar commercial strategies in the preceding and subsequent years, this does not detract from the exceptional nature of the situation, since it was demonstrated that these expenses nearly doubled compared to previous years, indicating that the adjustment for extraordinary expenses is justified given the specific characteristics of the Peruvian market and its automotive sector compared to the countries where the comparable companies are located.
Tax Court Ruling
The Tax Court’s response was that the Administration had not demonstrated that it had conducted an adequate comparability analysis, as it merely proposed a transfer pricing adjustment without substantiating its position, merely agreeing with certain aspects of the transfer pricing analysis contained in the EPT, without conducting its own analysis, especially given that the “comparison period” was modified (from a three-year average, 2007 to 2009, to the results of a single year, 2009).
Conclusions
The modification made by the Administration regarding the comparable period alters the time frame within which the analysis in the 2009 EPT was conducted; therefore, it was necessary for the Administration to perform an adequate comparability analysis of the selected companies for the 2009 period alone. In this regard, since the Administration had not provided the documentation for the new analysis, the Court ruled in favor of the Company and against the Tax Administration.
Once again, the concept of “burden of proof” proved decisive in resolving the case.