2.1 Tax Court Criteria

1

08360-1-2018

Objection regarding financial derivatives for which the termination of hedging is not substantiated is upheld: It is noted that during the audit, the appellant argued that the derivatives were set aside to be replaced by sales contracts under which the physical delivery of gold ounces was agreed upon in exchange for fixed prices; therefore, the payments made to discharge said obligation did not constitute a settlement of the financial derivatives. However, this was not substantiated. Likewise, the termination of the hedging arrangement was not substantiated, given that the hedging decision must be documented, identifying the risks hedged and the impact those risks would have on the generation of taxable income and revenue; merely alleging general business risks is insufficient, thus, Legislative Decree No. 970 is applicable.

The taxpayer did not provide supporting documentation showing the identification and analysis of the risks it sought to hedge with such contracts, the quantified measurement of the risks, their management and control during the term of the contracts, the margin it expected to hedge, or an analysis of the determination of the estimated fixed prices with which it intended to cover its production costs and the profit margin it sought to obtain.

2

05426-9-2018  

The objection regarding expenses for financial derivatives used for purposes other than hedging is upheld as lawful, since, in accordance with the provisions of subsection (b) of Article 5-A of the Income Tax Law, it is evident that in the present case there is no documentation supporting that the risk invoked does not constitute a general business risk, such as technical reports prepared by the appellant itself or by third parties, or other formal documents, prior to the execution of the financial derivatives.

The documentation submitted does support the operation, performance, and settlement of the financial derivatives; however, it does not substantiate the risk subject to hedging. The characteristics and measurement of the risk have not been demonstrated, and, consequently, neither has the manner in which the contracted financial derivatives would ensure the hedging of the transactions subject to risk.

While there may be volatility in the price of minerals on the international market, as the appellant asserts and the Administration acknowledges, nevertheless, in the present case, the specific risk in the appellant’s business has not been demonstrated, and although the appellant has stated that the volatility of mineral prices is “widely known” and that “it is evident” that any variation in prices will have a direct impact on its revenue, it must be taken into account that Article 5-A(b) of the Income Tax Law (LIR) requires formal documentation identifying the risk, as well as the criteria set forth in Tax Ruling No. 04335-9-2014, which states that the objectives and purpose of using financial instruments must be duly documented.

3

01948-1-2019

Regarding the objection concerning the loss from financial derivatives not considered for hedging purposes: Although the appellant argued that the risk to which it is exposed stems from exchange rate volatility—as evidenced by the mismatch between its revenue (in dollars) and its cash outflows (in soles)—adding that exchange rate behavior during fiscal years 2014 and 2015, and even 2016, has been volatile—the record of the case shows that the dollar exchange rate during 2014 and 2015 trended upward, which had a positive effect on the matching of its foreign currency revenue with its outflow streams resulting from loan payments in soles, and therefore the appellant was not exposed to (could not identify) a risk arising from exchange rate volatility—a necessary requirement for the derivative instruments to be considered hedging instruments and, consequently, for the loss generated by them to be recognized as deductible.

4

03062-3-2019

It is reasonable for a company to seek to hedge against the risk posed by the volatility of the price of the minerals it sells, particularly in the case of a commodity such as copper; however, this decision to hedge using financial derivatives should have been properly documented, with a clear identification of the hedged risks, their relationship to the specific assets or property being hedged, and the impact those risks would have on the generation of taxable income—which the appellant has failed to demonstrate.

The objection regarding the loss generated by financial derivatives is upheld, since the appellant did not provide supporting documentation identifying the specific risk it sought to hedge with such contracts, the measurement of the risk, its management and control during the term of the contracts, the margin it expected to be covered, or an analysis of the determination of the estimated fixed prices with which it intended to cover its production cost and the profit margin it sought to obtain.

5

00626-9-2019

Although the document “Cash Flow Hedging Policy” indicates the risk generated by the cash flow from sales, meaning that the type of hedge is on cash flow generated by the sale of concentrate, nevertheless, the risk of metal price fluctuations constitutes a general risk of the mining business, inherent to the type of goods it produces and sells, and it is not sufficient to assert that the hedged risk was the fluctuation in the price of concentrates, nor that the underlying assets correspond to the nature of the business, given that the appellant was required to demonstrate the specific objectives at the activity level of the contracted financial derivative—a requirement that does not appear to have been met in the case under review, in which only a statement regarding a general policy is provided.

Contrary to the taxpayer’s assertion, the Income Tax Law does provide, as a condition for classifying a financial derivative as a hedge, that the taxpayer must have formal documentation to establish the specific objectives at the activity level of the specific financial instruments.

The assessment regarding the loss incurred on financial derivatives that did not qualify for hedging purposes is confirmed as being in accordance with the law, since it is not possible to verify compliance with the requirement to demonstrate the existence of a specific risk, as provided for in Article 5-A of the Income Tax Law, for financial derivatives to qualify as hedging derivatives; therefore, the provisions of Article 50 of the Income Tax Law must be applied; and, consequently, the loss generated by non-hedging derivatives should have been separated from other income of Peruvian source for the purpose of determining the tax.

6

01011-9-2020

Although exchange rate fluctuations may occur, in this case the specific risk in the appellant’s business has not been established; and in this regard, according to RTF No. 04335-9-2014, the objectives and purpose of using financial derivatives must be duly documented.

The appealed decision is upheld, which declared unfounded the claim filed against a tax assessment issued by the Income Tax Office for the 2002 tax year and a related penalty resolution, regarding the objection to the loss arising from forward contracts, because the appellant failed to demonstrate that the financial instruments in question had hedged a risk on an asset or liability related to the business operations, and there was no certainty regarding which transactions supported the need to enter into such instruments—that is, the existence of a real exposure to exchange rate risk that needed to be mitigated or eliminated through the aforementioned financial derivatives. 

7

05112-3-2020

The objection regarding the contracting of financial derivatives linked to the sale of certain lots is upheld, since, with respect to some of them, the appellant failed to prove their validity, and with respect to others, failed to prove that they were used for hedging purposes.

8

05119-4-2020

The Mandatory Shareholders’ Meeting report submitted is insufficient to demonstrate a specific risk, the measurement of that risk, or its impact on the generation of taxable income; the tables showing fluctuations in the price of copper merely reflect the volatility of the mineral’s price, which represents a general business risk.

Furthermore, the report “Review of Results and Projections, July 2008” does not refer to any specific risk that it intends to hedge, since the documentation in question has failed to demonstrate the identification of the risk, its measurement, management, and control during the term of the contracts, the margin intended to be hedged, or an analysis of how the estimated fixed prices were determined to cover production costs and the profit margin sought.

The appeal is dismissed as unfounded with respect to the objection that the derivative transactions do not qualify as hedging transactions, since the taxpayer has not submitted documentation proving that a specific risk to be hedged through such transactions was analyzed, or that a technical report on the matter exists.

9

06103-1-2020

It was confirmed that a financial derivative does not qualify as a hedging instrument when the existence of a specific risk is not demonstrated and no documentation is submitted identifying the assets, property, and obligations hedged by the forward contracts entered into; therefore, such contracts do not qualify as financial derivatives for hedging purposes.

10

0817-1-2021

The constituent elements of a financial derivative were not identified: Neither the long or short positions that the contracting parties would have assumed, nor the underlying asset that would give rise to the financial derivative and underpin the contract, nor the cash flows that each party would have to exchange were identified, nor the start and end dates in the case of a swap, nor the basis for calculation; furthermore, the obligation assumed by the other contracting party was subject to a condition of acceptance in each case, which is inconsistent with the derivative agreements under review; additionally, swaps, regardless of their designation, are not financing instruments, as is evident from the text of the contract under review.

11

01453-9-2021  

Based on a comprehensive analysis of the documentation and the facts described, it is concluded that the appellant failed to submit supporting documentation proving the existence of a specific or clearly specified interest rate risk requiring hedging that would affect the appellant’s economic activity—a risk that the appellant sought to mitigate or reduce through the execution of the derivative contracts under review— as he failed to submit reports, projections, or other documents demonstrating the volatility of the LIBOR rate or the probability of its occurrence.

12

03221-1-2021

Based on the documentation submitted, it is not possible to link the derivative instruments to the sales contract and the invoice, since although the appellant alleges that the derivative contracts entered into hedged the sales volumes contracted by various foreign customers, it is evident that the quantities in metric tons do not match and the price at which the derivative was contracted does not match the price agreed upon in the sales contract.   Consequently, it is not possible to identify the specific assets, property, and obligations that were hedged.

The analytical tables contain information provided after the contracts were entered into; therefore, they do not constitute the appropriate instrument required by Section III of paragraph 3 of subparagraph b,2 of subsection b) of Article 5-A of the Income Tax Law (LIR).

While it is reasonable for a copper-producing company to hedge against the risk posed by the volatility of the prices of the minerals it sells—especially in the case of a commodity such as copper— this decision to hedge using financial derivatives should have been properly documented, with a clear identification of the risks being hedged and the impact such risks would have on the generation of taxable income, which the appellant has failed to do.

The objection regarding the loss on financial derivatives contracted by the appellant is upheld, as it is not possible to verify the existence of a specific risk affecting the business results, nor can the specific assets, property, and obligations that the financial derivatives were intended to hedge be identified, nor can it be established that they were entered into in recognized markets; Furthermore, while it is reasonable for a copper-producing company, such as the appellant, to hedge against the risk posed by the volatility of the prices of the minerals it sells; nevertheless, this decision to hedge using financial derivatives must be properly documented, with a clear identification of the risks being hedged and the impact those risks would have on the generation of taxable income, which the appellant has failed to demonstrate; the mere assertion of general business risks is insufficient.

13

07028-1-2021

The existence of a risk—that is, a threat—is not sufficient in and of itself for a financial derivative related to that risk to qualify as linked to the generation of taxable income and the maintenance of the source of such income, since the objectives and purpose of using financial derivatives must be duly documented in order to verify that the contracting of the financial derivative sought to reduce or eliminate a specific threat to the maintenance of the source of taxable income.

It is concluded that there is no link between the physical contracts cited as the basis for the hedge and the futures contracts entered into, given the discrepancy between the settlement dates and the volumes of tin hedged, as compared to the dates and volumes of sales in the physical market.

A financial derivative does not qualify as a hedge when the existence of a specific risk is not demonstrated, and no documentation is provided identifying the assets, property, and obligations being hedged.

14

September 22, 2021

The documents submitted during the audit proceedings describe the internal procedures established by the appellant for the purchase of bulk commodities and the management of hedges, the accounting policy adopted, and the assessment of the bulk commodities market. In this regard, the documentation does not indicate the existence of a specific economic relationship between the hedged item, as there is no documentation linking each derivative contract to a specific purchase, nor is there documentation that specifically details the quantity, prices, and dates on which the bulk supplies were needed; furthermore, there is no evidence of purchase commitments, since, if such commitments existed, these documents would only establish a general relationship; and it is not possible to link the financial instrument contracts to each purchase of bulk supplies.

Regarding the document titled “2014 Production Projection (PT kilos and balanced food),” it is noted that it is a regular Excel spreadsheet, undated and lacking documentation to support the information contained therein. In any case, although this document lists amounts related to the projected volume of macro-inputs to be purchased, this is insufficient to link it to the financial derivative contracts to which it would, if applicable, be tied; and in this regard, it does not demonstrate compliance with the requirement set forth in subparagraph iii) of paragraph 3 of subsection b) of Article 5-A of the LIR.

15

08159-4-2021

The documentation submitted did not allow for the unambiguous identification of the operations or transactions covered by the financial derivatives, since the payment receipts, the letter of notification to SUNAT regarding the execution of the financial derivatives, debits from their accounts, and accounting entries provided only general information. 

The appellant failed to demonstrate compliance with the requirement set forth in Section III of paragraph 3 of subparagraph b.2 of subsection b) of Article 5-A of the Income Tax Law; that is, it did not identify the specific assets, property, and obligations hedged by the forward contracts entered into, and therefore those contracts do not qualify as financial derivatives for hedging purposes.

16

00390-9-2023  

The taxpayer must have formal documentation allowing the identification of the financial derivative entered into, how it operates, and its characteristics.

The documentation submitted does not indicate the identification of any monetary liability, nor was any additional documentation provided to demonstrate that the appellant was exposed to a risk arising from exchange rate volatility that posed a specific threat to its business results.

Even considering that exchange rate fluctuations might occur in the economic environment in which the appellant operates, it did not submit documentation proving the existence of such a risk, nor that it complies with the provisions of paragraph 3 of subsection (b) of Article 5-A of the Income Tax Law (LIR).

Furthermore, the documentation submitted does not allow for verification that the amount received by the financial derivative was used to pay the obligation related to dividend payments, since it is not possible to trace the funds—as the company’s payees cannot be identified—nor has the amount that was to be distributed to each of its shareholders been substantiated.

The minutes of the board of directors’ meeting only confirm the existence of an obligation; however, they cannot be linked to the item being settled. Furthermore, there is no evidence as to why this obligation had to be paid in foreign currency, given that the company maintains its accounting records in the national currency.

17

07404-9-2023 

There is no identification of the specific assets receiving the hedge related to the accounts receivable in soles linked to the “Credit Balance in connection with the Profit”, referred to by the appellant, which generated a fully identifiable risk, nor has any additional documentation been submitted to establish that the appellant was exposed to a risk arising from exchange rate volatility in this regard that posed a specific threat to its business results, especially since the financial statements attached by the appellant themselves indicate that the exchange rate risk arose primarily from liability transactions and indebtedness with certain financial institutions in nuevos soles, without making any reference to the amounts in domestic currency resulting from the refund of the Credit Balance in connection with the Profit in fiscal year 2011.

18

06203-1-2025 

In compliance with the mandate of the Judiciary, a new ruling is issued, and the analysis now includes hedging of highly probable transactions; all evidence submitted is evaluated, taking into account the considerations set forth in the aforementioned resolution. It is indicated that it is necessary to demonstrate evidence that these are highly probable transactions that will occur in the future and to substantiate their connection to financial derivatives, for which documentation must be provided identifying the hedged item, as well as the time period during which the transactions are expected to occur, in order to verify whether they are the hedged transactions. Based on the analysis of the aforementioned transactions and the documentation on file, it is concluded that there are no highly probable anticipated transactions linked to the hedging contracts entered into.

19

02660-3-2025

The objection regarding the loss incurred on financial derivatives that do not qualify for hedging purposes, because the appellant did not identify the specific risk against which it intended to hedge and its impact on the business’s results, in accordance with the provisions of Article 5-A of the Income Tax Law, as its assertion that the hedged risk was the fluctuation in the price of concentrates is insufficient.

20

05759-8-2025

The assessment for losses on unsubstantiated financial derivatives is in accordance with the law, given that the appellant did not submit documentation evidencing the transactions carried out on international metals exchanges on the appellant’s behalf, such as: confirmations from the internal broker and from brokers affiliated with the metals exchanges, as well as documentation regarding the settlement of gains and losses resulting from the trading of the financial derivatives that are the subject of the objection. Therefore, the appellant failed to substantiate the validity of the hedging transactions that supported the recorded loss, and, consequently, it is not necessary to analyze whether the aforementioned loss was deductible—that is, whether it corresponded to a foreign source or a Peruvian source.

21

5977-1-2025

In the case of the objection regarding the unsubstantiated deduction of futures (open contracts from 2012), the appellant did not identify the specific assets, property, and obligations being hedged, nor did it identify or substantiate the risk it sought to eliminate, mitigate, or avoid, nor did it provide details on the accrual of each transaction in fiscal year 2013.

22

02998-1-2026

The objections regarding hedging transactions are upheld, as the documentation submitted does not demonstrate the identification of a specific risk whose fluctuation could affect the business’s results, but rather merely general risks.

23

01603-1-2026

The contested assessment is upheld, as it has been verified that the appellant failed to provide conclusive evidence of the items, obligations, or transactions that were effectively hedged by the forward contracts that were the subject of the assessment, thereby failing to meet one of the requirements set forth in Article 5-A of the Income Tax Law for considering financial derivatives as hedging instruments; for this reason, the objection is in accordance with the law and must therefore be upheld.