Argentine Supreme Court rules on transfer pricing of commodity exporters

This case, AFIP v Alfred C Toepfer Internacional, belongs to the first group of three controversies, related to the proper benchmarking of commodity export transactions, which have reached the Federal Supreme Court during the last twelve months.

These three cases involved notices of deficiencies issued by the Argentine Revenue Service (ARS) with regards to fiscal years 1999-2001, but only assessed almost six years later (close to the triggering of the statute bar).

The ARS auditing work on these matters has been the chronological precedent to the so called “sixth transfer pricing methodology”, designed by the Argentine tax authorities but subsequently widely spread to the whole Latin American region.

The other two cases involved commodity exporters Nidera and Oleaginosa Moreno Hermanos (Glencore group), which were decided by the Supreme Court on May 20 2014 and September 2 2014, respectively. However, out of these three cases, two were entered for the taxpayers and one for the ARS ( Nidera ).

The tax claim was substantially similar in these controversies: after the ARS scrutinised all taxpayers’ commodity exports, the revenue authorities only adjusted prices of those whose open market values on the shipment date where higher than those agreed on the former contract dates.

To reach this outcome, the ARS sustained that the conduct of the parties should govern, meaning that related-party transactions should be scrutinised in view of unrelated party conducts.

To this extent, the ARS further selected some internal comparables, benchmarking timing conducts, rather than prices, that would allow it to conclude that prices resembled open market values on the shipment date in the non-affiliated context, rather than on contract dates.

However, these conclusions either resulted from the tax authorities’ selection of incomparable transactions or by “cherry picking” a reduced number of related party transactions. No objection at all would be made by the ARS when prices agreed on the contract date were higher that open market values on the shipment date.

In the first case entered for the taxpayer – Oleaginosa Moreno - the Supreme Court confirmed the previous Court of Appeal’s decision that understood that “comparable transactions” selected by the ARS were proved incomparable.

To conclude this much the Court scrutinised the comparability analysis performed by the taxpayer and its consistent and numerous evidence collected during the litigation process; which involved economists, accountant, international trade experts opinions, among others.

In the second controversy entered for the taxpayer – the Toepfer case - the Supreme Court understood that the “cherry picking” mechanism performed by the ARS implied a disguise retroactive application of the so called “sixth method” of transfer pricing, which was passed by the Congress only ex post and - as a consequence - cannot be uphold on Constitutional grounds.

Since the Nidera case was first decided, and favored tax authorities, both the Oleaginosa Moreno and the Toepfer cases set new standards, by nullifying two ARS deficiencies based on open market prices on the shipment date rather than on the contract date.

The notices of deficiency that motivated these cases paved the way for the ARS to subsequently pass a law supporting the so called transfer pricing sixth method, a domestic general anti-avoidance rule (GAAR) which is meant to prevent commodities exporters from eroding the tax base by channeling international transactions thru non-resident unsubstantiated intermediaries. Such methodology was passed as Law 25,784, back in October 2003; but was recently reviewed and debated in the context of BEPS action 10 (i.e. transfer pricing aspects of cross border commodity transactions).

The Argentine GAAR establishes that, when a exporter of commodities sales to affiliated parties abroad by means of an unsubstantiated trader , the pricing should be made at the higher of two different prices: 1) the price agreed when the contract in question is entered; or 2) the market price when the commodities are shipped overseas. This methodology was first enacted in Argentina in 2003, but later expanded – with set mutations - to countries like Uruguay, Ecuador, Guatemala and, more recently, to Peru and Brazil.

The issues at stake further merited specific action under BEPS action plan 10, by the release of a specific paper on “transfer pricing aspects of cross-border commodity transactions” (December, 2014), which was addressed at the OECD public audience held on March 20, 2015.

In this regard, the OECD draft proposal for the review of the transfer pricing guidelines has not upheld the “sixth method”, but suggests a deemed pricing date – the date of shipment - in two cases: (1) when there is no reliable evidence as to the actual pricing date in the controlled transaction; and (2) when the date agreed is inconsistent with the facts of the case.

The previous case law illustrates how tax authorities may appeal to their own readings of the unrelated-party conducts or facts of the case, being of utmost importance the comparability analysis performed by taxpayers.

Benchmarking should not only be focused on price comparability but also on taxpayers’ conducts, to the extent they predicate as to relevant facts and circumstances of the transactions subject to comparison. OECD BEPS trends demand such a comprehensive approach, a standard that burdens both the taxpayer and the tax authorities as well, in view of the lessons learned from this case.

In collaboration with Cristian E. Rosso Alba, of Rosso Alba, Francia & Asociados, crossoalba@rafyalaw.com.