The years 2010 and 2011 could be characterised as highly productive for their transfer pricing rulings, and also oddly controversial, due to the actions undertaken by the Argentine Revenue Service (ARS) against major grain export companies.
In a nutshell, the transfer pricing rulings:
- recognised the difficulties caused by the complex and constantly changing transfer pricing regulations;
- accepted the usefulness of the OECD guidelines, although Argentina is not a member of the OECD;
- emphatically pointed out that the ARS bears the burden of proof when challenging the taxpayers' transfer pricing reports;
- banned the retroactive application of the sixth method;
- accepted comparables with frequent losses, and;
- last but not least, established a hierarchy of transfer pricing methods.
Unconfirmed rumours suggest that the cause of the controversies between the ARS and the grain export industry is the judicial battle undertaken by the latter against Law 26,351 – which established that exporters were to provide trustworthy evidence of the bearing or acquisition of agricultural products declared in the Sworn Statements of Sales within the period from the registration of the Sworn Statement of Sale and the date on which the export duty rates were increased. Many companies obtained injunctions putting a stop to the provisions of this regulation, thus significantly reducing the collection of relevant deficiencies of Customs duties.
Transfer pricing litigation
The Argentine Tax Court ruled on two cases regarding the transfer prices of Volkswagen and Toyota for the year 1999. That was a very particular year for the industry in Argentina, as a negative economic situation produced a series of unwanted effects: massive lay-offs, default of debtors and idle capacity. Both companies carried on self-inflected adjustments to even up their situation to the one of foreign comparables.
On July 12 2010, Chamber D of the Argentine Tax Court ruled on the Volkswagen Argentina SA c/ AFIP-DGI case. Volkswagen had selected the transactional net margin method to file its transfer pricing report. Though the ARS accepted the selected method and the proposed comparables, the challenge was based on the partial adaptation carried on by the taxpayer regarding its idle capacity and other effects of the economic crisis affecting the industry. According to the fiscal authority, Volkswagen should have proved that the financial results of the selected comparables had not been likewise affected by lay-offs, default of debtors and idle capacity.
The court recognised the difficulty for taxpayers and courts to interpret and comprehend transfer pricing regulations for the year 1999. After pointing that out, it focused the ruling on the burden of proof in transfer pricing cases. The court decided that the ARS should bear the burden of proving the basis for the challenge to the transfer pricing report and the selection of the comparables.
In Toyota Argentina SA s/ recurso de apelación, ruled on April 28 2011, Chamber A of the Argentine Tax Court also accepted the taxpayer adjustments based on the company's idle capacity. A particular aspect of this case is that the company used interquartile ranges on its transfer pricing report though that was not yet mandatory for the year 1999. The ARS calculated the average idle capacity of the comparables and then applied an adjustment based on these ranges. The court rejected this proceeding as no law had enabled the use of the ranges by the ARS for the year 1999.
On February 26 2010, Division D of the Argentine Tax Court decided the case Aventis Pharma SA, the first one under the amendment to the transfer pricing legislation in the year 2000.
The ARS objected to some of the adjustments made by the taxpayer to position its profit margin within the comparable's ratio. The heavy burden of proof imposed on the ARS by the court tore down that part of the assessment.
Furthermore, the ARS rejected one of the comparable companies (Bentley Pharmaceutical) for its diversity of business activities and frequent losses. The court severely rejected the ARS arguments describing them as merely rhetorical. The different business activities of the comparable were actually carried on by its subsidiaries. As to its frequent losses, the court rejected any challenge based solely on the fact that the financial statements of the comparable reflect negative results in more than one period. The ARS should bring an alternative economic analysis, proving the taxpayer's inclusion was wrong, the court said.
The decision was based, as the court pointed out, on the OECD Transfer Pricing Guidelines which should be regarded as a helpful interpretation source as long as they do not contradict local regulations.
In Nobleza Piccardo SACI y F c/ AFIP-DGI (July 15 2010), Courtroom B of the Argentine Tax Court decided a matter regarding the applicable transfer pricing method for export operations from an Argentine cigarette manufacturer (Nobleza Piccardo) to its affiliate distributor in Chile (British American Tobacco or BAT). The latter owns 70% of the shares of the first.
In its annual transfer pricing report the taxpayer had applied the transactional net margin method, when, according to the ARS, it should have applied the comparable uncontrolled price method for the year 1999 and the cost plus method for the year 2000.
By quoting the opinions of tax scholars and OECD guidelines, the Argentine Tax Court established that there is a hierarchy of methods to determine the correct price that falls within the arm's-length principle. The operation methods (comparable uncontrolled price method (CUP), the resale price method and the cost plus method), should be preferred over the profit methods (including the profit split method and the transactional net margin method). And the CUP should be the priority method. Therefore, the court partially agreed with the transfer pricing adjustments proposed by the ARS but ordered its reduction as it implied a profit margin of 116.12% while the average for the industry is 45.2%.
In Alfred C Toepfer International SA, dated July 5 2010, Chamber D of the Argentine Tax Court decided on the validity of a tax assessment issued by the Fiscal Authority challenging the price of export operations made by a major grain exporter to both independent and related parties in the year 1999.
It is worth mentioning that on October 22 2003, the Argentine Congress passed Law 25.784 which incorporated the so-called sixth transfer pricing method in article 15 of the Income Tax Law. Alfred C Toepfer International SA argued that during the fiscal year 1999, the arm's-length price of export operations to related parties were to be determined by the time of the execution of the sale contract (that is, to apply the CUP method as established in the OECD guidelines and the Argentine regulations). However, the ARS pretended to adjust the prices of some selected export operations to the loading date – which, needless to say, were higher – thus, retroactively applying the Argentine sixth transfer pricing method to fiscal year 1999. The Argentine Tax Court agreed with the taxpayer's claim against the retroactive application of the sixth method. Consequently, the court ordered the fiscal authority to issue a new assessment. The decision of the Tax Court in Alfred C Toepfer International SA was appealed by the Argentine IRS.
The ARS and the agriculture industry
Since the beginning of 2011, the ARS has launched a number of actions against the agricultural industry, targeted, the ARS says, at reducing the levels of tax evasion.
These actions included massive suspensions from the Fiscal Registry of Grain Operators (FRGO) of the main export companies in the nation, such as Cargill, Bunge, Dreyfus and Nidera. The FRGO allows companies to access a reduced rate of VAT withholdings in their local operations and an unlimited amount of bills of transport.
In response, many of these companies filed legal actions in the courts requesting temporally injunctions and the invalidation of the suspension with different results.
Many companies, including some of those already mentioned, were also suspended from the DEJAUTO, an export system which allows a delay in the payments of customs duties and their cancellation with VAT credits, which the state is supposed to reimburse. The suspension means that export companies have to calculate the appropriate duty over an estimation of the exported goods amount, which usually is higher, and accumulate useless VAT credits.
In addition, the ARS executed simultaneous and highly publicised seizure procedures on many of the mentioned companies, which involved hundreds of ARS inspectors and the presence of the mass media. The fiscal authority claims that many export companies are linked to cases of VAT evasion with the use of false invoices; these accusations had been consistently denied by the agri-exporter industry.
Finally, many of these companies have received information requests from the ARS regarding their transfer pricing in export operations. The requirements are aimed at supporting a transfer pricing adjustment based on the sixth method in force since 2003. Furthermore, ARS has issued some assessments containing transfer pricing adjustments for the fiscal period 2004.
Criminal prosecution of Cargill Argentina and Cargill Uruguay CEOs
An investigation for tax evasion of AR$56 million ($13 million) related to transfer prices led to the indictment of the chief executive officers of Cargill Argentina and Cargill Uruguay. Cargill is the main grain exporter in Argentina with operations of more than $4 billion. On October 2010 both indictments against the CEOs were preliminary accepted by a Federal Criminal Court which also ordered liens on their assets for AR$100 million. However, recently on February 2011 the indictments were revoked by a Court of Appeals which decided that the company's transfer pricing policy could not be characterised as a criminal conduct designed to evade taxes. Furthermore, the court highlighted the expert testimonies which concluded that the ARS was retroactively applying the sixth transfer pricing method to Cargill, as in the Alfred C Toepfer International SA case.
Relevant tax rulings of the Supreme Court
Recent years have witnessed an increased activism of the Argentine Supreme Court in tax matters. For instance, in Administración Federal de Ingresos Públicos c/ Intercorp SRL s/ Ejecución fiscal, dated June 15 2010, the court decided that the seizures carried on by ARS agents in debt execution procedures without a judicial order were unconstitutional. After this ruling, the ARS commanded its agents to request court-ordered seizures in future proceedings.
On the same day, the court declared the unconstitutionality of the Minimum Deemed Income Tax in Hermitage SA c/ Poder Ejecutivo Nacional – Ministerio de Economía y Obras y Servicios Públicos s/ proceso de conocimiento, a case where the taxpayer showed that he suffered from frequent losses which invalidated the presumption of income.
Finally, in Angulo, José Pedro y otros c DGI, dated September 28 2010, the court upheld the unity principle of the VAT established in article 10 of the VAT Law, deciding that interests can only be included in the taxable base of VAT together with the main transaction. Therefore, if the latter is exempt, so are the interests. The ARS pretended to apply the VAT independently over interest on any transaction as established by the Implementing Decree 692/98.
|Juan Manuel Soria Acuña|
Mitrani, Caballero, Rosso Alba, Francia, Ojam & Ruiz Moreno Abogados
Juan Manuel Soria Acuña has extensive experience in tax and constitutional law and tax litigation.
He is a partner in the tax law practice of MCR in charge of litigation matters. Previously, he was a partner at Rosso Alba, Francia & Ruiz Moreno from 2005 to 2009 and an associate in charge of the tax department at G Breuer Law Firm from 2002 to 2004. He served as manager of the tax department at KPMG Argentina from 1999 to 2002 and was an associate with O'Farrell Law Firm between 1997 and 1999.
Juan is also a graduate professor of tax law at Universidad de Palermo and a postgraduate deputy professor of tax law at the UniversidadAustral. He has been a lecturer at many conferences for graduate students of the Universidad Austral and has been a regular speaker at domestic and international tax conferences. He is an author of many articles appearing in international and national publications, such as Impuestos magazine, Periódico Económico Tributario, International Tax Review and CCH Tax Law. He has been consistently recommended as one of the leaders in their field (Tax – Argentina) by Chambers Latin America in 2008, 2009, 2010 and 2011.
Juan is a member of the tax department at the Universidad Austral, an active member of the Asociación Argentina deEstudios Fiscales and of the International Fiscal Association.
He was admitted as a lawyer in the province of Buenos Aires in 2005 and in Buenos Aires in 1997. He earned a masters degree in constitutional law from Universidad Católica Argentina, School of Law in 2010; a masters in taxation from Universidad Austral, School of Law in 2000; and qualified as an Abogado (JD equivalent) from Universidad de Buenos Aires, School of Law in 1997.
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