Since the transfer pricing (TP) rules were introduced in Argentina in 1998 in articles 14 and 15 of the Income Tax Law (Ley de Impuesto a Las Ganancias - LIG), the main requirements for taxpayers are:

• to conduct transactions with related parties abroad and with parties residing in low tax jurisdictions following the arm's length principle;

• to file returns and keep records; and

• to demonstrate the arm's-length nature of the transactions.

Transactions between an Argentine company and related parties created, domiciled or located abroad are considered, for all intents and purposes, uncontrolled transactions when the consideration and conditions are at arm's-length. When the consideration or conditions are not at arm's-length, they are subject to adjustments under the LIG.

Taxpayers subject to transfer pricing provisions must keep documentation and analytical data in their records in order to support the determination of transfer prices, the amounts of consideration or the profit margins allocated in the complementary annual return.

General ruling (GR) 1122/01 requires the maintenance of related-party information regarding identification data, description of business, description of transactions, agreements and work documents, among other things.

Transfer pricing rules stated in GR 1122/01 and Article 6 Exhibit II provide the general information to be included in the transfer pricing study.

Taxpayers are required to prepare and file documentation describing the accurate application of the transfer pricing regulations, including elements such as description of assets used to generate income, description of business activities and a detailed list of inter-company transactions and methodologies, among other things.

No specific mention is made with respect to obligations for domestic inter-company transactions.

Transactions with taxpayers located in tax havens must be analysed in the TP report and reported in TP tax returns, regardless of whether or not they are related parties.

RG 1122/01 requires taxpayers to file two informative returns, one corresponding to the first half of the fiscal year (F742) and one to the whole fiscal year (F743).

All transactions carried out with nonresident related parties or with unrelated parties in tax havens must be reported regardless of the amount.

GR 1122/01 requires taxpayers to electronically file the returns following this schedule:

• Form 742 (semiannual TP return), the same as Form 741 (1st semester); and

• Form 743, TP report, annual reports and CPA certification from the third to the seventh day (or the first working day) of the eighth month following the fiscal year-end following the same-ending-digit rule.

The arm's-length principle

Transactions that do not have differences affecting the price, profit margin or amount of consideration are deemed comparable. Transactions with such differences, which may be eliminated through adjustments enabling a reasonable degree of comparability, are also comparable. The factors that must be considered in determining the comparability include the characteristics of the transaction and the functions and activities performed and contractual terms.

As with other Latin American transfer pricing laws that follow the OECD criteria, the methods allowed by the LIG are:

• comparable uncontrolled price;

• resale price;

• cost plus;

• profit split;

• transaction net margin; and

• comparable uncontrolled price modified ("sixth method")

The so-called "sixth method" was introduced in 2003 and is applicable to exports of commodities to related parties where an intermediary party participates and the intermediary is not the effective consignee of the goods. The public price of the shipping day must be used, or the one previously established between the parties, if the latter was higher.

Legislation lets taxpayers choose the method that best fits the economic structure of the company and the transaction under analysis. Elements such as the quality and quantity of information available, as well as the number of required adjustments, should be considered. The exception to this best method rule applies to exports of goods when an intermediary party participates in the transaction and such goods have a market value (commodities). In this case, the recently created "sixth method" must be applied.

The procedure for computing the interquartile range is provided in exhibit V of GR 1122/01. If the price or profit margin set by the taxpayer is within the interquartile range, such prices, amounts or margins are deemed to be at arm's-length.

The statutory regulation of the LIG specifies a tentative list of different types and procedures for adjustments and let taxpayers perform other necessary adjustments to the selected comparables, with the condition that they reflect or improve the real economic situation of the transactions that are being compared. This also obliges taxpayers to document and keep working papers on the calculations.

The Justice Bureau (Inspección General de Justicia – IGJ) requires annual report filings of some Argentine companies. If the taxpayer knows the name of its competitors and they meet the comparability requirements, they can ask the IGJ for a copy of the required financial statements upon payment of a fee. However, as noted, descriptive information may be not available in the annual reports.

Given the limitations to obtaining information about domestic companies, foreign companies' information may be used. In audit cases, tax authorities request an official Spanish translation of comparables' documentation.

Secret comparables have not yet been an issue, but the law does not expressly deny their use. In fact, the Federal Tax authorities (FTA) consider their internal database as a tool, organised by industry, to determine the amount of average expenses to be deducted in certain transactions.

Penalties

A new strict regime of penalties related to TP and international transactions was enacted in Argentina in the last reform of 2003. Fines can be summarised as follows:

• not filing tax returns on time – a maximum of $6,700;

• formal breaches of compliance – $50 to $15,000;

• failure to respond to tax authorities' requests – $170 to $15,000 (aggravated cases range from $30,000 to $150,000);

• failure to pay income tax – 100% to 400% of tax not paid on time plus compensatory interest of 2% per month;

• under Article 15 of the LIG, the FTA may determine the net taxable profit by means of averaging, indexing or coefficients based on results obtained by independent companies with the same or similar activities or characteristics (such determination may result in a tax debt subject and penalties from the range mentioned); and

• 200% to 1000% of tax not paid on time plus same compensatory interest for willful failure of taxpayer to pay income tax.

Additional regulations

Argentina does not have advance pricing agreements (APA) or cost sharing rules and is generally not involved in this process. An official statement may be prepared in response to questions raised with the tax authorities. Following this procedure, taxpayers can also request a statement concerning the adequacy of a transfer price. However, these statements are not commonly used by taxpayers regarding TP matters.

The 2003 reform provides that interest is not deductible in the corresponding tax year in the proportion that the liability at year-end exceeds twice the amount of shareholder equity as of that date. Such nondeductible interest is treated as a dividend and may be subject to a withholding tax of 35% (or lower, if a tax treaty is applicable). However, the rule is only applicable to certain financial transactions where the rate of withholding is less than 35%.

Payments made to nonresidents for the exploitation of trademarks and patents are deductible for income tax purposes (up to 80% of the arm's length value) provided that the payment is made before the return filing deadline. This requirement applies regardless of whether or not the parties are related.

In April 2006, the FTA inspected foreign exchange losses derived from loans made before the devaluation crisis of 2002, arguing that interests from these loans and the corresponding foreign exchange losses are not deductible because the economic reality of the transaction looked more like a contribution to capital. For the FTA to accept the deduction, a taxpayer must, in most cases, keep records of a legal agreement that states the real starting date: this it is governed by foreign law with the corresponding apostille.

There are no specific transfer pricing rules regarding the analysis of intra group services or sales of stock.

Audits

There is no public information regarding how the FTA programmes transfer pricing audits. However, they may use the following documents in order to begin a transfer pricing audit: tax returns and internal criteria (sector profitability, among others). Approximately 40 audits have led to adjustments of around $40 million, and 30% of the audits were related to the automotive industry.

The transfer pricing issues raised by the Argentine FTA generally relate to the prices of goods, as well as to the outsourcing of production and supply. The tax authorities are specifically focusing on the automotive, consumer goods, distribution, pharmaceutical industries and sometimes in transactions of Argentine companies in the fisheries industry that have a trader located in a tax haven.

Imports and exports of tangible property are still scrutinised more frequently than intangible property transactions. Financial transactions and royalty payments are also being reviewed.

To date there has not been an official communication relating to the position of the tax authorities regarding transfer pricing audits, due to fiscal secrecy.

Relatively few transfer pricing cases have been litigated in Argentina because the tax authorities have only recently become active in tax assessments. However, it is known that one automotive case, some agribusiness cases, one textile case and some pharmaceutical cases are being litigated in the Administrative Tax Court, which is part of the executive branch and not the judicial branch. If a favourable ruling is not obtained, the taxpayer may appeal to a judicial court.

Managing the audit process

Argentina has scarce doctrine and insufficient jurisprudence to provide guidance on the development and treatment of transfer pricing inspections. They should be prepared following the typical administrative process of litigation for tax requirements.

There are no rules regarding partial or total abatement of debts due to failure to comply with transfer pricing obligations. Otherwise, depending on taxpayers' attitude to provide information during the audit process and formal compliance of filing TP documentation, the administrative judge is obliged by the Tax Procedural Law to consider reductions in fines.

Competent authority procedures for cases of double taxation can be accessed according to the tax treaties signed by Argentina.

Figure 1
Australia	Chile	Netherlands
Austria	Denmark	Norway
Belgium	Finland	Russia
Bolivia	France	Spain
Brazil	Germany	Sweden
Canada	Italy	UK

Argentina has entered into double taxation treaties with countries listed in figure 1.

Argentina's double taxation treaties define where the profits derived by individuals and entities may be taxed in different cases. The taxation of interest, dividends, royalties and other types of income are also addressed.

Corresponding adjustments are applicable as per article 9(2) of the OECD model. However, there is no known experience of this area in Argentina.

Arbitration and mediation procedures are not used in transfer pricing cases.

In one of the first transfer pricing proceedings, the National Tax Court has ruled on the pharmaceutical case of Industrias Bagó SA on appeal. The court held that the tax authority was unable to disprove the economic analysis submitted by the taxpayer. While offering different legal arguments, the court validated the inter-company prices used by the taxpayer and overruled the authority's position.

In Compañía Ericsson SACI the Fiscal Tribunal held that the taxpayer's criteria and rate in an inter-company loan was correct and that compliance with certain formalities when contracts are set was not essential, as the FTA expected. Moreover, the company had agreed a similar comparable contract with an unrelated party that showed that the rate of the former was established at fair market value.

Trends and perspectives

The recent changes in the internal FTA structure show that the government is preparing the system to generate more audits. This trend will change because some taxpayers will be more likely to litigate any proposed adjustments rather than accept the tax inspector's proposals. In the short-term, a greater number of inspections, court cases and more extensive doctrine on the authority's position are anticipated.

In the mid-term, the incorporation of APA rules and the unification of provisions with OECD rules are expected. In the long-term, a standardisation of transfer pricing documents with the rest of the world under the master file concept is to be expected.

Augusto Martín Camarero
		Baker & McKenzie in Argentina Tel: +54 (11) 5776 2333 Email: augusto.camarero@bakernet.com.ar A public accountant, Augusto Martín Camarero graduated from the University of Buenos Aires in 2004. Augusto is a member of the Argentine Association of Fiscal Studies (AAEF) and specialises in the preparation of transfer pricing reports of companies located in Argentina and abroad, transfer pricing planning and the understanding and analysis of national and international rulings.

Armando Cabrera
		Baker & McKenzie in Argentina Tel: +52 55 5351 4141 Email: armando.cabrera-nolasco@bakernet.com Armando Cabrera joined the firm as an associate in 2004. His practice includes transfer pricing for companies in the financial sector and financial valuation services. Armando took a degree in economics at the Universidad Autónoma Metropolitana, as well as degrees in corporate finance and international tax from the ITAM. He is attending the master's programme in business administration at the Universidad de las Americas. Armando was part of the General Department of International Tax Matters and the Central Tax Audit Administration of the Ministry of Finance and Public Credit as a coordinator of the analysis and study of international tax economics, participating in APA negotiations and transfer pricing audits. He has directly participated in transfer pricing negotiations with the Mexican financial authorities and has published several articles on transfer pricing and financial valuation.