At the start of 2020, three major transfer pricing developments are worthy of note in Argentina. From a normative perspective, by the end of 2019 the Argentine Revenue Service (ARS) published a draft transfer pricing regulation aimed at lining up the existing one with the latest amendments to the income tax law (Law 27,430) and its implementing decree. However, after the recently elected president took office, these draft regulations have been subject to further review. Consequently, by the end of March, the ARS issued resolution 4689 to postpone the deadlines for filing the 2018 and 2019 transfer pricing studies until between 18 and 22 May. Covid-19 has further grounded this deadline extension.
From a case law perspective, two major cases were recently decided by the Federal Supreme Court and the Federal Court of Appeals; in connection with debt to equity re-characterisations and the use of the transactional net margin method by car manufacturing companies.
There follows a summary of these recent transfer pricing decisions.
Debt to Equity Re-characterisation; the TESA Case (26 December 2019)
For more than fifteen years, the ARS has challenged the taxpayer’s use of tax inflationary adjustment, despite the levels of domestic inflation. Consequently, intra-group indebtedness in foreign currency would trigger foreign exchange losses in view of the devaluation rate, but would not have the countervailing effect of a taxable gain in view of the inflation rate after converting a loan of this nature into local currency.
To challenge the “winners” of the government policy, the ARS aggressively confronted intra-group indebtedness, to characterise it as “equity”. The TESA case is the first one decided by the Federal Supreme Court on this topic, and it was entered for the taxpayer.
The Court not only sets doctrine as to the proper standard for a debt to equity re-characterisation, but also expressly indicates the relevance of transfer pricing studies. The Supreme Court noted that the ARS failed to properly review the suitable documentation and benchmarking of the intra-group financing for transfer pricing purposes, meriting no challenge from the arm’s length point of view.
Benchmarking Car Manufacturing Companies: the Volkswagen Argentina S.A. Case (26 December 2019)
One of the transfer pricing core assumptions is that the market return for some activities is clearly identifiable, and, consequently, if a company gets such a return in its related-party transactions, it is presumed to have agreed arm’s length prices. While market conditions are relevant for any transfer pricing analysis, the information often acquired from developed market comparables is extrapolated to an emerging market analysis without an appropriate evaluation of the underlying market differences. To fill this gap, Argentine Tax Courts have upheld – among other comparability techniques – the so-called taxpayer’s selfinflict-ed adjustments, so that the taxpayer could segregate extraordinary losses from its operating results. For example, a capacity adjustment is permitted in the Volkswagen case, to evidence that the selected comparables do not face the same economic downturn. The decision under analysis ratifies the viability of this kind of adjustment, as well as the standards for its proper application. However, this outcome does have former precedents.The novelty of this case is that the Federal Court of Appeals supports taxpayer’s criterion as to the use of discharge of indebtedness income to improve the tested party’s operating profit. To support such criterion, the Court considered the evidence provided by the taxpayer regarding the use of such proceeds to improve working capital and its factory premises. This decision is in line with the previous one of the lower Tax Court. For this reason, the draft transfer pricing regulations under current review expressly indicates that financial results may not be computed to increase operating profits.
The Volkswagen decision also supports averaging the tested party’s results for three years; a topic that also proved controversial. The draft regulations also prohibit averaging for such a party. Expectations are based on the final version of these regulations.
