INSIGHT: Argentina Updates its Transfer Pricing Rules

Argentina is gradually moving towards a more modern framework of transfer pricing rules. The comprehensive tax reform (Tax Reform), enacted through Law 27,430 on December 29, 2017, and subsequent regulations, included several changes to the transfer pricing rules. Specifically, the Tax Reform repealed the “Sixth Method,” established master file requirements in line with BEPS Action 13 and simplified transfer pricing forms. The Tax Reform also adopted an Advanced Pricing Agreement (APA) program.

Decree 1170/2018 (the Decree), published on December 27, 2018, implemented the Tax Reform. On May 27, 2019, the Argentine Tax Authorities (AFIP for its Spanish acronym) published General Resolution (GR) 4496/2019, implementing some changes to the transfer pricing rules included in the Tax Reform and Decree. Considering all these changes, it is fair to affirm that Argentina is moving towards a more predictable transfer pricing environment. This is consistent with Argentina’s intention of becoming an Organization for Economic Cooperation and Development (OECD) member as formally stated in recent years.

Background

The transfer pricing rules were originally enacted in 1999. On October 22, 2003, Law 25,784 modified the local transfer pricing rules and established the controversial “Sixth Method.” The Sixth Method required local taxpayers that exported goods with quoted prices (commodities) to related parties through an international intermediary to determine the Argentine source’s income by using the export quotation price on the last day the merchandise was loaded for shipment, unless the agreed-upon price was higher, in which case taxpayers were required to use the latter. The Sixth Method did not apply if taxpayers were able to demonstrate that their international intermediary complied with certain conditions.

The Tax Reform repealed the Sixth Method and established a new requirement. Under the new rule, if the international intermediary is a related party of the Argentine taxpayer or the international intermediary is a third party but transacting between related parties of the Argentine taxpayer, the Argentine taxpayer will have to prove that the remuneration obtained by the international intermediary is in accordance with the risks assumed, the functions performed and the assets involved in the transactions. In other words, the Tax Reform requires the Argentine taxpayer to provide the documentation that helps to establish whether the remuneration is aligned with the functions, assets and risks.

In addition, for exports of commodities involving an international intermediary that is either a related party or an entity located in a non-cooperating jurisdiction for tax transparency purposes or a low or no taxation jurisdiction, the Argentine taxpayer must register the agreements related to the export transactions. The registration should include the relevant characteristics of the agreements, as well as, and where appropriate, differences in comparability (i.e., differences in export prices) that generate divergences with the relevant market quotation for the date of delivery of the goods, or the elements considered for the determination of premiums or discounts applicable to the quotation. If an Argentine taxpayer fails to register or does not fully complete the registration, the Argentine source income will be determined by using the quotation value of the goods on the day of loading of the merchandise, whatever the means of transportation, including any comparability adjustments. The price that would have been agreed to with the international intermediary will not be considered. This potential outcome resembles the old Sixth Method. Taxpayers should be aware, however, that AFIP has not yet implemented the registration process.

The regulations contained in the Decree include documentation requirements, a definition for relationship status, comparability provisions and transfer pricing methods updates, among others.

Documentation Requirements

The Decree establishes the master file requirement in accordance with OECD’s Base Erosion and Profit Shifting (BEPS) Action 13 standards. The master file was the last piece missing from the Argentine rules.

The Decree sets forth the following three-tier level of documentation:

1. Local file: Argentina has traditionally required taxpayers to annually submit a transfer pricing study, which resembles the local file to a certain extent.
2. Master file: The Decree includes a general description of the content of the master file, which is aligned with the Action 13 guidelines.
3. Country-by-country report (CbCR): On September 20, 2017, Argentina established the requirement of submitting the CbCR for tax years beginning on or after January 1, 2017. While local multinational entities are required to submit the CbCR, local affiliates need to notify the AFIP of which entity is required to file the CbCR and, in certain circumstances, may need to make a local filing of the group CbCR.

In addition, local documentation requirements include a set of transfer pricing returns/affidavits (forms) that Argentine taxpayers must prepare and file to declare transactions carried out with both related and unrelated parties.

The previous transfer pricing rules did not include minimum thresholds for filing the transfer pricing forms. The Tax Reform, however, stated that certain materiality thresholds were needed.

In this regard, GR 4496/2019 established certain limits under which taxpayers will be required to submit the transfer pricing forms if their transactions, invoiced during the tax year, individually exceed the amount equivalent to ARS 300,000 or as a whole exceed the total amount equivalent to ARS 3,000,000. While taxpayers with transactions that do not exceed those amounts are not required to file the transfer pricing forms, they are still required to retain the documents, information and evidence supporting the transactions.

Moreover, GR 4496/2019 eliminated the requirement to submit an annual transfer pricing return (Form 969) and established one due date in the eighth month following the end of the tax year for all other transfer pricing forms. Up to tax year 2017, the due dates were scattered throughout the year.

Relationship Status

Unlike many countries, the amended local transfer pricing rules define the relationship status by reference not only to the shareholder structure but also to other types of association or economic influence, for example, two or more entities having directors, functionaries or administrators in common; exclusive agents, distributors or concessionaires; an entity providing to another entity the intellectual property or technical knowledge that comprises the business foundation of the latter; and two entities deemed related because one is a unique or main supplier or customer of the other.

The Argentine transfer pricing rules also apply to transactions carried out by local taxpayers with entities located in non-cooperating jurisdictions for tax transparency purposes and/or low or no taxation jurisdictions.

Comparability Matters

The Decree gives priority to internal comparable transactions (i.e., a local taxpayer carries out the same kind of transactions with related and unrelated parties) over other market parameters to the extent there are no significant differences between the comparable transactions. If differences exist, the internal comparable transactions are still given priority, provided the differences do not affect the conditions analyzed, or adjustments can be made to eliminate the differences and optimize the comparison.

The Decree creates a transactional basis analysis for controlled transactions, even if they are identical or similar, whenever significant differences in relation to functional analysis are present.

The Decree also establishes an exception from the transactional basis analysis for separate transactions that are closely linked, are a continuation of one another, or affect a set of very similar products or services, in such a way that their independent valuation may be inadequate.

Moreover, taxpayers should evaluate transactions or lines of business based on segmented or disaggregated information contained in the taxpayers’ own financial statements or internal ledgers duly justified and reliably documented, following the guidelines to be implemented by AFIP.

The Decree includes other provisions that require the comparability analysis to identify and evaluate if any of the parties to the transaction were the owner or licensor of trademarks, patents or other intangibles, even if their use or economic benefit is not expressly remunerated. Furthermore, when conducting the functional analysis, taxpayers should take into consideration the existence of ancillary services, such as marketing, logistical or other services relevant to the transaction, whether routine or not.

Undisclosed Transactions, Secondary Tax Impact

As per the Decree, an Argentine taxpayer must evaluate and include in the transfer pricing analysis transactions that would have been carried out by the Argentine taxpayer in favor of a foreign related entity, without remuneration for the Argentine taxpayer.

Furthermore, AFIP also may require mandatory compliance with the transfer pricing rules for transactions or activities that generate exempt or unrealized income, or nondeductible costs or expenses, when the income, costs or expenses may be distributed, directly or indirectly, to other entities subject to income tax.

Transfer Pricing Methods

The transfer pricing methods are fairly aligned with the OECD guidelines, namely the comparable uncontrolled price (CUP); resale price; cost plus; profit split; and the transactional net margin method. As mentioned above, the Tax Reform repealed the so-called Sixth Method.

Aligned with Action 10, the CUP method is considered the most appropriate method for valuating and assessing transactions involving commodities by reference to comparable uncontrolled transactions or indexes, coefficients or market values (quoted prices).

Additionally, the Decree includes guidance on the application of the profit split method for transactions in which the parties contribute substantially to the creation of intangible assets or possess intangible assets involved in the transactions. In such cases, taxpayers may use the profit split method, provided they report the use of that method to AFIP in advance and follow a three-step procedure. Under the three-step procedure, taxpayers must:

1. Determine the overall operating result
2. Establish the routine profit of each related party (without taking into account the use of significant intangible assets) using the most appropriate transfer pricing method (not the profit split method) and
3. Allocate the residual operating profit to the related parties to the transaction, taking into account, among other things, the significant intangible assets used by them, provided those assets would reasonably have been used between independent parties in similar circumstances and in proportions equal to those used by the parties

Regarding the application of the transaction net margin method, the Decree specifies that the operating margin comprises the net profit before financial expenses and income tax, without considering extraordinary results.

In addition, the Decree allows for the application of other methods when the controlled transactions include the transfer of:

1. valuable and unique intangible assets;
2. financial assets that have no quotes or comparable transactions between independent parties;
3. investments in unique assets for which comparable transactions are not available and activation of those investments only produces results through the amortization of such assets.

Taxpayers must identify the most appropriate methods for analyzing each transaction or line of business. Those methods may be used, provided the factual circumstances or functional analysis that resulted in those methods being chosen remain unchanged. If applicable, changes in methods must be duly justified, and taxpayers must document the reasons for the method changes.

AFIP must still establish the procedures for providing information on the application of the profit split method or other methods in the context of hard-to-value intangible assets.

International Intermediaries

New regulations require taxpayers to analyze transactions involving the import or export of goods with the participation of a foreign intermediary. In these cases, there are at least three companies and one of the foreign parties involved should be a related party to the local taxpayer. Thus, there are two assumptions:

1. The international intermediary is a related party.
2. The exporter at origin (in the case of import of goods) or the importer at destination (in the case of export of goods) is a related party.

The Decree provides further guidance on analyzing transactions involving the import and export of goods when a foreign intermediary is involved. From Argentina’s perspective, an intermediary in an export transaction is the foreign entity to which the goods are invoiced, not the actual importer at destination. In the case of import transactions, the intermediary is the foreign entity from which the goods are invoiced and is not the actual exporter at origin.

Regarding these transactions, the Decree establishes that Argentine taxpayers must prove the following:

1. The foreign intermediary has a real presence in the territory of residence, has a commercial establishment where its businesses are managed and complies with the legal requirements of incorporation, registration and submission of financial statements and tax returns.
2. The remuneration to the international intermediary, even in the form of a commission or equivalent concept, is related to its intervention in the transactions for which it must provide information on purchase and sale prices and the expenses associated with the transactions.
3. The foreign intermediary used a specific type of commercial intermediation, performed certain functions, used assets and assumed risks associated with the transaction.

In addition to items 1. through 3., the taxpayer must demonstrate that the assets, functions and risks of the foreign intermediary are in accordance with the volume traded, which will be established by AFIP.

If the foreign intermediary’s remuneration is higher than that agreed upon between independent parties, the excess in the amount of such remuneration must be added to the Argentine taxpayer’s Argentine source income. As a result, the Argentine taxpayer will have to adjust its income tax return and pay more taxes.

Moreover, the Decree authorizes AFIP to reclassify the transaction, if after evaluating the transaction, AFIP determines that:

1. there is a clear discrepancy between the actual transactions and the functional analysis or signed agreements with the foreign intermediary;
2. the transaction was conducted solely for tax reasons; or
3. the conditions of the transaction differ from those to which independent companies would have subscribed in accordance with commercial practices.

Transactions Involving Commodities

The Decree includes a definition of commodities that is in line with OECD’s BEPS Action 10. Specifically, commodities are physical goods that have public prices negotiated in transparent markets, stock exchanges or similar national or international markets, when these prices or indices are habitually used as a market reference by independent parties.

While the general rules apply an interquartile range of comparable prices/profit margins, in the case of transactions involving commodities, the market range is determined by a full range that is between the minimum and maximum prices and quotations. Comparability adjustments to the quotation are allowed and subject to a full range. Taxpayers must document the transfer pricing mechanism, including the formulas for its determination, for purposes of discriminating among the different concepts that compose the price of the goods.

However, if the transfer price falls outside the total market range determined by the maximum and minimum prices or quotations, the presumed price to be used by independent parties will be fixed at the average between the maximum and minimum values.

Additionally, AFIP may reduce the daily price range when it detects deficiencies in the source used to determine the daily price range or biased behaviors that are abnormal with market practices between independent parties. To that extent, AFIP may define indices or prices, according to sport or future markets that the taxpayer may use as minimum values in transparent markets.

Lastly, for export transactions of commodities involving an international intermediary, the taxpayers must register their intercompany agreements and disclose the: date of the agreements; Argentine exporter’s details; buyers’ details; relationship status; type of cargo; type of products, volume and means of transport; price and sales conditions; quotation or market price; comparability adjustments to the quotation or market price; official price (if applicable); agreed price; and country or region of destination.

APA Program Will Lead to More Predictable Environment

The Tax Reform introduced tools to make the transfer pricing issues in Argentina more predictable. For example, a regime called “Determinaciones Conjuntas de Precios de Operaciones Internacionales” (DCPOI), or Joint Price Determinations of International Operations, was introduced in Title IV of Law 27,430. The DCPOI will be similar to an APA program. To start a DCPOI, an Argentine taxpayer should file a request before the beginning of the corresponding tax year that includes the details of the intercompany transactions that would be covered and the proposed transfer pricing methodology. This regime should be regulated by AFIP, but at the time this article was written, there was no indication of when regulations implementing the DCPOI would be issued.

In addition, the Tax Reform introduced rules to the Tax Procedure Law to regulate mutual agreement procedures (MAPs) established in the tax treaties for the avoidance of double taxation. On May 30, 2019, AFIP published GR 4497/19, which sets out the new “Regimen de consultas vinculantes” (binding consultation regime with AFIP). GR 4497/19 expressly includes under the scope of that regime practical issues related to transfer pricing. GR 4497/19, however, establishes that complex transfer pricing issues (e.g., a methodology discussion) should be included in the DCPOI regime, not the binding consultation regime.

Final Remarks

The Tax Reform modified the transfer pricing regulations in Argentina to align the rules with the OECD guidelines. Certain modifications have helped get the transfer pricing rules closer to the OECD standards. Yet, other modifications, such as too specific documentation requirements of the new rule on international intermediaries, are subtler and could distance the rules from the OECD principles.

Some of the new provisions included in the Tax Reform and Decree are still pending regulation by AFIP. The changes in GR 4496/2019 were mostly related to formalities, and another resolution is needed to cover most of the substantial changes. With upcoming due dates in August 2019, the regulation would be needed soon. Alternatively, we would expect an extension to allow the Argentine taxpayers to properly comply with the new regulations.

Finally, with these transfer pricing amendments, Argentina is moving towards a more predictable transfer pricing environment. However, it will take more time until APAs introduced amid the Tax Reform are a feasible alternative for Argentine taxpayers.

By Milton González Malla, Partner, Pistrelli, Henry Martin & Asociados S.R.L. (EY Argentina) Buenos Aires, and Pablo Godoy, Transfer Pricing Senior Manager at EY Argentina, Buenos Aires.

The views expressed are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global Ernst & Young organization.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.