By Elisa Kaminsky, transfer pricing senior associate, BaseFirma, Miami
Argentina’s tax authority on October 2 launched a public consultation on proposed guidance that includes significant and burdensome changes to the transfer pricing requirements that local taxpayers must comply with.
The resolution is proposed to be effective for fiscal years beginning between December 31, 2018, and May 31, 2019, and would amend the previous Argentina General Resolution N° 1.122.
Foreign party as tested party
In particular, the proposed resolution introduces the possibility of using the foreign related party as the tested party in the pricing analysis of a transaction. This is a major change since currently only the local taxpayer may be the tested party.
However, the tax authority is not making things easy because it is requesting significant information from the foreign entity, including audited and certified financial statements for the last three years, a transfer pricing report its or equivalent, and certified copies of the available agreements in place. Not to mention that all information must be officially translated into Spanish.
Financial information
Also, it was clarified that accounting numbers must be used in the pricing analysis; there is no possibility to use historic numbers (i.e. fiscal books) unadjusted by inflation.
This represents a challenge for many taxpayers since in 2018 Argentina GAAP introduced an inflation adjustment (a controversial and very polemic topic for different reasons).
Fiscal books and accounting books differ significantly because fiscal books are based on historic numbers and do not take into consideration inflation adjustments. Note also that taxable income and income tax expense are calculated on fiscal numbers.
However, if the transfer pricing analysis concludes the taxpayer is outside the arm’s length range using its accounting results, then a transfer pricing adjustment will be required.
Nevertheless, under the proposed guidance intragroup transactions are disclosed as invoiced (i.e. historic values).
We expect to receive further clarification from the tax authority in this respect.
Benefit test for intragroup services
The draft resolution also introduces the concept of a benefit test for intragroup transactions, as discussed in the OECD transfer pricing guidelines, and lists the types of expenses that are deemed nondeductible, including shareholder services, duplicative services, investment costs, and other expenses not properly identified.
However, the Argentina guidance omits to mention the treatment for low value-added services.
Financial transactions
The guidance also discusses the alternative of using the credit rating of the multinational group for determining the arm’s length price of an intragroup loan.
It further provides a detailed list of the necessary information to be included in the analysis and study, including a solvency test for the debtor.
Intangibles
Furthermore, if the local taxpayer is involved in the development, enhancement, maintenance, protection, or exploitation of intangibles, or so-called “DEMPE” functions, this must be clearly explained in the transfer pricing study. This concept also follows the suggestions in Chapter VI of the OECD transfer pricing guidelines.
Argentina transfer pricing documentation
The resolution further clarifies Argentina’s transfer pricing documentation requirements, deadlines, and thresholds.
A transfer pricing report (or the so-called local file) is required for companies engaging in intragroup transactions of more than ARS 9 million (approximately USD 155,000).
Regarding the thresholds, these numbers are immaterial considering the devaluation of the Argentine peso that has taken place in recent years. It would be much more relevant if thresholds were set in US dollars, if a different metric was used, or if these amounts were updated annually.
The new Argentine disclosure form (F. 2668) now requests disclosure of all international transactions (with third parties) and intragroup transactions.
This form is required for companies with tangible import and export transactions with independent parties over ARS 10 million (approximately USD 172,000), or intragroup transactions totaling over ARS 3 million (approximately USD 51,000) or individually ARS 300,000 (approximately USD 5,100).
However, it is still not clear how these thresholds work. We expect the tax authority will provide further clarification on how taxpayers and transfer pricing consultants should apply the thresholds.
Master file
The master file as per Action 13 of the BEPS project is a new requirement and it is mandatory for taxpayers with intragroup transactions over ARS 500 million (approximately USD 8.6 million).
It is important to highlight that all documentation must be in Spanish. If any document is translated from English to Spanish, an official translation is required.
In that regard, since most multinational groups produce the master file in English, taxpayers will need to comply with this requirement which is not only burdensome but represents an additional cost. As such, we expect the tax authority to waive this requirement in some cases.
Deadlines
The transfer pricing documentation, including the transfer pricing report, disclosure form F2668, and master file, is due six months after the closing of the fiscal year (i.e. June 2020 for fiscal years ending December 2019).
For fiscal years between December 2018 and May 2019, the deadline will be December of this year so taxpayers will need to expedite their compliance to meet the proposed deadline.
However, since the resolution includes major changes, we expect this date will be further postponed.
Special considerations – intermediaries
The resolution introduces special rules for transacting with intermediaries (i.e. an entity buying and selling products without taking title of the goods).
In that sense, a functional analysis of the intermediary is required in the transfer pricing report to meet the substance requirements outlined. If it is concluded from the analysis that the intermediary’s remuneration is not at arm’s length, the difference will be considered taxable income for local purposes.
The taxpayer will need to maintain specific documentation and analysis for certain types of transactions with intermediaries.
Profit split method
The reglementary decree 1170/2018 of the 2018 tax reform introduced a new requirement for taxpayers using the profit split method, which stated that when using that methodology, taxpayers must inform the tax authority beforehand, however; no further clarification was provided in the proposed draft.
Taxpayers and their advisors will continue to evaluate the implications of these new provisions.
Elisa Kaminsky is a transfer pricing senior associate at BaseFirma, Miami.
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