9 October 2018

​Tax Reform - Main changes referred to Transfer Pricing

Tax Reform - Law N° 27.430 

In this article, we will develop the main modifications introduced by Law No° 27.430 applicable to Income Tax Law (LIG), respect of international transactions between related entities and companies located in non-cooperating jurisdictions or with low or no taxation.

I - Transactions with counterparts domiciled in jurisdictions with low or no-taxation and non-cooperating jurisdictions. Differentiation and coexistence

As of the amendment introduced by this tax reform, transfer pricing control will be applied to operations or transactions carried out with individuals domiciled, incorporated or located in non-cooperating jurisdictions, as well as those conducted with persons domiciled, incorporated or located in low or no-taxation jurisdictions, which will not be considered adjusted to the practices or normal market prices between independent parties.

The reform incorporates the following definitions into the text of LIG:

Non-cooperating jurisdictions

Countries or jurisdictions that do not have an agreement of exchange of information on tax matters (ADII) or an agreement to avoid double taxation (CDI) with broad information exchange clause in force with the Argentine Republic. Likewise, those countries that, having in force an agreement with the scope defined in the previous paragraph, do not effectively comply with the exchange of information, will be considered non-cooperative too.

The standard clarifies that this deals and agreements between countries must comply with international standards of transparency and exchange of information in tax matters. It should be clarified that this definition involves not only ADII and CDI but also the Convention on Mutual Assistance in Tax Matters to which Argentina has adhered, involving 115 countries including Argentina.

This law delegates to the National Executive Branch the preparation of a list of jurisdictions that qualify as non-cooperating.

Low or no-taxation jurisdictions

Countries, domains, jurisdictions, territories, associated states or special tax regimes that establish a maximum tax on corporate income of less than 60% of the aliquot contemplated in subparagraph a) of article 69 of LIG. Thus, starting from an aliquot of 15% jurisdictions that apply an aliquot above this percentage will not be included into the category of low or no-taxation jurisdictions.

II - Operations in which an international intermediary participates

This reform introduces an anti-abuse test for import or export operations involving an international intermediary, whatever the type of asset involved. This obligation is established to prove that the remuneration obtained by the international intermediary is related to the risks assumed, the functions performed and the assets involved in the operation. This requirement will be applicable for all foreign trade operations in which there is a link between the parties involved.

The link conditions to which we refer are:

  • That the intermediary is linked to the local subject.
  • That if the intermediary is not linked, the exporter in origin or importer at destination is.

A relevant and novel fact is that the law imposes in these operations that the tested party is the counterpart from abroad.

The norm does not only ask for proof that the intermediary has substance in terms of an organization that involves material and personnel resources commensurate with the scope of its functions (implicit conditioning of the test), but goes further by requiring the existence of a relationship between remuneration and deployment of activity (expressed in functions, assets and risks).

III - Application of the so-called sixth method as an anti-abuse measure

The project brings new rules for export of commodities in which an international intermediary intervenes, accepting to some extent the claims of the agro-export sector and the opinion of OECD, regarding the application of the so-called "sixth method". The obligation to apply the "sixth method" as the "best method" is eliminated, which will nevertheless remain in force, but for extreme situations where taxpayers do not agree to register the purchase agreements corresponding to their operations in the special registry the AFIP must enable to the effect.

This registry must include the relevant characteristics of the contracts and, if applicable, the differences in comparability that generate differences with the "relevant market price for the date of delivery of the goods".

The consequence of the lack of registration is that the gain should be quantified considering the price of the asset at the date of loading the merchandise, as it should be by application of the sixth method, without considering the price that would have been agreed with the international intermediary.

These rules apply in the following cases:

- That the intermediary is linked to the local subject.

- That, not being the intermediary, the importer at destination is linked.

- That the intermediary is located, incorporated, settled or domiciled in a non-cooperating jurisdiction or with low or no-taxation.

V - Validity of these changes

All the aforementioned changes are effective for fiscal years starting on 01/01/2018.

Javier Portillo – Tax Manager – Auren Argentina

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