The Argentine Tax Court has recently ruled on the “Cargill” Transfer Pricing case, concerning the timing for benchmarking the exports of commodities (contract date vs. shipment date) as well as the tax consequences of using a foreign branch in the supply chain of products originating from Argentina.
Cargill Argentine subsidiary (“CSA”) channelled 98% of its commodity exports through a Uruguayan branch (“CSU”). CSA invoiced the exports to CSU, but shipped the goods directly to the final clients (CSU customers). In fact, CSU performed the trader function for the products originating from Argentina, as a branch registered in Uruguay would not be exposed to foreign exchange restrictions, while it would consolidate its income with its head office in Argentina. The prices invoiced by CSU to its clients could be equal to, lower or higher than the price invoiced by CSA to CSU, since the trader would take the pricing risks—and hedge functions—from the date of purchase to CSA until the final sale to each customer.
The Argentine Revenue Service made two Transfer Pricing assessments to CSA, concerning fiscal periods 2000 to 2003: (i) a first one, increasing CSA export price to prevent CSU from experiencing a loss while on-selling such goods to either affiliated companies or deemed related parties (e.g. traders in low tax jurisdictions). For the Argentine Revenue Service, it was unreasonable that the trader, CSU, would be reselling at a loss, despite its risks and functions; and (ii) a second one comparing the value of the transactions carried out by CSU with related companies and traders, with the Argentine-listed “comparable uncontrolled price” published by the Argentine Agriculture Secretary on the date of shipment of the commodities, rather than on the export agreement date.
The Argentine Revenue Service dismissed both assessments. Concerning the first one, the Argentine Tax Court understood that the CSU profit and loss statement was always consolidated in the CSA's annual financial statements, so that the Transfer Pricing adjustment may not be made in the tranche between CSA and CSU. In fact, the Argentine Tax Court rejected the methodology used by the Argentine Revenue Service, since it would overlook the accounting consolidation without providing any sound reason for it. However, the Argentine Tax Court made no elaboration as to the need for the taxpayer's group to create a clear line between CSA Argentine-sourced income and its foreign source, which was collected by CSU.
Regarding the second assessment, related to the adequate timing for pricing commodity exports, the Argentine Tax Court stated that the “Sixth Method” was not in force during the fiscal periods scrutinized by the Argentine Revenue Service, so it was not legal to apply it on a retroactive basis. It should be noted that such a methodology was enacted ex post, namely by a change to the Argentine Income Tax Law in 2003, so as to allow the Argentine Revenue Service to benchmark internationally triangular transactions at the higher price on the export agreement date or the shipment date; whenever an unsubstantiated trader was placed in between. The Argentine Tax Court further noted that if the Argentine Revenue Service sustained that the benchmarking should have been made on the shipment date, it should have adjusted CSA export prices on such date in all cases, not only in those ones that experienced an upward pricing from the agreement date until shipment. In the Cargill case, the latter wouldonly be a minority of the cases, according to the Argentine Tax Court. The taxpayer evidenced that if the Argentine Revenue Service would have benchmarked all CSA commodity exports on the shipment date, consistently, CSA would have experienced a higher loss, rather than a Transfer Pricing deficiency.
The decision of the Argentine Tax Court in connection with the retroactive application of the “Sixth Method” was in line with the ruling of the Argentine Supreme Court in the “Toepfer” case (decision published on March 25, 2015). This ruling set the case law standards for the industry, which were later reproduced in other commodity exporters' cases such as the “Nidera” case (Supreme Court case, August 9, 2016).
Read the WTS Global Transfer Pricing Newsletter here.
