Transfer Pricing – Recent Developments in Argentina

Fernando M. Vaquero

Marval, O´Farrel & Mairal5th Annual U.S. - Latin American Tax Planning Strategies Conference

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General Overview - Legal Issues -

� Transfer pricing: rules are applicable since

1998 (Law 25,063 and Law 25,239).

� In general, it follows the OECD Transfer

Pricing Guidelines.

� Broad definition of related parties.

� Transactions: carry out transactions with low

tax jurisdictions.

� Methodology: Five Methods

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General Overview - Legal Issues -

� Sixth method for: (i) export transactions involving grain, oilseed, and other crops, hydrocarbons and derivatives and, in general, goods with a known price in transparent markets and (ii) if there is participation by an international intermediary that is not the actual receiver of the goods being sold.

� The price will be the higher between (i) the market price for the goods being exported on the date the goods are shipped and (ii) the price agreed with the international broker.

� Not applicable if the trader has “substance”according to certain parameters.

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General Overview - Audit Issues -

� The Tax Authority has a specialized group that performs transfer pricing audits.

� Detailed audits, focused on grain exporters, car manufacturers, oil and pharmaceutical industry.

� The establishment of different ratios for each industry.

� Tax audits have been expanded to other industries/situations (transfer of technology, trademark and patent license, international financing and taxpayers with accrued losses).

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Agri-export industry

TRADER

ARGENTINE EXPORTER

FINAL CLIENT

Goods

Invoice: Price: X

� Trader: Uruguay, Singapore, Switzerland, Barbados, Cayman.

� Tax Audit: 890 taxpayers. Commercial transactions differ from the custom transaction.

Invoice: Price: X + 1

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Agri-export industry

� Discussion 1: Transaction Date / Sixth transfer

pricing method

- Alfred C. Toepfer Internacional (Tax Court, Room D, July 5,

2010).

- Nidera S.A. (Tax Court, Room D, September 26, 2011).

� Discussion 2: Fulfilment of “substance requirements”

of the trader.

� Discussion 3: Criminal Prosecutions / Suspensions

from the Fiscal Registry of Grain Operators

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Agri-export industry

URUGUAYANTRADER

ARGENTINE EXPORTER

FINAL CLIENT

Goods

Invoice Invoice

CHILE Holding

Dividends

Dividends

- Resolution 799/10 – www.infobae.com (04/06/11)

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Car Manufacturer Industry

� Toyota Argentina S.A. (Tax Court, April, 28, 2011): Idle capacity.

� Volkswagen Argentina S.A. (Tax Court, Room D, July 12, 2010): Effects of the economic crisis affecting the industry.

� Other cases: DaimlerChrysler Argentina, Volkswagen Argentina S.A.

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Summary – Litigation cases

Tax AuthorityGrain ExporterExportations1999/

2000

Nidera

(2011)

TaxpayerHydrocarbon Exportations1999YPF

(2011)

TaxpayerAutomobileExpo/Impo1999Toyota (2011)

Tax AuthorityGrain ExporterExportations1999Alfred Toepfer (2010)

TaxpayerTobaccoExportations1999

/2000

Nobleza Piccardo(2010)

TaxpayerAutomobileSeveral Transactions

1999Volkswagen (2010)

TaxpayerAutomobileExportation1998Volkswagen

(2009)

Tax AuthorityAutomobileExportation1998Daymler Chrysler (2009)

TaxpayerPharmaceuticalSeveral Transactions

2000Aventis Pharma

(2010)

TaxpayerPharmaceuticalExportation1998Laboratorio Bagó S.A. (2006)

DecisionIndustryTransactionPeriodCase

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Conclusions – Future Developments

� New transfer pricing rules are not expected.

� Advanced Pricing Agreements - Anti-Tax Evasion Plan III –

� Tax Authority will become more skilled in the area of transfer pricing (expertise, and practice).

� Litigation will probably continue. Many cases are pending of resolution at the Tax Court.

� OECD Guidelines

� Exchange of Information (customs authority and tax authority, plus tax authority with foreign tax authorities).

Transfer Pricing – Recent Developments in BrazilianAdministrative Case-Law and legislation

Luciana Rosanova Galhardo

Pinheiro Neto Advogados5th Annual U.S. - Latin American Tax Planning Strategies Conference

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General Overview

� Transfer Pricing Rules were introduced in Brazil by Law No. 9,430 of December 26, 1996 (“Law 9430/96”)

� Differs significantly from tax legislation adopted in most countries

� Based on OECD’s guidelines, but with an important difference

� Adoption of stringent and objective criteria for the determination of acceptable prices and deductible expenses

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General Overview - cont

� Fixed profit margin rates for the ascertainment of the parameter price - not compatible with arm’s length

� Three transfer pricing methods are adopted for imports and four are available for exports

� No best method rule – specific consultations per industry or activity are rare and difficult

� When existing methods are difficult to adopt in practice, DDL rules should apply

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Import Transactions - Methods

Import Method General Aspects

Compared Independent Price Method

(“PIC”):

- Difficult to apply

- Defined as the average resale price of the goods, services or rights, whether identical or similar, ascertained in the Brazilian market or in other countries, as regards purchase and sale transactions between unrelated persons, in similar conditions;

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Import Method General Aspects

Method of Production Cost plus Profit

(“CPL”)

- Defined as the average production cost of the goods, services or rights, whether identical or similar, in Brazil, in which they were originally produced, plus taxes and fees charged by such country on exports, plus a profit margin of 20%, calculated over the cost ascertained

Import Transactions - Methods

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Import Method General Aspects

Resale Price Less Profit Method

(“PRL”):

- Defined as the average resale price of the goods, services or rights, less: (a) the unconditional discounts granted; (b) the taxes and contributions assessed over sales; (c) the commissions and brokerage fees paid; and (d) the profit margin of:

(i) 60% in the event of import of goods applied to the production calculated over the resale price after deduction of the amounts previously mentioned and the value added in Brazil; or

(ii) 20% calculated over the resale price on other hypothesis

- Method most widely adopted by Brazilian companies

Import Transactions - Methods

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TP Discussion – Case Law

- PRL Method Calculation - In the event of import of goods applied to the production a profit margin of 60% should be considered and calculated over the resale price after deduction of the amounts previously mentioned and the value added in Brazil

Law No 9,430/96

Normative Ruling 243/02

-PRL Method (new calculation)proportional calculation on net sales price was necessary to do away with the value added in Brazil to later determine the applicable profit margin and the arm’s length price

� However, Normative Ruling 243/02 changed PRL structure in case of goods used in production by imposing an additional procedure:

� The value added, as stated by Law 9,430/96, is a part of the calculation:

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TP Discussion – Case Law

Law No 9,430/96 and Law No 9,959/00 established 2 formulas

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TP Discussion – Case Law

Normative Ruling 243/02 introduced 5 formulas

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TP Discussion – Case Law

� Normative Ruling 243/02 actually excludes the value added to the imported good in Brazil, bringing adjustments in the price of the transactions and increasing the tax burden

� The tax authorities issued several infraction notices claiming the taxes derived from the adjustments provided by IN 213/02. Enormous amounts in dispute

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TP Discussion – Case Law – Defense Arguments

� Unlawfulness of Normative Ruling 243/02:

� - Innovation of the method

� - Proportional Calculation not foreseen in Law 9,430/96

� - Increase to the transfer pricing adjustments/ IRPJ/CSL tax base

� Mathematic Expert Opinion

� Tax Counselor Opinion

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TP Discussion – Case Law – Recent Decisions

� On May 10, 2012, the Administrative Court of Tax Appeals held an unprecedented decision, ruling the unlawfulness of Normative Ruling 243/02

� Counselors decided that a Normative Ruling could not bring a higher tax burden on taxpayers

� Although this decision is not final and unappealable, it is a very important precedent, considering that was the first time the Court held that Normative Ruling 243/02 should not apply

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Brasil Maior Plan – Provisional Measure No 563/12

� The Federal Government, in the context of the Brasil Maior Plan, issued Provisional Measure No 563 of April 3, 2012 (“MP 563/12”), seeking to encourage industrial companies

� According to the “new” PRL method, the profit margins applicable to ascertain the arm’s length price are:

� 40% for manufacturers of chemical-pharmaceutical and pharmaceutical products, tobacco, optical, photographic and cinematographic equipment and instruments, activities related to trading of machines, devices and equipment for dental, medical and hospital use, oil and natural gas extraction, and manufacture of oil derivatives;

� 30% for manufacturers of chemicals, glass, glass products, cellulose, paper, paper products and metallurgical applications; and

� 20% for all the remaining sectors (general rule).

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Brasil Maior Plan – Provisional Measure No 563/12

� Despite these novelties related to the profit margins mentioned, the method for calculation of the “new” PRL brought about by MP 563/12 was taken from IN 243/02

� On adopting the assessment PRL method set in IN 243/02, MP 563/12 ended up:

� legalizing the application of this methodology for the periods after the effectiveness of MP 563/12 (April 3, 2012 or as from 2013, at the taxpayers’ discretion); and

� tacitly recognizing the unlawfulness of such methodology for periods prior to the effectiveness of said MP, for lack of grounds

Transfer Pricing – Compliance and Audits:Difficulties faced by industries in Brazil

Maria Fernanda Campos

Ford Motor Company Brasil Ltda.5th Annual U.S. - Latin American Tax Planning Strategies Conference

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Overview

� Free Trade Agreements (FTA) with Mercosur and Mexico enabled automotive industries to enhance their businesses in Latin America, reducing fixed costs and increasing competitiveness levels.

� Tax Treaties do not foresee any specific mechanism to avoid double taxation for incompatible transfer pricing rules.

� Brazil Transfer Pricing Rules are not OECD compliant and may lead to double taxation when the other side of the transaction uses an arm’s length standard.

� Complicated Documentation Requirements result in additional costs incurred for specialized personnel, services (audit & law firms) and IT systems in order to comply (no sinergy with corporate systems and teams are feasible).

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Compliance

Brazil Documentation issue Brazil Documentation issue

� Many methodologies (and safe harbors for exports) but no clear guideline on documentation

� Very few legal precedents

� Reports validated by independent audit companies are not accepted

� Methods that utilize information from other jurisdictions are very difficult to apply and place a heavy burden on those jurisdictions

CostsCosts

� Specific and unique legislation means it is not possible to utilize standard corporate systems or personnel to reduce the compliance costs.

� Lack of documentation and audit guidelines increases costs and creates a lot of workload to the tax departments.

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Compliance

Methods Pro Cons

Imp

ort

Resale Price Less Profit

Method(“PRL”):Documentation

adjustments due to the fixed margins (not relevant due to the

current exchange rate)

Method of Production Cost plus

Profit (“CPL”) Low adjustments Documentation

Compared Independent Price

Method (“PIC”)Low adjustments Documentation

Ex

po

rt

Resale Price Less Profit

Method(“PVA/PVV”)Low adjustments Documentation

Method of Production Cost plus

Profit (“CAP”) Documentation High adjustments due to the

fixed margins

Compared Independent Price

Method (“PVEx”)Documentation

N/A (all vehicles are exported to

related parties)

Safe Harbors DocumentationDifficult to apply due to the

current exchange rate

Summary of the methods and local compliance difficulties faced by the automakers:

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Audits

� Specialized Audit Groups: Brazil IRS has a specialized audit group that understand the industry and has a lot of expertise in audits and legislation.

� Volume of information required during an audit is huge and it is often long (6-9 months), which creates a lot of workload for the envolved areas.

� Lack of specific audit guideline does not create a ‘patern’ in terms of information and documentation requested, samples, etc.

� Tax Assessments: Relevant tax assessments have been issued for the automotive industry (especially related to the PRL discussions), which require book reserves or off-balance controls.

Transfer Pricing – Mexican Update & Highlights

Ricardo León Santacruz

Sánchez-DeVanny Eseverri, S.C.5th Annual U.S. - Latin American Tax Planning Strategies Conference

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Transfer Pricing in Mexico

� Current transfer pricing fucus:

� Distribution and related activities

� Automotive and transportation industries

� Maquiladoras

� Pharmaceutical and chemical industries

� Consumer products industry

� Communications & technology industries

� Finance

� Hotels / leisure industry

� Restructured groups – OECD reorganization

� Interest & royalty payments32

Transfer Pricing in Mexico

� Examination process findings:

� Lack of adequate comparability analysis

� Absence of contemporaneous documentation (contractual & statutory)

� Failure to support “best method”

� Use of global studies vs. regional or country focus

� Unjustified business cycles

� Case law has upheld transfer pricing methodology and compliance burden

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Transfer Pricing in Mexico

� Bilateral / Mexican APA themes

� Maquiladora industry

� Shelter industry

� Service providers / commisionaires

� Manufacturing & distribution activities

� Royalty payments

� Thin capitalization

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Transfer Pricing Mexico / U.S.

� Strong working relationship

� Issues:� Maquiladoras

� Cost sharing payments

� Cost allocation / shared services / HQ expenses:

�Mexican Federal Tax Court supported OECD

�Unconstitutionality of prohibition to deduct

� Business restructuring and associated transfers of function & risks

� Anti-abuse tool / debt push downs

� Adjustments to improve comparability under CPM, TNMM (asset-intensity, etc.)

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Transfer Pricing Mexico / U.S.

� Requirement to exhaust remedies in Mexico for U.S. foreign tax credits

� OECD guidance on attribution of impact to PE’s

� 2010 revisions to OECD guidelines on comparability, profit based methods

� U.S. – Mexico – Canada initiatives on TP:

� Exchange of information

� Simultaneous audits

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Transfer Pricing – Recent Developments in Peru

Gustavo Lazo

Estudio Olaechea5th Annual U.S. - Latin American Tax Planning Strategies Conference

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General Overview

� General rules enacted in 2001. Main operative rules recently in 2006.

� TP in Peru is in an intermediate/consolidation phase

� TP rules mainly based on OECD’s guidelines though domestic legislation adopted a more strict/non-flexible language.

� Incidence on income, valued added and excise taxes.

� Incidence also on domestic transactions.

� Best method rule (CUP, Resale Price, Cost Plus, Profit Split, Residual Profit Split, TNMM)

� Available local data is very limited. Foreign comparables acceptable.

� Self-initiated adjustments are allowed

� Important APA procedural regulations still pending.

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Competent Authority (CA)

� CA still learning.

� Request of technical reports to an important number of taxpayers. General and special TP audits (2009-on).

� Information translated to Spanish.

� Reserved attitude changing to openness.

� Precision required on whether CA should accept information regarding costs, prices and margins provided by a foreign related entity, and/or perspective and with the information regarding the domestic entity.

CA (cont.)

� Common indicators that increase possibility of CA audit are transactions involving:

1. Substantial amounts

2. Royalties and management fees (especially if local entities receiving the services obtain low profits).

3. Tax haven jurisdictions

4. Sudden changes in pricing (without visible change in functions or structure of taxpayer)

5. Operating losses

6. Lesser profits than average competitors

7. Significant variation on returns from year to year (up or down).

8. Filing inconsistent information (annual tax return, financial statement, TP filings)

9. Late filings, modifications on tax returns.40

Taxpayer perspective

� Some sectors audited:

� Oil and gas

� Pharmaceuticals

� Distribution activities

� Assessments:

� Cash-poolings

� Focus on operating margin rather than gross margin (marketing expenses, etc.)

� Assimilated need to comply with formal requirements, though poorapproach (support is deficient).

� Lack of integration with other tax matters/strategy of the company.

� Support produced after filing income tax return impedes timely rectification of TP contingencies (increased probabilities of TP adjustments).

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Market perspective

� Consulting market evolves according to changes in expectations and behavior of taxpayers and CA.

� Introduction phase: big-4 with multi-disciplinary teams, predominated in consulting market assisting multinational companies.

� Consolidation phase: important number of legal advisors, accounting companies and even individuals (low cost, more flexible “conclusions”).

� Maturity phase: TP audits will intensify. Taxpayers will internalize TP importance in their overall tax planning strategy. Prices and transaction planning, development of policies, integral tax advisory and support in fiscal audits will be significantly more demanded from multidisciplinary teams with global and local experience (accountants, lawyers, economists and financial analysts).

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Administrative issues and trends

�Regarding transactions declared in 2010 (US$60,000 MM):

� 31% corresponded to operations among domestic related entities

� 50% corresponded to operations with entities resident in the UK, Switzerland, Spain, Chile, USA and Bermuda.

� US$10,000 MM corresponded to operations involving tax havens, including financial transactions and import of Chinese products through Hong Kong.

� US$ 3,500 MM corresponded to payment for services.

� Large taxpayers explained between 70% and 85% of the amounts declared on TP.

�Special international taxation and transfer pricing department recently created.

� Tasks: Propose policies, strategies, rules and procedures on TP issues. Define criteria to select target taxpayers, answer internal and external technical inquiries, evaluate APA proposals and elaborate technical contents of CA training plan.

Legislation developments

� Today, CA working on introducing technical improvements to Law.

� Basically, CA proposes to amend rules regarding TP scope; adjustments; APAs.

� CA is open to receive private expert input before filing their final draft law to the Finance Ministry.

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Transfer Pricing – Recent Developments in the United States

Mark Martin

McDermott Will & Emery5th Annual U.S. - Latin American Tax Planning Strategies Conference

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Competent Authority

U.S. Competent Authority Statistics

� The U.S. CA docket is dominated by foreign initiated

adjustments

� 82% in last 5 years and 85% in 2011

� The U.S. CA process is successful at eliminating double

tax

� 80% relief in 2011, but 83% of 20% single case

� 92% last three years

� 96% over last 15 yrs, eliminating large unresolved cases

Competent Authority

U.S. Competent Authority Statistics (cont.)

� 2 yrs and 4 months to process transfer pricing cases

� 686 double tax cases pending compared to 705

cases in 2010

� Docket five years ago (2007) was 500 cases

� CA statistics suggest that U.S. giving more than

receiving

U.S. Advance Pricing Agreement Program

� U.S. APA Statistics

�43 APAs 2011

�Compare NL: 205 APAs in 2010

�Unilateral completion time 2 ½ yrs

�Bilateral completion time 3 yrs 8 months

�Compare NL: 47 day completion time

�CPM PLI 70% non-service and 60% service

cases

Current Environment

�Significance of Transfer Pricing

�Government – tax base erosion

�Taxpayer – certainty

� IRS Increased Enforcement & Staffing

�1,500 new hires for international tax

�Increased budget, formation of transfer pricing

practice

Move to LB&I and the Creation of a Transfer Pricing Practice

�Creation of International Division

�Creation of Transfer Pricing Practice

�Transfer Pricing Director

�APMA Director

�Senior Economist

�Rationale: increase U.S. initiated transfer

pricing adjustments

Consolidation of APA and Competent Authority

�Advance Pricing and Mutual Agreement

(APMA) Program

�Report to Transfer Pricing Director

�New SES level APMA Director

�APMA Deputy Director

�Role of ACCI – “strategic cases”

�Advance Pricing and Mutual Agreement

(APMA) Program (cont.)

�Non-TP cases and Treaty functions to Assistant

Deputy Commissioner (International)

�100 professionals, 12 divisions

�New Revenue Procedure

Consolidation of APA and Competent Authority

Comments on Transfer Pricing Practice

�More U.S. proposed adjustments

�Better U.S. positions

�Focus on important issues

Comments on APMA

�Better funding and resources

�Reduced processing time

�Eliminate “hand-off”

�Concern with move out of ACCI

�Better coordination on rollback

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Thank you!

Maria Fernanda CamposFord Motor Company BrazilEmail: mcampo19@ford.com

Luciana Rosanova GalhardoFirm: Pinheiro Neto AdvogadosEmail: lrgalhardo@pn.com.br

Mark MartinFirm: McDermott Will & EmeryEmail: mrmartin@mwe.com

Ricardo León SantacruzFirm: Sánchez-DeVanny Eseverri, S.C.Email: rls@sanchezdevanny.com

Gustavo Lazo

Firm: Estudio Olaechea

Email: Gustavolazo@esola.com.pe