Argentine National Tax Court rejects tax authorities' position on economic relationship

Tax Controversy & Dispute Resolution ()

In March 2013, the National Tax Court (an administrative body dependent on the Executive Branch) ruled in favor of Akapol S.A.C.I.F.I.A., regarding the relationship of Akapol and a third party exclusive distributor located in Uruguay (Distributor), sustained by the Administración Federal de Ingresos Públicos (AFIP) in connection with transfer pricing issues.

In Argentina, the section added after the Section 15 of the Income Tax Law (ITL) establishes the concept of economic relationship, while General Resolution 1122/01 (GR 1122) issued by AFIP, rules the application of that law, providing in Schedule III a list of assumptions that would imply economic relationship.

During a tax audit, AFIP attempted to characterize Akapol and Distributor as related parties for tax purposes using the list of assumptions from Schedule III of GR 1122; and thus, applied a transfer pricing adjustment for the fiscal period 2001. The court rejected the economic relationship presumed by AFIP, considering that the exclusive distribution agreement alone does not provide the decision making power to control the activities of Distributor, the fact that the ITL requires for economic relationship to take place, and thus, the application of the transfer pricing rules.