Latin American tax authorities rely heavily on the formality requirements, which are based on the opposite to the bona fide principle, which assumes the good intentions of the parties.
Three cases where recently decided by Argentine Courts dealing with the "substance vs form" in intra-group financing and services.
In Compañía Ericsson S.A.C.I. (Federal Tax Court, August 15, 2007), the subsidiary of the Swedish telecommunications multinational, obtained a loan from one of the group’s financial vehicles, whose terms and conditions, but for the formal instrumentation, were unquestionably arm's-length.
The loan was formalized in a memo disclosing the parties' names, purpose, amount, and interest rate, but lacked the signature of the borrower. The Argentine Internal Revenue Service re-characterized the debt as equity on the grounds that independent parties would have met certain formalities where the taxpayer did not.
Even though the Tax Court in this case reversed the assessment based on the prevalence of substance over form for transfer pricing purposes (following sections 1.10, 1.28 and 1.29 of the OECD Guidelines), the message between the lines was that under the tax authority's approach, meeting all civil law and administrative formalities seems to play a very prevalent role (for example: entering into a written contract, signing before a notary, obtaining the Apostille according to The Hague Convention, translation of documents not in Spanish by certified public translator, certification of transfer pricing report by certified public accountant, legalization of professionals' signatures with the relevant professional association, registration with the Patent and Trademark office, etc).
Litoral Gas S.A. (Administrative Litigation Court of Appeals, Room II, April 17, 2008), the natural gas distribution utility ultimately owned by Suez-Tractebel from Belgium and Techint from Argentina, also was granted an intra-group loan, but the outcome rendered by the Court of Appeals confirmed the “form over substance” approach used by the Fisc.
The interest deduction was denied to the taxpayer, decision that was neither grounded on thin capitalization nor on transfer pricing evaluations.
Based on expert witness opinion delivered to the tribunal, the instrumentation by the company of the agreement evidencing the loan with Tractebel from Belgium and Netherlands did not meet the formality requirements to be considered a specific date valid vis a vis third parties (according to Civil Code Section 1035: filing the document with a court or public body, recognition before a notary and two witnesses, transcription in any official record, death of any of the signers).
Here is another example. J.W. Thompson Argentina S.A. (Administrative Litigation Court of Appeals, August 24, 2006), the subsidiary of the U.S. advertising agency, incurred various expenses outside of Argentina (for advertising materials, travel, and shipping among other things) that vendors invoiced to the U.S. headquarters, which in turn attached a copy to "advice memos" and passed them through to the local entity.
The Court of Appeals affirmed the Tax Court decision denying deductibility of charges not invoiced directly to the Argentine taxpayer or included in "advice memos," as not meeting the formality standards to be considered as serious evidence of the expenses.
All posts will be appreciated, as well as comments by phone at +5411 4776 8200, by email at daniel@enterpricing.com or at http://www.enterpricing.net/contactus.htm.
Daniel Rybnik, Partner, EnterPricing
www.enterpricing.com
