Substance and Form may or may not lead to discrepancies, but comparing real facts to projections is a different story. Reality most likely will present departures from estimates, even if prepared on a best efforts basis.
Oleoducto Trasandino Argentina S.A. (an Argentine subsidiary of A&C Pipeline Holding Company, in turn owned by YPF and Empresa Nacional del Petróleo -ENAP-) that operates a transandean oil pipeline transporting crude oil from Argentina to Chile, anticipated to pay an "x" amount to a foreign technology transfer provider and ended up paying "x + n".
Which of the two amounts should control? What are the consequences for withholding tax purposes? What is the treatment of the difference? What implications arise from a deductibility standpoint? Are there any transfer pricing safeguards?
Companies seeking to take a deduction and to get reduced withholding tax under domestic or Treaty law on payments for technology transfer must register an agreement with the Argentine Patent & Trademark Office (INPI).
The registration process requires to meet certain substance and form requirements, including payment of the 0.02% INPI rate on the self assessed expected nominal economic value of the agreement (i.e., for the full term), and then the INPI validates the documentation and is ready to issue a certificate.
Under the Argentine IRS approach, the taxpayer calculated best estimate for the INPI rate, implied a cap to the amount eligible for a reduced withholding tax rate.
The technology transfer agreement registered by Oleoducto Trasandino contained variable retribution based on daily and hourly rates, as opposed to a fixed payment stream.
The company calculated the reduced withholding on the actual amount paid under the agreement, which exceeded the prediction made at the INPI registration stage.
The taxpayer was assessed a tax deficiency using the default withholding tax rate on the gap between the projected versus the actual amount paid.
After confronting the Fisc position, Oleoducto Trasandino was awarded a favorable judgment in all three judicial instances, the most recent by the Federal Supreme Court (in re: Oleoducto Trasandino Argentina SA c DGI, CJSN, April 8, 2008). The tribunals concluded that the forecasted amount must be disregarded and therefore the excess amount is also subject to the reduced withholding tax rate.
The Supreme Court decision was grounded on the lack of a legal requirement to register a new agreement if the actual figures exceed the anticipated amount.
No matter how mandatory and what projections are made at the INPI registration phase, the actual amount paid controls for withholding tax purposes.
Under domestic law, deduction on payments for technical or financial assistance rendered from outside of Argentina is subject to the following cap:
3 percent on the sales or revenue taken as a contractual basis for compensating the advice;
5 percent on the amount of investment effectively made as a result of the advice.
Based on the facts and circumstances of the Oleoducto Trasandino case, the Supreme Court did not address the deductibility issue on technology transfer payments and whether any of these limitations would be applicable.
However, the decision implicitly convalidates compensation policies based on daily and hourly rates for cross border services.
Accordingly, the tax planning lesson is that transfer pricing policies for intra-group services based on variable factors, for example based on time (days, hours) will be deemed acceptable. Those based on percentages (i.e., on sales, revenue, investments) -if the services are rendered from abroad- will be subject to the 3 or 5 percent limitations, as the case maybe.
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Daniel Rybnik, Partner, EnterPricing
www.enterpricing.com
