A recently published decision of the Argentine tax court (Tribunal Fiscal de la Nación) concerns a challenge from the tax authorities (AFIP) of the terms and conditions—as well as the economic substance—of an intercompany loan between an Argentine taxpayer and a foreign related party.
The court's decision (issued in late October 2016, but only recently made publicly available) was in favor of the tax authorities, but reflects a "split decision" of the court (that is, two judges held for the AFIP, whereas one judge supported the taxpayer's position).
The tax authorities asserted that the loan at issue represented “funds integrated as capital contributions.” The taxpayer took a contrary view, claiming that there were several elements of the loan that reflected a valid lender-borrower relationship such as:
In rejecting these claims, the court majority found that the debt-generated tax deductions (e.g., interest as well as foreign exchange losses) were not aligned with the arm’s length principles, and on considering the economic relationship between the parties and the “permanence of the funds,” the transfer would more appropriately be treated as a capital contribution.
The court minority, however, disagreed and expressed an opinion that the loan was reasonable and supported in the transfer pricing reports as being in line with market interest rates (as well other conditions). This assertion was countered by the court majority which noted that:
Finally while noting there is certain flexibility allowed with respect to formal requirements between related companies (items that are not commonly omitted in agreements between independent parties), the court majority held that in this particular case, the formal instruments and the economic substance of the loan were not sufficiently well articulated to demonstrate a loan transaction.
The unique and particular features of each situation clearly depend on the facts and circumstances of each case. It is expected that if the decision is appealed, an appellate court decision could bring more clarity to this and similar situations.
For more information, contact a tax professional with KPMG's Global Transfer Pricing Services group in Argentina:
Marcelo A. Castillo | +54 1143165891 | firstname.lastname@example.org
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.