A recent ruling by the National Tax Court analyzed the substantial differences that would arise between the price declared when exported to Uruguay and its final shipment to Brazil.
The grounds for confirming the value adjustment made by the customs service and, consequently, the customs infringement due to the fact that the declaration was not accurate, have been based on the considerations of Member Dr. Miguel M. Licht, who has dealt with issues related to transfer pricing, OECD principles, among other aspects, and which were supported by Member Dr. Claudia Beatriz Sarquis. For his part, Member Dr. Horacio Joaquín Segura voted in dissent.
Relevant foundations
Linking and transfer pricing
In general terms, it is clear that multinational companies must provide detailed information on their transactions with related companies, including the prices agreed and the methods used to determine them. Tax authorities, for their part, are empowered to review and adjust transfer prices if they consider that they do not adequately reflect the market value of the goods or services involved in the transaction.
Under such conditions, while it is true that the rules and standards contained in these Guidelines are mostly located under the umbrella of income tax, it is no less true that they are not of specific concern to such tax since they are materialized through foreign trade operations and, therefore, also affect taxes related to cross-border trade.
This is because any rule applied to transactions between related companies will imply an analysis and possible departure from the prices agreed between the parties, with the consequent effect on the taxable base of income tax and, for a matter of fiscal coherence, also with respect to taxes levied on foreign trade. This is particularly relevant in Argentina, where taxes coexist not only on imports but also on exports.
OECD Guidelines
Thus, specifically in relation to taxes levied on foreign trade, among the OECD Guidelines for the application of the Arm's Length Principle, "the use of customs value" is mentioned.
The OECD maintains that “many customs administrations apply the arm’s length principle to compare the value attributable to goods imported by associated companies, which may be affected by the special relationship between them, with the value of similar goods imported by independent companies.”
It warns that “the valuation methods for customs purposes may not coincide with the methods recognised by the OECD for determining transfer prices” –within the framework of taxes that tax income–, while recognising that such value “may be useful to tax administrations to assess the conditions of full competition of the transfer price of the related-party transaction, and vice versa” (Chapter I “The Principle of Full Competition”, point 1.137).
In other words, the determination of Transfer Prices in customs matters should not necessarily be limited to the determination methods suggested by the OECD itself for income tax - Comparable free price, Resale price, Increased cost, Net operating margin or Distribution of results - as long as the arm's length principle, the guiding standard of the OECD Guidelines, is pursued.
Customs value and transfer prices
From the foregoing, it follows that, according to the "OECD Guidelines for transfer pricing to multinational enterprises and tax administrations 2022", in cases of transactions between related companies such as the one in question, prior to using the prices agreed between the parties - transfer prices - which in customs matters are usually transferred to the customs value - via transaction value or another valuation method - both the importing/exporting firm and the tax authorities must verify compliance with the OECD Arm's Length Principle, that is, that the price at which the merchandise was sold between the two related firms is similar to that at which it would have been sold between independent parties, for goods with the same physical characteristics, quality and volume, as a prior step to determining the tax base - customs value - on which customs duties will be calculated.
Law 22.415 (CA) and Transfer Prices
Such principles have been incorporated into domestic legislation through Law No. 22.415 of the Customs Code, which, in the case of exports, Article 735 et seq., provides that “for the application of the ad valorem export duty, the taxable value of the merchandise exported for consumption is the FOB value in transactions between a buyer and a seller independent of each other…”. While Article 742 defines “sale between a seller and a buyer independent of each other” as -in what is of interest here- “a sale in which, especially, the following conditions are met: …b) the agreed price is not influenced by commercial, financial or other relationships, whether or not contractual, that may exist, apart from those created by the sale itself, between the seller or any person of visible or ideal existence associated with him in business, on the one hand, and the buyer or any person of visible or ideal existence associated with him in business, on the other…”. And art. 746 warns that “1. The fact that there is a link between the buyer and the seller that affects the provisions of article 735 does not constitute sufficient reason to consider the price paid or payable as unacceptable, unless such link influences the price. 2. If the link influences the price, the customs service may disregard the price paid or payable as a basis for valuation and in such case will determine the value in accordance with the provisions of article 748”. Finally, art. 747 establishes that “the price paid or payable will be accepted and in such case the merchandise will be valued in accordance with the provisions of article 746, section 1, if the exporter demonstrates that said price does not differ substantially from any of the current values resulting from taking into account article 748, paragraphs a), b) or c). However, if the customs service also has information, taking into account the same criteria, which differ significantly from the price paid or payable, it may require the exporter to justify its transaction price, under penalty of not considering it acceptable.
Customs and its powers
(…) it is clear that the actions of the customs service have been in accordance with the law, in the sense that, having proven the link between the Argentine exporting company and the Brazilian importing company, the tax authority proceeded to verify compliance with the arm’s length principle prior to using the transfer price as a basis for calculating the FOB value that will determine the amount of the foreign currency flow of the operation. And, as far as national regulations are concerned, the customs service proceeds to apply the theoretical notion of valuation in export matters in art. 745 CA that allows, in what is of interest here, the calculation of the FOB value - which determines the amount of foreign currency to be entered - based on the price at which any seller could deliver the merchandise to be exported, in the places referred to in art. 736, as a result of a sale made between a seller and a buyer independent of each other. That is, it establishes the conditions of a sale, and should be considered as such by all commercial operations actually agreed between a buyer and a seller, making the corresponding adjustments to arrive at said theoretical value.
Specifically in this case, the FOB value was determined taking into account the origin and destination of the physical journey of the brewing barley malt based on information recorded by the customs services involved, since it is exactly the same shipment that is sold in Argentina (the load was carried out between February 27 and March 1, 2007) and, a few days later, it is then sold in Uruguay to Brazil (entering Recife Customs on 7/3/2007, that is, 6 days after leaving Argentina) without changing transport, that is, a perfect comparability since it is not only the same type of merchandise with matching volume and origin but exactly the same cargo, thus complying with the provisions of art. 748 inc. a) CA, namely: “the value obtained by comparative estimation with identical merchandise or, failing that, similar competitive merchandise, which had been the subject of clearance, taking into consideration the modalities inherent to the export”, understanding that it was appropriate to compare the identical/similar product exported by the plaintiff to Uruguay with that sold to Brazil.
The exporter and his justification
(…) I must draw attention to the fact that the proceedings do not contain sufficient documentation to refute and/or justify the difference between the two FOB values, given that they are dealing with the same product, including the same shipment, thus reducing the aforementioned justification to mere dogmatic assertions.
In summary, in the specific case, I understand that the tax authority has been able to demonstrate price inconsistencies in a context of transactions between related parties, without the appellant being able to justify the differences with the degree of certainty necessary to defeat the customs service's argument. There is certain and clear data that demonstrate that ... sold certain merchandise to its related company based in Uruguay, who a few days later resold it to a company related to both, with substantial price differences, and the final destination of the exported physical goods being the same, even being the same shipment, without the plaintiff being able to justify it.
Dissent
Triangulation does not hold prohibition
Triangulation, in itself, is not prohibited by current legislation. In international trade of certain commodities, there are common practices of intervention by intermediary companies between supply and demand, known as traders, which, although they do not add value to the traded goods, provide real and effective services that justify a remuneration that, if not billed as an individual service to one of the parties, can be deducted from the purchase price or added to the sale price, depending on whether the commodities have a "transparent" international quotation or not. But it is also true that in international trade, non-genuine triangulations are used, which can be harmful in the customs, tax, exchange, corporate or money laundering fields, or even in several of these fields at the same time.
Therefore, the existence of a triangular operation constitutes an element that enables the customs service to investigate and gather more information on the declared value, in order to evaluate the genuineness of the commercial operation declared as the basis for customs destination.
Linkage and infringement
It is worth noting that, for the purposes of configuring the infringement in question, it is necessary, firstly, the existence of a difference between what was declared in the customs destination application and the result of the verification and, although a triangulated operation allows the customs service to investigate and gather information on the declaration made, in order to prove the existence of a difference between what was declared and what was verified, sufficient elements must be presented.
That the fact that it has been proven, through the use of the INDIRA system, that the same merchandise that was sold by … to the firm …, and was entered into the Brazilian market, for a value higher than that which was exported from the Argentine Republic, does not constitute by itself an element that is sufficient to be able to consider that the value declared in the first of the sales, by the firm here appellant, does not turn out to be the real value of the transaction. That is to say, the fact that there was a subsequent sale for a price different from that of the initial sale, carried out by a related “trader”, … does not imply by itself that the declared price is not the transaction price, and that it is a fraudulent maneuver tending to generate less foreign currency inflow into the country.
There is no regulation limiting the number of operators who may participate in a foreign trade transaction and that such activity is illegal; however, this proven connection was enough for the customs service to initiate an investigation using the INDIRA system, concluding with the imposition of a fine for violation of art. 954, paragraph c) of the Customs Code, thus assuming the entry of an amount of foreign currency other than that which actually corresponds.
In the case in question, the customs service attributed an inaccurate infraction classified in art. 954, paragraph c), to an allegedly fraudulent linking maneuver between the companies, when what the infraction type represses is the inaccuracy of the declaration; therefore, in the case in question, the price declared by the appellant was identical to the price actually invoiced, received and recorded in the accounts; therefore, the elements of the type that allow the infraction charged to be imputed in the terms of paragraph c) of art.954 of the CA are not given. Therefore, since the budget required by the rule is not configured, a difference between what was declared and what was verified, capable of causing an income or expenditure of foreign currency other than the corresponding one, I consider that the resolution appealed in this case should be revoked.
Background cited
Citing the ruling of the SCJN in the case “Maltería Pampa SA v. DGI” (TFN 27.000-I) dated 13/03/14, together with the opinion of the Attorney General, in which tax controversies related to Income Tax were resolved in a partially analogous case, ruling in favor of the taxpayer, recognizing that the Uruguayan firm constitutes a company with independent legal status, and not a stable establishment (in the terms of the Income Tax Law) and, even less, a fiction that hides a direct sale to Brazil.
The Court, in its decision, validated the operation of successive sales for the determination of the Income Tax, recognizing the legitimacy of the price in relation to the tax that is the tax base, so that extrapolating the issue to the case at hand, the intelligence used by the highest court to assert that this link is an illegitimate legal reality cannot be ignored.
The judgment corresponds to Chamber G “MALTERIA PAMPA SA v. GENERAL DIRECTORATE OF CUSTOMS s/ APPEAL”, file No. 35.393- A. And was issued on April 28, 2023.
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