Applicability of Non-Discrimination Clause in Technology Transfer

I-  Background

Technology Transfer Law No. 22,426 (TTL) states that agreements regarding technology transfer or technical support to an Argentine company and by a foreign company may have certain benefits, as long as said agreements are registered with the Technology Transfer Office of the National Patents Office (NPO).

Section 9 of the TTL sets forth as a condition for the deduction of the expenses for purposes of income tax that said agreement be registered with the NPO. This norm states that lack of registration implies that payments to a foreign supplier will not be deductible for tax purposes as expenses by the local taxpayer, and the totality of the paid amounts will be considered as net profit for the supplier.

In this case, Pirelli Neumáticos SAIC (Pirelli) made certain royalty payments in favor of Italian Pirelli Pneumatici SPA before the patent license and technical assistance agreement between both parties was registered before the NPO. Therefore, the Argentine Federal Revenue Administration (AFRA) issued an Official Tax Assessment (OTA) for Pirelli’s income tax obligations for fiscal years 1998 and 1999, as it understood that the lack of registration of the agreement before the NPO impeded the taxpayer to consider royalties paid abroad as deductible, by virtue of Section 9 of the TTL.

Pirelli argued that the registration with the NPO in order to be able to perform the corresponding deductions was not applicable by virtue of Section 25 of the Italy-Argentina Treaty Against Double Taxation (the Treaty). Said Section 25 of the Treaty stated that interest, royalties and other expenses paid by an entity of one State-Party (for example, Argentina) to a resident of the other State-Party (for example, Italy) were deductible, for purposes of income tax assessment of the first company, under the same conditions as if the expenses were paid to a resident of the first State-Party (in this example, Argentina).

Given that to deduct payments from an Argentine resident to another Argentine resident by virtue of a technology transfer agreement, for purposes of income tax, said agreement does not need to be registered before the NPO, and by virtue of Section 25 of the Treaty, therefore the registration requirement should not be applied for agreements between an Argentine and an Italian resident.

On June 22, 2011, Room “D” of the Federal Tax Court (FTC) issued a ruling by which it ratified the AFRA compulsory adjustment as it considered that, pursuant to Section 9 of the TTL, the failure to register the agreement in due time and form implied an inability to deduct the paid royalties.

Pirelli filed an appeal against said ruling before Room V of the Federal Court in Administrative Matters (Administrative Court), as it argued that the FTC had not applied the non-discrimination clause set forth in Section 25 of the Treaty.

On May 23, 2013, the Administrative Court ruled to revoke the FTC ruling on the understanding that the registration of agreements before the NPO requirement was not applicable in order to deduct those payments locally in accordance with Section 25 of the Treaty. It emphasized that said article establishes the possibility to deduct payments made to the other State-Party (for instance, Italy) under the same conditions as if made to a local (Argentine) entity, which is the reason why the Administrative Court saw no obstacles for the application of the deduction.

Against said ruling, the AFRA filed an appeal by means of a federal recourse with the Supreme Court of Justice (the Supreme Court).


II-  The Supreme Court ruling

On May 9, 2017, the Supreme Court ratified the Administrative Court’s ruling. The Supreme Court stated that, by virtue of Section 75, subsection 22 of the Argentine Constitution, international treaties have a higher hierarchy than local law. Pursuant to the Treaty, royalties paid to an Italian resident may be deducted under the same conditions as if made in favor of an Argentine resident.

In view of the above, the Supreme Court ratified the Administrative Court’s ruling and, therefore, reaffirmed the applicability of the non-discrimination principle included in the Treaty.


III-  Conclusion

The Supreme Court’s ruling re-affirms the integral applicability of treaties against double taxation, which Argentina is legally obliged to comply with by virtue of their higher hierarchy in comparison with local laws.