New Regulations on Income Tax related to “transfer pricing” and “thin capitalization”

Decree No 916/2004 was published in the Official Gazette on July 23, 2004. It amends Decree No 1,344/1998, regulatory of the Income Tax Law. This regulation became necessary because of the amendments to the Income Tax Law made by Law No 25,784 on October 2003, that were mainly related to “transfer pricing” and “thin capitalization”.

Decree No 916/2004 modified the regulations applicable to gains arising from foreign trade transactions carried out by both independent and related parties. The most relevant amendments could be summarized as follows:

(i) It set forth that A$1,000,000 (approximately US$ 300,000) per year is the amount of transactions above which independent parties entering into foreign trade transactions for which there is not a known price in a transparent market, must inform to the tax authorities the main terms and conditions of said transactions in order to allow such authorities to check whether the values agreed are arm’s length or not.

(ii) It set forth that two or more entities are going to be deemed “independent” to the extent they are not directly or indirectly subject to the direction or control of the same persons or such persons do not have the power to define their activity by virtue of their interest participation, or functional influences or of other kind.

(iii) It set forth that a transaction between independent parties is not going to be deemed as arm’s length if one of the parties involved is organized under the laws or has domicile in a so-called “tax haven”. As a consequence thereof, such transactions are going to be subject to the general transfer pricing regulations.

(iv) It amended some specific regulations related to the methods applicable in order to determine the price of certain transactions (i.e. resale price method between independent parties and “commodities”).

Regarding the rules related to interest deductibility, mainly based on the equity of the local entity owing such interest, some of the main amendments were:

(i) It broadened the concept of “liability” (pasivo) for purposes of calculating the interest deduction limit, including now indebtedness related to labor, taxes and social security obligations.

(ii) It pointed out that any contribution or advances in account of future capitalization would be computed for purposes of calculating the net equity of the entity only if they are irrevocable, or duly documented, and do not accrue any interest for the contributor.

(iii) It defines the interest to which the “thin capitalization” rules do not apply in such a way that said rules might apply to interest derived from loans granted by foreign residents in countries to which Argentina has entered into a Tax Treat to avoid Double Taxation.