Transfer pricing, the burden of proof

On November 16, 2006, the Federal Tax Court (Tribunal Fiscal de la Nación) ruled in “Laboratorios Bagó S.A.” on the comparative sale prices of certain pharmaceutical companies drawn up by the Federal Tax Authority (Administración Federal de Ingresos Públicos, “AFIP”) for the purposes of determining the income tax liability of a local company.

According to the facts and circumstances described in the ruling, AFIP initiated assessment proceedings. According to the law and regulations in force at the time, AFIP selected a series of Argentine laboratories and compared the results of their export transactions before concluding that the income declared by Laboratorios Bagó appeared to be inadequate.

The taxpayer appealed the tax authority’s assessment before the Federal Tax Court, offering as evidence a transfer pricing report made by a professional auditor. This report was intended to prove that the export prices were consistent with transfer pricing provisions and that the selection of comparable laboratories picked by AFIP for the purposes of the assessment was not the appropriate one. The main objection was that the comparison was made with pharmaceutical firms (i.e., Rontag, Casasco and Roemmers) that were not similar in terms of volumes of transactions and levels of exportation. It also objected that AFIP had not carried out any form of analysis to “homogenize” these laboratories’ operations with those of Laboratorios Bagó.

The Federal Tax Court held that the evidence submitted by the taxpayer countered with reasonable precision and convincing strength the conclusions of AFIP and, as a result, decided the case in favor of the taxpayer.

This ruling is interesting because it is one of the first cases on transfer pricing. Also, it imposes the burden of proof on the tax authority and highlights the importance of the evidence submitted by the taxpayer to challenge the fiscal presumptions that lead to these kinds of assessments.