On October 11, 2012, the Federal Administration of Tax Revenues, the AFIP, of Argentina accused a large agriculture biotechnology company of using sham loans from related parties to avoid up to $77 million in taxes. According to the AFIP, the company “pretended” to borrow money from related overseas parties to show lower revenues. The lenders were located in the United States, Panama and Bermuda.
A second issue is the purported failure to complete a transaction between a US entity and a Spanish company that would be the parent company of the Argentinean entity. The AFIP asserts that the transaction was never completed and that the Spanish company is a shell company.
As part of the exam, the AFIP has found that the $250 million loan contract suffered from several defects, as the term of the loan was indefinite, that it had not been duly legalized at the consular office, the international court registration process had not been completed, and several key signatures were missing from the document.
Currently, the government has ejected the company from the exports register. Ejection from the register carries significant limitations on the activities of the company in that it limits the amount of materials the company is allowed to received and dispatch each month. The company can limit the effect of this by hiring third parties to fulfill the gaps, but this also raises the cost of these operations. Ejection also raises the company’s income tax bracket from 2 to 15 percent and its sales tax from 8 to 10.5 percent.
Of interest is that Argentina will be requesting information under the newly entered exchange of information agreement with Spain effective January 1, 2013 and from the US under the OECD updated multilateral Convention on Mutual Administrative Assistance in Tax Matter which it ratified in September.
The need to ensure the proper completion of intercompany agreements, standardization of the agreements to local requirements, and consistency in all supporting transfer pricing documentation is imperative in order to mitigate exposure.
Do you think ejection from the exports register was justified? Share your thoughts in the comment section below.