A few days ago, AFIP issued a document with recommendations and suggestions to take into account when documenting the transfer prices of Argentine taxpayers during the periods impacted by the COVID-19 pandemic situation.
Although the Argentine tax authority visualizes the particular situation that taxpayers are going through as a consequence of the pandemic context and expresses that it understands the complexities that may arise at the time of making the Transfer Pricing Reports, it emphasizes that the taxpayer must demonstrate that its operations were carried out according to the arm's length principle in accordance with the provisions of the regulations in force in Argentina, without exception. Keeping this purpose clear, AFIP points out that it will be of vital importance that in any transfer pricing analysis covering periods affected by the pandemic situation, taxpayers must document how and to what extent they have been affected by the pandemic and that references to general situations will not be valid in any way.
Additionally, it emphasizes that we must pay special attention to the preservation and clarity of the information to be submitted and that such information must give a detailed account of the effects that the pandemic situation had on the taxpayer's activity.
It also mentions that it will be necessary for taxpayers to perform a robust functional analysis in their Transfer Pricing studies and that they should appropriately distinguish between the economic effects of the pandemic, the new risks assumed as a consequence of the pandemic and those corresponding to their normal business operations. The taxpayer may support its transfer pricing analysis with publicly available information regarding the effect of COVID-19 on its business and/or industry and on the controlled transaction. In this regard, AFIP mentions that the information used as a source and an analysis that specifically relates the pandemic situation to the business or transaction of the affected taxpayer must be submitted.
The tax authority suggests, in the document issued, a series of sources of information that it considers could be useful when identifying and justifying the extraordinary effects and results generated by the pandemic situation. The following are some of the sources mentioned by the tax authority:
Analysis of the changes in sales volumes during the affected periods compared to sales generated during prior years to the pandemic;
Analysis of the change in installed capacity utilization;
Specific information regarding incremental or exceptional costs borne by the parties to the controlled transaction;
The extent to which government assistance has been received and, if so, quantify the effect and identify the type of assistance and its accounting treatment;
A comparison of budgeted or forecasted internal data related to sales, costs and profitability compared to actual results.
The aforementioned document highlights that in situations of assistance provided by the Argentine State to face the pandemic, it will be necessary for taxpayers to consider in their analysis the terms and conditions of such programs to determine the impact on the transactions carried out with their related parties; as well as to analyze in depth the particular conditions of the selected comparables, since they could have received governmental assistance as a consequence of a pandemic context.
A relevant issue is that AFIP recommends to be cautious in performing analysis considering multiple years of analysis, since this approach, the document clarifies, could lead to the distortion of results of pre- and post- pandemic periods. Likewise, it clarifies that comparables that show recurring losses will not be taken as valid as a general rule.
Among the last points, the document mentions the changes in the risks assumed by local taxpayers. In this regard, AFIP recommends taxpayers to carefully analyze and justify the business reason for any changes in the risks assumed before and after COVID-19. The document also points out that "special attention" should be paid to those situations in which losses are assigned to a low risk distributor, which historically did not assume market risk and perceived a fixed routine return, due to a change in risk management derived from the pandemic.
Finally, the tax authority refers to the impact that the pandemic situation may have on the transfer pricing policies, on the value chain of the Multinational Group of the local taxpayer, stating that the responsible parties should keep all available information that allows evidencing the impact that the pandemic had on its operations and results. In addition, this situation must be consistent with the information presented in the Master Files, in those Groups reached by such obligation.
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