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Exclusive Q&A on Transfer Pricing with Milton Gonzalez Malla

Posted: 30th June 2017 08:40
New rules and regulation often brings a period of uncertainty as we wait to see how it will be interpreted and enforced. In response to the new OECD/G20 BEPS initiative, what measures can multinationals take in order to minimise the risk of infringement?

Whatever the forces are that have been promoting the benefits of tax transparency, they seem to be proving successful. Most of our C-level clients think non-compliance with global regulations to promote tax transparency and curb tax avoidance can affect their institution’s reputation. On top of regulations like FATCA, the OECD/G20 BEPS initiative requires that multinationals prepare a global set of transfer pricing documentation described in Action 13 of BEPS initiative.
In particular, CbCR required by said Action 13 conveys a dramatic shift in the accountability of both multinationals and tax jurisdictions. Most relevant countries for multinational business (either OECD or non-OECD) have issued domestic regulations in order to enforce compliance with CbCR and the Masterfile. In the near future the global consistency of the multinationals transfer pricing policy will be disclosed to several tax jurisdictions, and eventually challenged. Moreover, the exchange of information networks and mechanisms are also improving dramatically. The level of transparency has never been higher, and the resources available for transfer pricing substantiation have never been as favourable, as they are today for tax authorities.
My advice to taxpayers and multinational enterprises is to ensure that all their legal entities in the supply chain have the required assets and carry out the functions and risks ascribed to them. In times of uncertainty in the financial market players might choose “flight to quality”. It is very likely that today we have the similar conditions as regards transfer pricing risk of infringement. In today’s competitive environment, taxpayers who adopt the new rules early will gain an advantage over those that wait.

Can you talk us through the current transfer pricing landscape in your jurisdiction?

In recent years (since 2003 until 2015), during the Kirchnerˈs government, the trend was an increasing tax pressure and significant focus in transfer pricing audits. During this period the landscape was characterised by intense transfer pricing controversy, in particular regarding foreign intermediaries and the export of goods. The new Macri administration (since late 2015) started with the derogation of a number of taxes (for example the duties on certain exports). The approach to transfer pricing audits under the new administration has been more reasonable and taxpayers friendly compared to previous litigation.
Argentina is not an OECD member country and the OECD Guidelines are not referenced in Argentina’s Income Tax Law and Regulations. However, the tax authority usually recognises the OECD Guidelines in practice, as long as they do not contradict the ITL and Regulations. Some case law also recognise the use of the OECD Guidelines, insofar as they do not contradict the ITL and Regulations. The new Macri administration filed in 2016 an official application for Argentina to join the OECD. This request has triggered a number of institutional reforms, which will be monitored and evaluated by OECD during next year (2018).
What are the transfer pricing documentation requirements in your jurisdiction?

Transfer pricing regulations require extensive contemporaneous documentation in Argentina. Furthermore, taxpayers are required to file an annual transfer pricing study for all transactions with related parties, deemed related parties and independent parties located in non-cooperating countries. Taxpayers are required to keep and eventually submit all of the documents evidencing that prices, amounts received and profit margins have been established on an arm’s-length basis. The transfer pricing study must be in Spanish and has specific format requirements (for example, it has predetermined sections that must be filed, some of them require a CPA attestation or certification). Both related and non-related parties transactions are within the scope of transfer pricing returns (for example, imports and exports with third parties must be disclosed in a specific return). The whole set of transfer pricing documentation to be filed with tax authorities includes:
  • An annual transfer pricing study
  • Audited financial statements
  • An independent certified public accountant’s certification of certain contents of the transfer pricing study
Transfer pricing-specific returns submitted electronically

Are there any noteworthy case studies or recent examples of new case law precedent?

Case law around international tax issues during the last 20 years has been mainly about transfer pricing and treaty abuse controversy. During this period about 30 sentences about transfer pricing disputes have been published; and mainly three industries have been on the spot: (i) automotive, (ii) pharmaceutical and (iii) agri-business exporters. The first two groups of taxpayers have experienced audits more or less in line with international standards, the discussion in the third industry has had non-OCDE flavour due to the controversial Argentine sixth method for commodity exports.
The FTA’s first wave of auditing the transfer pricing practices of commodity exporters consisted mainly of questioning formal aspects of the export transactions, such as, for example, the ‘‘true date’’ of export trades. The date the commercial agreement was entered into generally was disregarded by the FTA due to the lack of available accounting records or the lack of a written intercompany agreement witnessed by third parties, among other reasons. The rulings on Nidera S.A. case (involving years 1999-2000) and Alfred Toepfer case (year 1999) extensively address these issues. Notably, decisions in these cases seem to support in general the FTA requirement that the export of commodities to foreign related entities must have a ‘‘true date.’’ Another legal issue often raised during this first wave of audits was the retroactivity of Law 25,784. The FTA in practice applied this method to transactions performed before the law was enforced in 2004, intending to apply the rule retroactively.
While taxpayers adopted changes in their accounting records and documentation to comply with the standards required by the FTA, tax inspectors began a second wave of audits. The new audit approach to commodity exporters was based on internal or external comparable transactions. Under this second wave of audits, tax inspectors supported adjustments based on transactions carried out with independent entities that were used as internal comparables—for example, challenging whether they were sufficiently independent. Alternatively, the prices of these independent transactions usually were higher than the official freight on board (FOB) prices applied intercompany on the date of shipment. Having observed transactions with the abovementioned features, the FTA presumed that export prices agreed between independent companies were similar or higher than the official intercompany FOB price at date of shipment. Clear jurisprudence on this aspect was issued in the Oleaginosa Moreno Hermanos controversy regarding year 2000. In the Oleaginosa Moreno case, the taxpayer was successful in proving that its transactions carried out with third parties did not meet the requirements to be considered comparables. The Oleaginosa Moreno case represents a turning point in the FTA’s approach to transfer pricing audits of commodities exporters. Since this first court decision was published in 2012, the FTA changed its audit approach to require strict compliance with the a-b-c test. Under the new approach—followed in the third wave of audits— the FTA challenges the compliance of international intermediaries with the a-b-c test. For instance, the FTA may argue that the equity owned by such entities would not be sufficient considering the traded volume. No jurisprudence currently exists regarding this third wave of controversy in the agri-business exporters industry.

In your opinion, what are the biggest transfer pricing challenges currently facing multinationals?

I think the biggest challenge for multinationals is to catch up with the disruptive force of digital economy and the internet of things. The new technological environment is both an opportunity and a challenge for many business and industries. This atmosphere constitutes mainly a challenge regarding tax issues, in particular regarding transfer pricing.
To begin with, because the enhanced tax transparency environment will challenge the multinationals consistency of global transfer pricing policy. It will be therefore important that taxpayers and multinational enterprises make sure that all their legal entities in the supply chain have the required assets and carry out the functions and risks ascribed to them. Secondly, because the technological changes within the multinationals are re-shaping the global supply chain. From the transfer pricing standpoint, in terms of the OCDE guidelines these changes might be considered a business restructuring within the same economic group.
Finally, because the technological changes are re-shaping the key value drivers of the business themselves. Where are the intangibles? Is it R&D or are the IT executives driving the digital economy? How to factor the role of proactive consumers? What are the consequences of the “Significant digital presence” concept for transfer pricing and permanent establishment issues? Probably the traditional one sided profit methods are not enough to answer all these questions, and in the near future the profit split method will play a more relevant role in transfer pricing studies.

How can multinationals utilise technology to minimise risk and efficiently manage resources?

Tax compliance work has been a handcrafted business that involves a professional manager extracting data from a company’s accounts, and then submitting returns to a tax authority in a prescribed manner. At EY we feel that technology is challenging the entire notion of this work.
“Robots” software applications that run repetitive tasks at super-high speeds are moving into the tax sphere. These little packets of hard-working code will transform the way people interact with the tax function. Artificial intelligence, the process of machines thinking for themselves, is also expected to change the way professionals work in the tax industry. Analysts believe that machines capable of seeking solutions to complex problems will ultimately do even intricate tasks.
New intelligent forms of technology will also force companies to reassess how they train employees, from lower-level staff to current and future C-suite executives. In many companies today, workers get to know several aspects of the firm and the business from their first day on the job, learning how to deal with clients, run teams and manage up and down. Technology is quickly transforming this traditional approach.

Milton González Malla is a partner in Pistrelli Henry Martin y Asociados S.R.L., the Ernst & Young member firm in  Argentina, focusing on transfer pricing. He is based in Buenos Aires.

Milton has worked in the Tax group since 2000, serving as a consultant to multinationals and internal and external investors doing business in Latin America. In aExclusive Q&A on Transfer Pricing with Milton Gonzalez Malla ddition to transfer pricing documentation, he has been involved in transfer pricing controversy projects, international tax planning projects and business restructuring tax issues, focusing especially on South America.  

Prior to joining Ernst & Young, Milton taught Economics and Finance to undergraduate students in Argentina and Spain. He has also worked at the Finance Department of an international trading company.

Milton has a B.A. in Economics from Universidad Nacional del Sur (Bahía Blanca, Argentina) in 1997 and a Master of Science degree in Economics and Finance at Universidad Pompeu Fabra (Barcelona, Spain) in 1999. He has also participated in seminars and conferences on business topics such us economics and taxes.

Milton González Malla can be contacted on +54 11 4318-1602 or by email at

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