BASF ARGENTINA S.A. is an Argentine company that manufactures and distributes chemical products, paints, plastics and agricultural inputs. For the 2008 tax year it filed a transfer pricing study applying the TNMM to most transactions with related parties abroad and the CUP method for interest on loans, using external comparables and BASF’s global income statement as the tested data.
Following an audit focused on this study, the tax authorities determined income tax ex officio for 2008, increasing taxable income by ARS 5,625,444.17 on the basis that BASF’s profitability, especially in its chemical manufacturing activity, was below the range of independent comparables. The tax authorities did not dispute the choice of TNMM, the multi year period or the set of external comparables, but challenged BASF’s implementation of TNMM and certain comparability adjustments. They rejected BASF’s aggregation of all business segments and functions into a single operating margin, and instead used segmented information by function that BASF later provided, concluding that the chemical manufacturing function alone fell below the interquartile range. They also disallowed three adjustments: exclusion of export duties as “extraordinary,” exclusion of the holding result as non operating, and an upward adjustment to sales in the automotive paints business that BASF said reflected unpassed cost increases.
BASF appealed to the National Tax Court, arguing that OECD Guidelines allowed aggregation of closely linked activities, that full segmentation was not required by accounting rules and was operationally difficult, and that the three adjustments were needed to align its financial statements with those of the foreign comparables.
Judgment
The National Tax Court dismissed the appeal and upheld the tax authorities’ determination in full, with costs to BASF.
The Court held that, in this case, manufacturing, distribution and product lines were clearly distinguishable and BASF had not proved they were so integrated that they had to be analysed together, so TNMM had to be applied on a segmented basis.
It found that export duties were a recurrent feature of the Argentine market and had not been shown to lack equivalents abroad, so they could not be excluded as extraordinary items; that BASF had not proved it was unable to pass cost increases to automotive customers; and that removing only the holding result in an inflationary context undermined both internal consistency and comparability with foreign companies.
The Court concluded that BASF’s aggregation approach and its three adjustments did not improve comparability and conflicted with the arm’s length principle, and therefore confirmed the income tax adjustment for 2008.
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