The tax authorities had partly disallowed amounts deducted by Nike Argentina for three expenses; royalties for use of trademarks and technical assistance, promotional expenses for sponsorship of the Brazilian Football Confederation, and commissions of Nike Inc. for purchasing agents. Issue one and two was dropped during the process and the remaining issue before the tribunal was expenses related to commissions for purchases according to a contract signed between Nike Argentina and Nike Inc.
The tax authorities (AFIP) had found that the 7% commission rate paid by Nike Argentina had not been determined in accordance with the arm’s length principle.
The tax authorities stated that the purchase management services were provided by NIAC, and that Nike Inc.’s participation was merely an intermediary, and therefore it charged a much higher percentage than the one invoiced by the company performing the actual management.
The Court of Appeal ruled in favor of Nike Argentina. The analysis in the Transfer Price Study based on external comparables supported the 7% commission.
See also the prior decision of the Tax Court.
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ARG v NIKE 2019
It is an important decision concerning comparability issues of two contracts used in applying comparable uncontrolled price method. The decision contains a detailed discussion on facts to establish how the two contracts are dissimilar.
The Appeal Court noted that the tax authorities did not analyze the economic factors that could have helped them to not consider the agreement with NIAC as comparable.
No doubt, the commission of 7% is on the higher side, and the tax authorities could have analysed the seven comparables identified in the transfer pricing reports to select contracts that could be considered real comparables. This would have involved the comprehensive analysis as the tax court has done. Further, which percentage point within the interquartile range could be considered at arm’s length? Why not on the lower side of the range or median of the result. I am unsure what does the law provide.
The appeal court has highlighted a significant issue of obligations of taxpayers and tax authority in the matter of transfer pricing analysis based on the imbalance of information available with them. The initial burden is on the taxpayer to justify its transactions are at arm’s length.