Argentina’s Sixth Method

transfer pricing rules | 45 a situation a company may have an incentive to use a lower margin to reduce its tax obligation.

Risk of double taxation: Another criticism of the fixed-margins app-roach is that it was adopted somewhat unilaterally without adequate consultation with other countries in which Brazilian subsidiaries might have had business activities. As a result, MNC profits could be taxed twice, if, for example, the other country refused to make the correlative adjustment. For this reason, introducing this approach unilaterally may raise issues as it may make the country appear less attractive for foreign investment. Where multiple jurisdictions are concerned, coordination between countries would be judicious in order to balance the need to attract investment and collect tax revenue. Weak tax administrations may consider adopting the fixed-margin approach on a multilateral or bilateral basis if it is feasible.

Brazil’s Accession to the OECD and the End of the Fixed-Margins Approach

By way of Decree No. 9,920, of July 18, 2019, the Brazilian gov-ernment announced its intention to join the OECD. In this respect, the OECD and the Brazilian Tax Administration issued a statement deciding that the Brazilian transfer pricing rules would be fully aligned with the OECD transfer pricing rules (OECD and RFB, 2019). This decision will override some of the positive features of the Brazilian transfer pricing approach (Schoueri, 2019). Going forward, the fixed-margin approach may be less attractive for developing countries that aspire to join the OECD but may still have merit as a methodology.

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length, and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction’ (IBFD, 2016: 59).

The Sixth Method is targeted specifically at the commodities industry and is also referred to as the ‘Commodity Rules’. In Argentina, com-modity transactions include grain, oilseed, and other crops, petroleum and their derivatives, and, in general, goods with a known price in transparent markets. The adoption of Argentina’s Sixth Method was triggered by the government’s perception that the commodi-ties industry was involved in aggressive transfer price manipulation (Baistrocchi, 2017: 102). Argentina’s tax authority observed that subsidiaries in Argentina traded raw materials for low prices to their related parties in countries with lower tax rates, which resulted in very low taxes paid in Argentina (Baistrocchi and Roxan, 2012).

The Sixth Method specifies that the transfer price must be deter-mined according to the publicly quoted price in the transparent market, on the date of shipment of the goods traded. To obtain pricing information on goods, the Sixth Method requires the use of public databases.⁷ These databases are freely available to the public, so nei-ther taxpayers nor tax authorities have to pay expensive subscription fees for access to private databases. In fact, use of private databases is not allowed under the Sixth Method. The Sixth Method also specifies that the price used must be that on the date of shipment of the goods in question. This makes it difficult to report a fake transfer price as the tax administration can check the date of shipment with the cus-toms administration. If the date of transaction were used instead, for example, the parties could report a date with a more favorable price in order to engage in profit shifting.

Benefits of the Sixth Method for Developing Countries

The Sixth Method is a very popular transfer pricing method, which is especially appropriate for developing countries as many of them are commodity dependent. It has been adopted in numerous coun-tries in Latin America, including Uruguay, Ecuador, Mexico, Peru, Guatemala, Honduras, the Dominican Republic, and Brazil; African countries including Zambia, and Eastern European countries, such as Ukraine. However, each country’s domestic legislation may have its own peculiarities. The Sixth Method has been officially recognized as an accepted method by several international organizations including

transfer pricing rules | 47 the IMF, the OECD, the UN and the World Bank Group (The Platform for Collaboration on Tax, 2017). As a result, this method is considered compatible with the international transfer pricing rules.

Below are additional advantages of the Sixth Method.

Predictability: Transfer prices derived through application of the Sixth Method are predictable, because the list of databases that must be referred to are indicated in the tax law; it is clear for both tax authorities and taxpayers that they should refer to the same databases to obtain the benchmark prices. An additional benefit of having a limited list of databases specified in the tax law is the reduced administrative burden on tax authorities, who do not have unlimited time to search for pricing information in all existing databases. This also reduces the chances of a contested outcome of transfer prices by the tax authority as well as by the taxpayers.

Less likelihood for asymmetry of information: Since the taxpayer and tax authority must use the same databases, this ensures that there is symme-try of information between the MNCs, which are capable of accessing many expensive private databases, and the tax administrations, which are resource constrained.

Reduced financial burden on tax authorities: Publicly available databases eliminate the need for subscription fees required for private databases.

This is extremely important for developing country tax authorities, as access to the private databases is costly while access to the public data-bases is free.

Difficulties in Application and Other Criticisms of the Sixth Method

The Sixth Method also has disadvantages, as described below.

Limited scope: A downside of the Sixth Method is that it is limited to the commodity industry only. In addition to commodities, developing country economies are also composed in large part by services such as insurance, telecommunications, and so on. The Sixth Method would therefore not cover all transfer pricing cases faced by developing coun-try tax authorities but still address quite a few.

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Lack of pricing information: Another difficulty may arise if the reference prices of commodities do not exist in the public market. This can hap-pen, for example, if a commodity is very specific to one country. There are two versions of this problem. First, if there is no pricing informa-tion in the public databases at all, then the Sixth Method will not be applicable. Alternatively, if there is pricing information in the public databases but it does not match the existing market conditions, then a price adjustment will be required. This in turn makes the process more complex and expensive, as additional information will be needed, undermining the advantages of the Sixth Method. This difficulty arises particularly with respect to the specificity of certain minerals. A study for minerals carried out in 2013 reported that: ‘at first glance, one might think that the identification of comparable transactions is easy in the mining sector because some minerals are listed on world markets (such as the London Metal Exchange (LME) or Platts). In reality, the price of ore is not necessarily the determining factor’ (Charlet et al., 2013: 527).

Lack of clear guidelines: Although Argentinian law allows for comparabil-ity adjustments, there are no formal procedures for how this additional analysis should be conducted. The process can therefore benefit from additional clarity and transparency. Increased transparency regarding the price adjustment process would therefore be an improvement to the Sixth Method as currently implemented in Argentina.