Overview of Argentina’s federal tax reform

December 2018 | EXPERT BRIEFING | CORPORATE TAX

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Effective since 1 January 2018, the comprehensive tax reforms enacted by the Argentine federal government have resulted in the amendment of many fiscal regulations, including the Income Tax Law (ITL), the Value Added Tax Law (VAT), the Tax Procedures Law (TPL), as well as replacement of the Criminal Tax Regime (CTR).

Amendments to the ITL

Tax rate applicable to corporations. The tax reform reduced the tax rate applicable to corporations and permanent establishments from 35 to 30 percent for fiscal years starting on 1 January 2018 and 2019, and to 25 percent for fiscal years starting on 1 January 2020 onwards.

Financial transactions. The tax reform amended different provisions of the ITL concerning income derived from financial transactions of individuals and undivided estates resident in Argentina. Previously, the ITL provided an exemption for gains derived from the sale and disposal of securities listed under public offer, including shares, securities and bonds.

The tax reform establishes that only the results from sale, transfer or disposition of shares, securities representing shares and certificates of deposit of shares that are carried out through stock exchanges or stock markets authorised by the Argentine Securities and Exchange Commission will be exempt.

The foregoing exemption will also be applicable to foreign beneficiaries to the extent that such beneficiaries do not reside in, and the funds do not come from, non-cooperative jurisdictions. The exemption will also be applicable to public securities issued by the Argentine federal and local governments, negotiable obligations and representative shares or deposit certificates shares and other securities, provided that such securities have been issued by entities domiciled or located in Argentina, with the exception of the so-called LEBACs (securities issued by the Argentine Central Bank).

Net income from an Argentine source of individuals and undivided estates arising from profits related to interest or return on the placement of deposits made in financial institutions, public securities, negotiable obligations, share of mutual funds, debt securities of financial trusts, bonds and other securities, would be taxable at rate of 5 percent if they were issued in Argentine pesos (ARS) without an adjustment clause, or 15 percent if they contemplated an adjustment clause or were issued in a foreign currency. These rates will also apply to foreign beneficiaries, as long as they do not reside in non-cooperative jurisdictions and the funds invested do not come from non-cooperative jurisdictions.

Dividends and other similar income, obtained by Argentine-resident individuals and undivided estates located in Argentina, will be taxed at the rate of 13 percent (7 percent during fiscal years 2018 and 2019) on net income. This will also be applicable to dividends and profits that will be paid to foreign beneficiaries by way of withholdings made by an Argentine entity at the time of payment.

The net profits from an Argentine source of individuals and undivided estates resulting from a transfer of securities will be subject to a tax rate of 5 percent in the case of securities issued in ARS without an adjustment clause or 15 percent if there is an adjustment clause or they have been issued in a foreign currency. In the case of shares, representative securities and certificates of deposits of shares and other securities, certificates of participation of financial trusts and any other right over trusts and similar contracts and shares of mutual funds, which do not meet certain conditions, a 15 percent tax rate will be applicable.

The results of the transfer or sale of real estate or property rights by individuals (Argentine-resident or not) are now subject to a 15 percent rate. Property Sales Tax at a 1.5 percent rate over the price no longer applies. With some exceptions, these provisions apply to the sale or transfer of real estate or property rights acquired after 1 January 2018.

Transfer pricing. Modifications to two technical concepts used in the transfer pricing section of the ITL were also introduced by the tax reform. The term “fixed establishment” was replaced by the term “permanent establishment”, describing one of the fact patterns where transfer pricing regulations apply: transactions between a “permanent establishment” and a foreign entity. The ITL also extends the application of transfer pricing rules to both “low tax jurisdictions” and “non-cooperative jurisdictions”.

Non-cooperative jurisdictions and low tax jurisdictions. A definition of the term “non-cooperative jurisdiction” as any jurisdiction or country that: (i) has not signed an information exchange agreement with Argentine; (ii) has not signed a convention to avoid double taxation with Argentina; or (iii) has signed either agreement or convention but does not comply with its obligation to share information with Argentina was incorporated. The Argentine federal executive branch is responsible for issuing a list of non-cooperative jurisdictions.

The term “low tax jurisdictions” is also defined and includes any country, jurisdiction dominium, territory, associated state or special tax regime in which the maximum corporate income tax rate is lower than 60 percent of the income tax rate established in the ITL (18 percent during 2018 and 2019, and 15 percent from 2020. Funds transferred from a low tax jurisdiction to an Argentine entity are considered untaxed income for the local entity, regardless their nature.

Permanent establishment. A definition of “permanent establishment”, comprising the case of a person or entity physically present in the country acting on behalf of a foreign entity, and in such capacity executing contracts or playing an important role that results in contracts being executed, is also included. It also limits the use of an independent intermediary in the country to avoid being regarded as a permanent establishment.

Thin capitalisation. These conditions now trigger the application of the thin capitalisation regime. First, a local receiving a loan and paying interest must be a legal entity not qualified by Law 21,256 as a financial entity. Second, a lender must be a resident or non-resident entity that controls the borrower. Third, the interest deduction is limited to 30 percent of the net income of the fiscal period, before taking the deduction. Loans used to purchase goods or services are excluded from the regime. If these conditions are met, interest may not be deducted for tax purposes, and will be subject to the same withholding rates as deductible interest. The ITL allows taxpayers to carry forward interest paid in excess of the established limits for up to five fiscal years.

Amendments to the VAT

A new taxable event related to the provision of digital services by individuals or entities domiciled abroad whose use or effective exploitation is carried out in Argentina, as long as the customer is not subject to the tax of other taxable events and is not a registered taxpayer, was introduced. This tax will be paid by the customer, directly or through a reverse withholding mechanism.

If an intermediary, whether resident or domiciled in Argentina, intercedes in the payment, the intermediary will act as a reverse withholding mechanism agent. If there is more than one intermediary, the agent of reverse withholding will be the one which has the closest commercial relationship with the provider of the service. Entities providing collection services are included in this provision.

Amendments to the TPL

Final Voluntary Agreement. The tax reform incorporates the so-called Final Voluntary Agreement as an alternative to the conclusion of assessment proceedings. The authorisation of a Final Voluntary Agreement is a prerogative of the Administración Federal de Ingresos Públicos (AFIP). The agreement must be approved by the federal administrator. In the event that the taxpayer rejects the solution, the original tax assessment procedure will continue.

Regulation of Mutual Agreement Procedures (MAPs). The tax reform incorporated into the TPL regulations regarding mechanisms to carry out MAPs set forth in Conventions for the avoidance of double taxation subscribed to by Argentina. Pursuant to these amendments, the treasury secretary of the Treasury Ministry will be the competent authority and will apply the MAP to cases where there are doubts regarding tax Convention application.

New criminal tax regime

The tax reform sets forth a new criminal tax regime (CTR). In a nutshell, higher thresholds for all tax figures were enacted, and a fine of two to 10 times the amount of tax evaded for corporations, when the criminal act has been performed in its name or for its benefit, was eliminated. The CTR also allows criminal actions to be extinguished, once per tax per responsible individual or corporation, provided certain conditions are met.

Duties on the exports of goods

In September 2018, duties on the export of goods were re-imposed by the Argentine federal executive branch. With some exceptions, Decree No. 793/2018 taxes the export of goods either with a 12 percent ad valorem rate capped at ARS 3 or ARS 4, depending on the good’s tariff line- per US dollar of their free on board (FOB) valuation. The Argentine federal executive branch recently submitted a bill to the Argentine Federal Congress, aiming to modify the Customs Code and impose duties on the export of services.

Walter C. Keiniger is a partner and Tomás E. García Botta is an associate at Marval, O’Farrell & Mairal. Mr Keiniger can be contacted on +54 11 4310 0133 or by email: wk@marval.com. Mr Botta can be contacted on +54 11 4310 0178 or by email: tegb@marval.com.

Walter C. Keiniger and Tomás E. García Botta

Marval, O’Farrell & Mairal