Argentina’s labour and tax reforms
February 2018 | EXPERT BRIEFING | LABOUR & EMPLOYMENT
One of the most important topics on Argentina’s economic agenda has been the need for fiscal and labour reform.
The Draft Bill of the Labour Amendment (Labour Draft) sets out to pursue objectives which include human development, economic progress with social justice, increased productivity of the Argentine economy, generation of employment and employee professional training.
Law No. 27,430 (the Fiscal Tax Law) entered into force on 29 December 2017 and aims to achieve a more stable and effective tax system and intends to modify certain aspects regarding different taxes.
The main aspects are summarised below.
Labour Draft Bill
The Labour Draft provides a regime of regularisation of unregistered employment whereby employers will be able to register employment relationships in the private sector or rectify the current remuneration or hiring date of the employment, with the exception of those related to domestic service, establishing certain benefits, such as: (i) the termination of criminal action for tax evasion of social security obligations and the release of infractions, fines and penalties; (ii) de-registration from employers with the Labour Penalties Registry, regarding infractions committed or verified until the effective date of the law; (iii) debt forgiveness for capital, interest, penalties and fines when they originate from lack of payment of withholdings and contributions destined to certain Social Security subsystems – a 100 percent pardon is possible if the registration is made in the first 180 days of the regulation of the law and 70 percent after the first 180 days; and (iv) exemption from payment of fines for lack of registration of the employment relationship or deficient record of the remuneration or hiring date established in National Employment Law No. 24,013 (NEL), to the extent that such registration or rectification of the actual remuneration or hiring date of the employment is carried out in accordance with the terms provided in the draft.
The draft establishes the opportunity, for those employees included within the registration period, to compute up to 60 months of services with contributions (depending on the registration), calculated on a monthly amount equivalent to the minimum mandatory wage in force (currently $500), to meet the relevant years of services for the benefit of retirement and obtain the universal basic benefit and unemployment benefit.
The benefits will apply, regarding non-condonable capital and interests, if an employer pays them in full or through the payment facility plan, which will consist of a payment equal to 6 percent of the debt and, the balance, in up to 60 monthly instalments, with a financing monthly interest of 0.75 percent.
Employers will have 360 days from the date of entry into force of the regulations of this law to regularise employment.
In addition, if the existence of undeclared or irregularly registered employees is verified after the adoption of the regime established in the Labour Draft, the granted benefits will be withdrawn.
Reporting obligation for administrative and judicial authorities
The Labour Draft establishes the obligation upon judges and administrative authorities to report final judgments condemning companies to pay compensation for failure to register the employment relationship or deficient registration of the actual remuneration or hiring date of the employment, as well as approval resolutions of conciliatory agreements acknowledging facts and law relating to said situations to the tax authority (AFIP).
The Labour Draft proposes modifying the concept and scope of employment registration, as it provides that the employment relationship or contract is considered registered when the employer registers the employee in the special book of section 52 of the Labour Contract Law No. 20,744, or in the labour documentation that replaces it, according to the particular regimes; and simplified AFIP registration systems.
On the other hand, the Labour Draft proposes modifying the sections of the NEL referred to compensation for lack of registration, deficient registration of the hiring date of employment and actual salary, which will be turned into fines that must be paid to the ANSES.
The amount of the fines is the equivalent of 25 percent of the current minimum wage for each period of lack of registration, the periods not registered from the hiring date until the incorrectly documented hiring date or the periods deficiently registered in the case of deficient registration of the remuneration.
Furthermore, certain fines for lack of or deficient registration of employment are eliminated.
Individual employment relationships
The scope of the application of Labour Contract Law No. 20,744 (LCL). Self-employed economically-dependent workers are included in the group of workers not covered by the provisions of the LCL, considering those persons who provide services in a habitual, personal and direct manner for a person or a company, on which they depend economically for up to 80 percent of their annual income and for which they work up to 22 hours per week.
Principle of non-waiver of rights. The Labour Draft proposes to return to the text prior to the current wording, there being no impediments for the employee to waive the rights arising from the agreement between the employment contract parties. However, in the event of change of essential elements of the employment contract, the Labour Ministry or labour judges must approve such changes.
Outsourcing and delegation. The works or services that are contracted or outsourced to carry out complementary activities of cleaning, security, assembly of facilities of machines, medical and hygiene services and safety at work, gastronomy or information technology, which are carried out in the establishment or operation, are excluded from the scope of this section. Transportation services to and from the establishment will also be excluded. Although the main company’s obligation to control compliance with the labour obligations of its contractor is maintained, it is established that the assignors, contractors or subcontractors that comply with the control obligations will be exempt from the joint and several liability set forth in the regulation but must inform the unions about the relevant outsourcing.
Special leave system. The regulation extends the number of certain types of leave and their duration.
Compensation for seniority. The semi-annual bonus, awards or bonuses paid to an employee who lacks monthly, normal and usual periodicity are excluded from the calculation basis.
Update of labour credits. The labour credits coming from individual employment relationships will be updated, according to the rate set by the Banco de la Nación Argentina for the purchasing value units corresponding to its mortgage credit operations, from the date when it had to be paid until the date of its effective payment.
Finally, the Labour Draft establishes a labour cease fund which replaces the compensation for seniority, among other issues related to the system of training practices, promotion of youth employment, unemployment insurance, collective employment relationships and assessment agency of health and technologies.
Fiscal tax reform
The tax rate for corporations will be progressively reduced from 35 percent to 25 percent. Dividends and other similar income obtained by individuals will be taxed at the rate of 13 percent over the net income (7 percent in the first three fiscal periods beginning as of 1 January 2019).
The tax reform aims to promote the reinvestment of revenue by companies. Thus, many presumptions were included to avoid hidden dividend distribution (such as when withdrawals of funds are made or when there are fees or compensations in which the service or other obligation is not effectively supported by evidence).
Under certain conditions, indirect transfer by non-residents of shares of Argentine corporations and other values will be considered as Argentine source income and therefore subject to Argentine income tax. Net income obtained by individuals arising from the sale of shares, representative securities and deposit certificates of shares, quotas and other participations, digital coins and other values will also be taxed at different rates from 5 to 15 percent.
The anti-deferral rules included in the Income Tax Law were also modified to make them stricter.
The parameters for the application of ‘thin capitalisation rules’ were modified. Interest arising from financial debts – not including those arising from the acquisition of goods, leasing or rendering of services related to the scope of the business – agreed with related parties (either resident or not) will be deductible up to the annual amount to be established by the government, or up to the equivalent of 30 percent of the net income corresponding to the previous fiscal year, whichever is highest. Interest that could not be deducted in a particular fiscal period may be added to those of the following five fiscal periods. Financial entities, financial trusts and companies whose main corporate purpose is based on the celebration of leasing agreements, are excluded from these rules. Under certain conditions, these limits would not be applicable.
A definition of permanent establishment was included in the income tax law by the Fiscal Tax Law, in accordance with the concept introduced in the recent conventions for the avoidance of double taxation signed by Argentina. The concept of low or non-tax jurisdictions is revisited, according to which, a jurisdiction is to be considered as a low or non-tax jurisdiction if the rate of related regimes or of special tax regimes that establish a maximum tax rate on companies’ profits is lower than 60 percent of the corporate tax rate provided in the income tax law. Cooperating jurisdictions continue to be those with which Argentina has entered into information exchange agreements.
Value added tax
The reform included a regime of tax credit reimbursement available for the companies that have invested in the country and have not yet recovered the VAT tax credit vis-à-vis the VAT tax debit within the following six months. The objective is to promote investments by reducing financial costs.
In addition, the concept of taxable event was broadened to include digital services provided by foreign companies when those services are used or exploited in Argentina. VAT in these cases will be withheld by local entities through which the payment of the services is made.
Tax on the transfer of real estate
This tax was abrogated and from now on income tax will be applied at a reduced tax rate of 15 percent. Other significant amendments include: (i) fiscal electronic domiciles will be mandatory for all taxpayers; (ii) a conciliation agreement with the tax authority is pending; and (iii) regulations regarding the mutual agreement procedure (MAP) under tax treaties and the advance pricing agreement (APA) are also included in the bill.
The re-evaluation of certain assets
It was also included in the tax reform the possibility of re-evaluation of certain assets in relation to their tax and accounting treatment and which re-establishes, for the future, and subject to certain limitations, inflation adjustment proceedings.
The executive branch defined the main purposes of the fiscal reform as being to establish better conditions to promote investment in Argentina, to improve competitiveness, to move toward a fairer, more efficient and modern tax system and to reduce tax erosion.
Enrique M. Stile is a partner at Marval, O’Farrell & Mairal. He can be contacted on +54 (11) 4310 0100 ext. 1606 or by email: email@example.com.
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Enrique M. Stile
Marval, O’Farrell & Mairal