Tax reform in Argentina: another squeeze of the lemon
November 2018 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
November 2018 Issue
The history of Argentina for the past 70 years has been determined by certain constants: an increase in tax, an increase in the power and prerogatives of politicians, and corruption.
This is probably a worldwide trend, but in Argentina it seems clearer than anywhere else. Concepts such as ‘social justice’, ‘redistribution’, ‘the common good’, ‘the people’ and other similar terms are excuses used as arguments to increase taxation of certain citizens.
Politicians, in general, put citizens into two categories: those who can pay taxes, and thus should be squeezed as much as possible, and the poor, who are viewed as clients or mouths to feed and whose number should be augmented in order to make the political game easier.
In December 2015, Mauricio Macri took office in Argentina. His coalition, Cambiemos, promised to terminate populist policies, change the complex tax system and reduce the tax burden in Argentina, which was second only to the Island of Comoros, according to the World Bank tax burden index.
After three years of this administration, the results of the Cambiemos administration speak for themselves. Argentina’s GDP is lower than it was in 2015, inflation will be at least 42 percent in 2018, poverty has increased and price controls are back. At the same time, the tax burden, and taxes of course, have increased and even the few minimal tax reductions or tax justice regulations, such as, for example, the acceptance of adjusting financial statements by inflation, will likely be reinstated. Let us review the tax changes of 2017.
Tax reform 2017
On 29 December 2017, Law No. 27,340 was passed, applicable from fiscal year 2018 onwards.
Corporate tax rate. Under the new law, the tax on retained earnings of corporations and permanent establishments has been reduced from 35 to 30 percent for fiscal years commencing from 1 January 2018, and then to 25 percent from 1 January 2020. However, this reduction will never happen. There is a new tax on the distribution of dividends. An additional tax of 7 percent for 2018 and 13 percent from 2020 will be charged. The new law renders void the equalisation tax set forth by section 69 of the tax law. Dividends and earnings resulting from accrued benefits prior to the date the law becomes effective will be exempt from the additional tax on dividends. The law also provides that two new business entities – simplified corporations (SAS) and single-shareholder corporations (SAU) – will also be subject to income tax.
Presumed income for dispositions of funds and goods. The law provides for a presumed interest for each currency, which must be duly regulated. The law establishes presumed income of 8 percent of real estate’s current market value and 20 percent of the current market value of other goods.
Transfer pricing. The law establishes a minimum amount of the taxpayers’ annual income and a minimum amount for transactions in order to enforce the filing of annual declarations related to transfer pricing. Bear in mind that Argentina had already implemented the country-by-country (CbC) report provided in the Organisation for Economic Co-operation and Development (OECD’s) base erosion and profit shifting (BEPS) Action 13 programme.
Imports and exports. The tax authorities estimate that large amounts of income tax are lost through the use of intermediaries. Therefore, with regard to the import and export of goods via foreign intermediaries, taxpayers must now prove that the intermediary’s remuneration is proportional to the risks, functions and assets involved in the operation if the intermediary, the exporter or the importer are related to a local taxpayer.
If the foreign intermediary is linked with the local taxpayer and such an intermediary is located in a non-cooperative jurisdiction or in a low or zero-tax jurisdiction, an agreement must exist and be filed with the Argentine tax authorities.
Sale of real estate. Earnings obtained by individuals from the sale of real estate, except where property is a dwelling, will be taxed at 15 percent. This tax replaces the tax on transfers of real estate property and applies to properties sold and acquired from 1 January 2018.
Executive termination. Compensation payments arising from the termination of employment of an individual with director or executive positions in a company that exceed a specified amount established by Argentine labour law will be subject to income tax (from which it was previously exempt). Amounts arising from a consensual agreement are subject to tax to the same extent as amounts paid the minimum compensatory amount set forth by the applicable labour law for unjustified dismissal.
Permanent establishments. The law redefines the concept of ‘permanent establishment’. It is a fixed place of business in Argentina from which a foreign person performs activities in whole or in part. Moreover, the law establishes that permanent establishments include but are not limited to a headquarters, a branch or a factory.
In addition, the law provides that there is no permanent establishment when an individual acts in Argentina on behalf of a foreign individual or legal person and has a deposit account in the country where he or she regularly delivers goods on behalf of the foreign person, takes risks on behalf of the foreign person or acts under detailed instructions or the control of a foreign person.
Self-employed persons. The law attempts to boost entrepreneurship by establishing a special deduction of 100 percent, or 150 percent for new professionals and new entrepreneurs, for self-employed persons. Contributions to the Argentine social security system or an applicable pension fund are an essential requirement for calculating the deduction.
Trusts and other offshore structures. Trusts and other offshore structures are now generally considered transparent. A tax on profits arising from the management of assets on behalf of trusts, private interest foundations and other similar structures organised, domiciled or located abroad will be imposed on a resident who controls a foreign structure.
The law provides that income earned by trusts incorporated, domiciled or located abroad must be declared by the local taxpayer who controls the trust. A local taxpayer is considered to have ‘control’ when there is evidence that the financial assets remain under his or her power or management. For example: (i) the settlor is also a beneficiary; (ii) the taxpayer directly or indirectly decides to invest or divest the assets; (iii) the taxpayer holds rights to dispose of the assets of the trust, has a right to appoint administrators or is a manager whose vote defines the decisions to be followed; (iv) the taxpayer has power to remove managers; or (v) the taxpayer has a current right to benefits.
Non-cooperative and low or zero-tax jurisdictions. The law defines ‘non-cooperative jurisdictions’ as countries or jurisdictions where there are no tax information exchange agreements in force or international agreements to avoid double taxation under which information exchange with Argentina is allowed. Countries that have entered agreements with Argentina but which do not effectively comply with them will be deemed non-cooperative jurisdictions. The law leaves the preparation of a list of non-cooperative jurisdictions to the tax authorities.
In addition, ‘low or zero-tax jurisdictions’ are defined as countries, jurisdictions, territories, associated states or special tax regimes which impose a maximum tax on corporate income at less than 60 percent of the current rate in Argentina.
Indirect transfers of assets located in Argentina. The law considers that income arises from an Argentinean source when it arises from the transfer of shares, quotas, convertible stock or any other certificate representing ownership interest in an entity, fund, trust or similar instrument, permanent establishment, property subject to encumbrance or any other entity organised, domiciled or located abroad, provided certain statutory conditions are met. Transfers made within an economic group are excluded.
Financial income. The law imposes a tax on financial income, which was previously exempt from taxation for individuals resident in Argentina. ‘Financial income’ includes capital gains from shares of stock and deposit certificates for shares of capital stock, and any other stock or quotas, digital currency, transfers of financial trust certificates and, in general, assignments of rights over trusts and similar contracts, corporate bonds and quotas of mutual funds, except those exclusively created by publicly traded shares.
The tax rate varies as follows: (i) earnings from the sale of shares in an Argentine corporation that is not publicly traded will be taxed at a rate of 15 percent; (ii) earnings from the sale of interests in Argentine bonds (in Argentine pesos and without an adjustment clause) will be taxed at a rate of 5 percent; and (iii) interest from fixed-term deposits (in Argentine pesos and without an adjustment clause) will be taxed at a rate of 5 percent.
Controlled foreign corporations. Argentina has redefined the concept of controlled foreign corporation (CFC).
Foreign-source income obtained by Argentine residents for their direct or indirect participation in corporations or other entities that are organised, domiciled or located abroad or under a foreign legal regime, with no ‘fiscal personality’ in the jurisdiction in which these companies are incorporated, will be subject to income tax without deferral proportionately to the respective participation of the local resident.
Foreign-source income obtained by Argentine residents for their direct or indirect participation in corporations or other entities that are organised, domiciled or located abroad or under a foreign legal regime will be subject to income tax without deferral directly to the local taxpayer, provided that certain requirements are met.
Interests from financial debts. The law sets forth a limit for the deduction of interest from financial obligations to related resident and nonresident individuals. This interest will be deducted up to the annual amount established by the tax authorities or 30 percent of the net profit without taking into account interest and depreciation, whichever is greater. Interest that cannot be deducted may be carried forward up to five fiscal years.
VAT on digital services. One of the most significant changes is the creation of a new taxable event adding ‘digital services’ to the VAT law. The tax is the result of three main drivers: (i) the widespread use of digital services in Argentina from foreign companies such as Facebook, Twitter, Netflix, Spotify and Uber; (ii) the thirst of a government with a large fiscal deficit; and (iii) a desire to be in the good graces of the OECD to gain approval for OECD membership.
Digital services are subject to VAT at the rate of 21 percent. The rate is applied to the net price of the transaction as stated on the invoice provided by the foreign service provider. The recipient of the services is obliged to make the VAT payment.
The law covers various digital services, including foreign web hosting services, designs and components, software downloads, data storage services, games, streaming services, music, media, dating website services, e-learning and data analysis on the internet. E-book or other digital book downloads are not subject to VAT, as books are generally exempted from VAT.
Digital services relate to services having ‘effective exploitation’ in Argentina. Effective exploitation applies in Argentina upon the first use of the service by the receiver or when the receiver uses the service for its consumption.
New taxes for 2019 and conclusions
2018 has been a very stable year in Argentina. On 2 January 2018 the dollar to peso rate was AR$18.65; in mid-September it was AR$40.30, a 214 percent increase. Inflation will be around 42 percent for 2018. This level of stability has been recorded over the past 70 years in Argentina.
The politicians tell us that ‘external conditions’ – namely increased US interest rates – have dried the financial markets to obtain public debt and, therefore, if Argentina does not want to experience the eighth default in its history, the country will ‘have to make some additional efforts’, which translates to ‘you will have to pay more taxes’.
The project that is circulating seeks to increase personal assets tax only for offshore assets to 1 percent and to tax exports at a fixed rate of AR$4 or AR$3 (depending on whether it is goods or services) for each dollar exported. In the meantime, we are approaching another election in 2019 and there is great uncertainty over what will happen in the future in our beautiful country.
Javier Canosa is a partner at Durrieu Canosa. He can be contacted on +54 11 5252 2462 or by email: firstname.lastname@example.org.
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