Login
Argentina – a place that promised to be among the wealthiest countries in the world at the beginning of the 20th century but somehow managed to become a breeding ground for currency devaluations and economic crisis – has taken significant strides in recent months and has once again reformed its tax system. This article looks at some of these changes and considers their impact on cross-border activity, in particular developments in the tax treatment of digital services.
Introduction: Winds of Change
In December 2015, Mauricio Macri took office in Argentina. His coalition, “Cambiemos” (“Let’s change”), altered the course of history by putting an end to the left-wing populist government of the Kirchners (first the husband and then his wife) who had controlled Argentina for over a decade.
Among the many promises, Cambiemos pledged to terminate populist policies, change the complex tax system and reduce the tax burden in Argentina (which is second only to the Island of Comoros according to the World Bank tax burden index1). Five days after taking office, the new administration lifted all existing exchange controls in Argentina. Subsequently, in July 2016, Argentina launched a new tax amnesty – the largest in the world ($117 billion). This was followed by discussions of large-scale tax reform, which eventually became law on the last working day of 2017, December 29, 2017, with effect from January 1, 2018.
In the cross-border context, the most notable amendments in Law No. 27,340 (the Law) include, inter alia, a new definition of permanent establishment, new rules on Controlled Foreign Corporations, new procedural rules and Value Added Tax (V.A.T.) on digital services. Most of these changes follow the Organization for Economic Cooperation and Development’s (O.E.C.D.) action plan on Base Erosion and Profit Shifting (B.E.P.S.).
New Provisions
- Income Tax
Corporate tax rate. The tax on retained earnings of corporations and permanent establishments is reduced to 30% for fiscal years commencing from January 1, 2018, and then to 25% for fiscal years commencing from January 1, 2020. The previous rate was 35%.
However, there is a new tax on the distribution of dividends. An additional tax of 7% for 2018 and 13% as from 2020 will be charged. The Law renders void the equalisation tax set forth by the section which follows 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 (S.A.S.) and single-shareholder corporations (S.A.U.) – will be subject to income tax, also.
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 that presumed income 8% of real property’s current market value and 20% of the current market value of other goods.
Transfer pricing. The Law establishes a minimum amount to 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 B.E.P.S. action 13.
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 is related to a local taxpayer.
If the foreign intermediary is linked with the local taxpayer and such intermediary is located in a non-cooperative jurisdiction or in a low or zero-tax jurisdiction, an agreement must be in existence and filed with the Argentine Tax Authorities.
Sales of real property. Earnings obtained by individuals from the sale of real property, except when the property is a dwelling, will be taxed at 15%. This tax replaces the tax on transfers of real estate property and applies to properties sold and acquired as from January 1, 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 labor law will be subject to income tax (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 labor 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 the following: (a) a headquarters, (b) a branch, or (c) 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 (a) has a deposit account in the country where he or she regularly delivers goods on behalf of the foreign person, (b) takes risks on behalf of the foreign person, or (c) acts under detailed instructions or the control of a foreign person, etc.
Self-employed persons. The Law attempts to boost entrepreneurship by establishing a special 100% (or 150% for new professionals and new entrepreneurs) deduction for self-employed persons. Contributions to the Argentine Social Security System (“S.I.P.A.”) 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 to a resident who controls the 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:
- The settlor is also a beneficiary.
- The taxpayer directly or indirectly decides to invest or divest the assets.
- The taxpayer holds rights to dispose of the assets of the trust, has a right to appoint administrators, or is manager and its vote defines the decisions to be followed.
- The taxpayer has power to remove managers.
- 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% of the current rate in Argentina.
Indirect transfers of assets located in Argentina. The Law considers that income arises from an Argentinian 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:
- Earnings from the sale of shares in an Argentine corporation that is not publicly traded will be taxed at a rate of 15%.
- 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%.
- Interest from fixed-term deposits (in Argentine pesos and without an adjustment clause) will be taxed at a rate of 5%.
Controlled Foreign Corporations. Argentina has redefined the concept of Controlled Foreign Corporation (C.F.C.).
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 immediately subject to income tax, provided the following conditions are met:
- The income does not have other specific treatment (such as income generated from other “controlled” structures, i.e. trusts).
- Control over 50% of the capital or voting rights of the relevant foreign corporation is held directly or jointly with (i) an entity controlled by the taxpayer, (ii) the spouse of the taxpayer, (iii) the paramour of the taxpayer, or (iv) relatives of the taxpayer up to the third degree (ascendants, descendants or collateral, and either by consanguinity or affinity).
This condition will be met where the taxpayer or the related party:
- Hold rights to dispose the assets of the entity
- Hold rights to elect and remove the majority of the members of the board or managers
- Hold rights to the profits of the entity
It will also be met when at least 30% of the aggregate value of the foreign company’s assets is derived from Argentine-source investments generating passive income exempt from income tax in the hands of foreign beneficiaries (regardless of the participation percentage of the Argentine residents).
- At least 50% of the foreign company’s revenue is composed of passive income or other income that generates directly or indirectly deductible expenses for Argentine residents.
- The foreign company is subject to tax in its home jurisdiction at a rate less than 75% of the income tax that would be applicable in Argentina.
It is presumed that this condition is met if the foreign company is incorporated or domiciled in a low or zero-tax jurisdiction or in a non-cooperative jurisdiction.
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 (i) the annual amount established by the Tax Authorities or (ii) 30% of the net profit without accounting for interest and depreciation, whichever is greater. Interest that cannot be deducted may be carried forward up to 5 fiscal years.
- Fiscal Procedures
Voluntary closing agreements. In the context a tax audit, the tax authorities are entitled to enter a “voluntary closing agreement” when appropriate for determining decisive facts or establishing the correct application of the law.
Precautionary measures. Under the Law, tax authorities entitled to take precautionary measures for preventing acts of tax evasion.
Exchange of information. Tax secrecy will not apply to competent authorities of countries with which Argentina has entered an agreement to avoid double taxation in relation to balance sheets and financial statements filed by taxpayers.
Advance pricing agreements. The Law introduces a system of advance pricing agreements known as the “Joint Determination of International Transaction Prices” by which the taxpayer and the tax authorities may determine the criteria to be adopted with regard to transfer pricing assessments.
- V.A.T.
V.A.T. on digital services. One of the most significant changes is the creation of a new taxable event by adding “digital services” to the V.A.T. Law (Law 23,349 as amended and restated by Decree 280/1997). The tax is the result of three main drivers: (a) the widespread use of digital services in Argentina from foreign companies such as Facebook, Twitter, Netflix, Spotify and Uber; (b) the thirst of a government with a large fiscal deficit; and (c) a desire to be in the good graces of the O.E.C.D. to gain approval for O.E.C.D. membership.
Previously, when an Argentine resident acquired goods or services from a foreign service provider, there would be no V.A.T. applicable in Argentina. This now is no longer applicable to digital services.
Under the Law, digital services are defined as “those carried out through the internet or any other adaptation or application of protocols, platforms or technology used by internet or other net through which equivalent services are provided that, by their nature, are basically automatized or require a minimal human intervention”.
Digital services are subject to V.A.T. at the rate of 21%. 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 V.A.T. 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 V.A.T., as books are generally exempted from V.A.T.2.
Digital services relate to services having “effective exploitation” in Argentina. Effective exploitation in Argentina upon the first use of the service by the receiver or when such receiver uses the service for its consumption.
Several exceptions exist to the general rule.
- For V.A.T.-registered taxpayers, a rebuttable presumption exists that effective use or exploitation takes place where (a) the recipient’s the mobile phone or SIM card is based or (b) the IP address of the recipient’s electronic device is based.
- For V.A.T.-not-registered taxpayers, a rebuttable presumption exists that that effective use or exploitation takes place in Argentina when (a) the recipient’s mobile phone or SIM card is based in Argentina, (b) the IP address of the recipient’s electronic device is based in Argentina, (c) the domicile of invoice is in Argentina, (d) the bank account of the recipient is in Argentina, or (e) the domicile of the bank account or credit card is based in Argentina.
The taxable event takes place when the digital service is finalised (i.e., delivered to the Argentine recipient) or upon total or partial payment of the service price, whichever happens first.
Taxpayers registered for V.A.T. in Argentina should include their applicable V.A.T. on digital services on monthly tax declarations to the tax authorities. Taxpayers not registered for V.A.T. in Argentina should pay the tax directly or should have V.A.T. withheld by the local Argentine intermediary carrying out the payment. If there is more than one intermediary resident or domiciled in Argentina, the intermediary with the closest commercial ties to the recipient should act as the withholding and paying agent. Thus, for services paid with a local Argentine credit card or bank account, the local bank or credit card company should withhold 21% of the purchase price of the relevant services. (If the price is in U.S. dollars, use the rate of exchange for selling U.S. dollars of the National Bank of Argentina.) This withholding mechanism became operational on June 14, 20183.
The regulation4 provides a list of companies providing services that should give rise to V.A.T. withholding when payment is made from a local account. This list will be updated on a monthly basis. Certain other payees5 may be included in the withholding mechanism when the payment does not exceed U.S. $10 (or its equivalent) and the recipients of the services are not registered V.A.T. taxpayers in Argentina.
The withholding should be carried out on the date of payment of the bank or credit card statement, even when the payment is partial. When there is no local bank or credit card payment, the taxpayer should pay the tax directly by the last day of the month in which the digital service were provided.
Conclusions
It is very difficult to reduce taxes or simplify the tax system in Argentina. Even when the publicly-announced intention is to reduce taxes to spur competitiveness, the net result is often more taxes and a more complicated system.
After the reform, Argentina still ranks number 2 on the World Bank index because, although some taxes have been nominally reduced (e.g., personal assets tax, corporate income tax), the net effect of the reform was neutral due to the creation of new tax charges.
Ronald Reagan once said, “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
We often see how human invention and markets create environments that are more efficient and evolve faster than governmental regulations. Governments look at the efficiencies of technology as an interesting source of revenue, and they are eager to chase that revenue. In Argentina, the victim is not the technology company but the local taxpayer who now should pay more for the same services, paying now two governments – the foreign government where the technology company is based and the Argentine government where the taxpayer resides – for the same service.
1 https://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS?name_desc=false&view=chart
2 As per section 7 of the V.A.T. Law 23,349.
3 30 days after the publication in the Official Gazette of Resolution 4240/2018 of the Tax Authorities.
4 General Resolution 4240/2018 of the Tax Authorities.
5 E.g., Airbnb, Apple, and SONY.