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Argentina: Argentine Congress passes comprehensive tax reform

27 February 2018

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The Argentine Congress passed the proposed tax reform on December 27 2017 and it became effective on January 1 2018. Some changes introduced are important, including an immediate transitional reduction in the corporate income tax (CIT) rate from 35% to 30% for the two taxable years beginning on or after January 1 2018. For taxable years beginning on or after January 1 2020, the CIT rate will decrease again, to 25%.

The two-step corporate tax rate reduction is offset by a new withholding tax on dividend/profit distributions at a rate of 7% (while the applicable CIT rate is at 30%) and 13% (when the corporate rate lowers to 25%). Thus, in the absence of a tax treaty, the combined effective rate on dividend/profit distributions would be set at 34.9%. It will decrease to 34.75% when the 25% CIT rate is in place.

The tax reform also has abolished the so-called equalisation tax for profits generated in taxable years starting on or after January 1 2018. The equalisation tax was a withholding tax levied at a rate of 35% on dividend distributions in excess of tax earnings, which still applies to dividend and branch profit distributions made out of earnings accumulated before January 1 2018 that exceeded tax earnings as of the year-end before the relevant distribution.

Transfers of Argentine shares

The tax reform confirmed that the transfer of Argentine securities that occurred after September 23 2013, including transfers of Argentine shares made between non-residents, is subject to tax. The tax, however, does not apply to the sale of shares and American or global depositary receipts (ADRs or GDRs) made by non-residents through stock exchanges, whether local or foreign.

Before the tax reform, the rules required the buyer to withhold tax on the capital gain. However, in practice, taxes were not withheld on sales between non-residents because there was no legal mechanism to do so. In July 2017, the Argentine tax authorities issued Resolution No. 4094-E, establishing the mechanism for paying the capital gains tax due by non-residents for those transactions that occurred on or after September 23 2013. Because of the turmoil this resolution caused, the tax authorities later published Resolution No. 4095-E, suspending the previous resolution for 180 days. On January 11 2018, Resolution No. 4190-E was issued repealing Resolutions Nos. 4094-E and 4095-E.

The tax reform now provides that the seller, and not the buyer, should be the party responsible for withholding the tax. As such, Resolution No. 4190-E provides that the tax authorities will issue a new mechanism regulating how non-resident sellers should pay the tax on the capital gain for transactions that take place on or after January 1 2018 and how non-resident buyers should comply with their withholding tax obligations with respect to taxable transactions that occurred between September 2013 and December 2017.

Non-residents are now exempt from tax on capital gains realised from the sale of shares in publicly traded companies, but only to the extent that the shares are sold through the local stock exchange. Furthermore, non-residents continue to be exempt from tax on capital gains from the sale of sovereign bonds and corporate bonds issued in an IPO. The yields from those bonds are also exempt from Argentine tax. In all cases, the exemption is conditioned on the foreign seller being a resident in a jurisdiction that has an exchange of information agreement with Argentina and that the funds come from these jurisdictions. Only yields and capital gains derived from specific securities issued by the Argentine Central Bank (LEBACs) do not benefit from this exemption and are subject to a 5% tax. If, for capital gains derived from their sale the tax cost cannot be determined, the tax can be levied at a rate of 4.5% over the sales proceeds.

Indirect transfers of Argentine assets (including shares) are now taxable under the tax reform, provided that (i) the value of the Argentine assets exceed 30% of the transaction's overall value and (ii) the equity interest sold in the foreign entity exceeds 10%. The tax is due if any of these thresholds were met during the 12-month period before the sale. The indirect transfer of Argentine assets, however, is only subject to tax to the extent those assets are acquired on or after January 1 2018 and the transaction does not take place within the same economic group, provided the requirements to be set by regulations are met.

Other income tax changes

  • In line with the OECD Model Tax Convention, the concept of 'ancillary or preparatory' limits the scope of the activities that are excluded from being deemed to constitute a permanent establishment.
  • The 2:1 debt-to-equity thin capitalisation rule is replaced with the BEPS-based rule. The deduction on interest expense and foreign exchange losses with local and foreign related parties is now limited to 30% of the taxpayer's taxable income before interest, foreign exchange losses, and depreciation. The taxpayer is entitled to carry forward excess non-deductible interest for five years and unutilised deduction capacity for three years.
  • Amendments have been introduced to relax the so-called sixth method for transfer pricing analysis in cases involving commodity transactions with foreign intermediaries.
  • Argentine CFC rules have been amended. Thus, an Argentine taxpayer is immediately taxed on the passive income generated by a CFC that is directly or indirectly held to the extent that more than 50% of that CFC's income is passive and is effectively subject to a tax that is lower than 75% of the applicable Argentine income tax rate.
  • The tax reform subjects individuals to tax on both the sale and yields of sovereign bonds and corporate bonds issued in an IPO. The tax, however, is levied at a rate of 5% if the bonds are issued in Argentine currency and 15% if they are issued in foreign currency. Before the tax reform, individuals were exempt from tax on this type of income.
  • The tax reform also confirms that ADRs/GDRs generate Argentine-sourced income. However, a non-resident is exempt from the prevailing 15% capital gains tax on their sale if they reside in a jurisdiction that has an exchange of information agreement with Argentina and the underlying shares are also publicly traded in Argentina.

Other tax changes

  • With respect to VAT, the tax reform provides for an expedient recovery mechanism for VAT credit balances on certain infrastructure and investments in capital goods, to the extent that companies have not been able to recover the VAT within six months. The VAT legislation has also been amended to include 'digital transactions' (such as digital services, hosting, on-line technical support, software services, and internet services) as taxable events. As a result, this type of service is now subject to VAT at a rate of 21% if it is supplied by a non-resident entity to an Argentine customer, provided that that the services are effectively used in Argentina.
  • The tax reform also updates the minimum thresholds to characterise a tax omission as tax fraud and introduces other amendments to the Tax Procedure Act, including some provisions on mutual agreement procedures (MAPs) and advanced pricing agreements (APAs).
  • Argentine employers are also exempt from paying social security contributions for the first ARS 12,000 ($600) per month per employee. The change will be implemented gradually over a five-year period (from ARS 2,400 in 2018 to ARS 12,000 in 2022 and thereafter).
  • Negotiations with the provinces are expected to reduce provincial taxes, such as the turnover tax and the stamp tax.
  • Finally, the tax reform also includes the one-time tax aimed at offsetting the absence of inflation adjustment rules with an optional revaluation of assets as initially drafted – see our contribution to the December-January issue. Going forward, for newly acquired assets as well as those whose bases have been adjusted, taxpayers are entitled to recover their lost value by adjusting the tax basis for inflation, because inflation adjustments have been reinstated for those assets. Taxpayers opting to revalue their assets must withdraw judicial or administrative proceedings that claim inflation adjustments for past or future taxable years.

Given the wide scope, nature and relevance of these changes, the Argentine tax reform legislation may substantially affect the way multinational companies operate and organise their businesses in Argentina. Therefore, they may need to revisit their holding structures for their Argentine investments as well as for existing financing and cash repatriation structures.

Rodriguez-Ignacio
Ignacio Rodríguez

Ignacio Rodríguez (ignacio.e.rodriguez@ar.pwc.com), Buenos Aires
PwC
Tel: +54 11 4850 6714
Website: www.pwc.com/ar






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