Argentina: Comprehensive tax reform drafted
As part of the commitment to modernise the tax system, but also with aim of monitoring the fiscal deficit, the Executive Branch presented its proposal for a comprehensive tax reform that it will submit to Congress with the aim of making it applicable from fiscal year 2018 onwards.
By mid-September, as part of the budget sent to Parliament for 2018, the government introduced a tax flavour aimed at somehow solving the lack of inflation acknowledgement for tax purposes after having faced annual rates higher than 20%-25% during the past 3-4 years.
An optional revaluation tax has been proposed, which would allow Argentine individual and companies to update the tax cost of fixed assets – except automobiles but including mines, quarries, forests and similar goods – shares and/or other participations in Argentine companies and/or intangible assets. Goods completely amortised are excluded.
The tax rates would be 8% for real estate properties (15% if considered as inventories), 5% for shares in Argentine companies only when held by individuals, while a 10% rate would apply to the revaluation of any other assets. The taxpayers can opt for each class of goods to be revaluated but once the category is selected all of the items have to be updated (namely, (i) real estate property as capital goods, (ii) real estate property as inventories, (iii) shares, (iv) intangible assets, and (v) movables assets).
The tax would allow taxpayers to enjoy a higher amortisation deduction for the larger of the remaining useful life or the following five or 10 year-term (the latter for real estate and intangibles and the comparison would be with 50% of the remaining useful life in these cases) and also to be able to still update the tax cost moving forward since the same bill would reinstate the inflation recognition for newly acquired assets including those revaluated.
Those taking this option must renounce to promote judicial or administrative proceedings demanding general tax inflation recognition and alleging tax confiscatory scenarios for past or future fiscal years, according to the bill.
The revaluation must be made by considering "factors" provided by the bill. However, for real estate property not considered as inventories and/or movable assets, an external appraisal can be used with a ceiling of 1.5 times the revaluation that would have resulted if "factors" had been applied.
For determining the net present value of the savings and comparing the future benefit with the present tax payment, the above is somehow tied with the bill expected to be sent to Congress in which it proposes a cut in the corporate income tax rate for the next two fiscal years to 30% and to 25% thereafter combined with a withholding tax on dividend/profit distributions of 7% and 13% respectively (meaning that the overall rate would remain almost at the current 35% for amounts distributed). Current equalisation tax will be removed.
Measures included in the corporate tax reform bill include, among others, the following:
Taxation of individuals at a 5% or 15% rate – depending if it is issued in Argentine peso or foreign currencies – of income derived from the alienation of (a) sovereign bonds; and (b) corporate bonds placed by IPO (so far exempted) as well as the respective yields obtained;
Clear definition of American depositary receipts (ADRs) or similar securities representing Argentine shares in foreign stock exchange markets as Argentine-sourced, providing full exemption from the existing 15% capital gains tax to foreign beneficiaries located in "cooperative" jurisdictions for exchange of information purposes. Foreign beneficiaries would also remain exempt from tax in case of alienation of (i) shares listed in the Argentine SEC and negotiated through it, (ii) sovereign bonds; and (iii) corporate bonds place by IPO. In case of (ii) and (iii) their respective yields are also exempted. With respect to past transfers of securities made by foreign beneficiaries since September 23 2013, the liability for paying the tax would remain the same – regulations suspended to be applied as of January 2018 in principle – except for those transactions made through securities exchange markets where no tax was withheld, which would be forgiven;
Taxation of indirect transfers of Argentine assets – including shares – if the value of the transaction resulted in more than 30% from the value of these assets and the shareholding in the foreign entity sold is larger than 10%. The tax would also be triggered if any of those thresholds have been surpassed during the 12-month period before the transfer;
Relevant amendments relaxing the so-called sixth method for transfer pricing analysis in case of transactions with commodities with an foreign intermediary;
Introduction of a permanent establishment definition for foreign parties developing activities in Argentina;
Drastic change of thin capitalisation rules (currently 2:1 debt-to-equity ratio) migrating to a maximum limit of 30% of the taxable income – before interest, foreign exchange (FX) losses and depreciations – for interest and FX losses stemming from related-party debt of a financing nature from either a local or foreigner. Carry forward of: (i) exceeding non-deductible interest for five years; and (ii) non-used capability for three years may be available; and
Change in controlled foreign corporation (CFC) rules with full attraction of passive income obtained directly and/or indirectly through a chain of controlled companies, provided those companies are obtaining more than 50% of such a passive income and are subject to a tax lower than the 75% of the Argentine income tax rate, among other conditions.
The bill also includes: (i) amendments on tax rates for excise taxes on, among others, automobiles; (ii) measures intended to slowly increase the amount of tax on financial transactions creditable against income tax establishing a timeline to finally remove it; and (iii) to speed up the VAT recovery related to certain infrastructure and capital goods investments. Also, an update of minimum thresholds to characterise a tax omission as tax fraud as well as other amendments to the Tax Procedural Act are expected to occur. Furthermore, social security taxes (employer's contributions) are expected to be reduced gradually.
Finally, tough negotiations with the provinces are envisioned to accomplish with public commitment a reduction of provincial taxes as turnover tax and stamp tax.
Ignacio Rodríguez (email@example.com), Buenos Aires
Tel: +54 11 4850 6714