Argentina: Argentina introduces major tax reform
Ignacio Rodríguez and Juan Manuel Magadan of PwC Argentina outline the impact of Argentina’s significant tax reform and analyse key considerations for taxpayers.
On December 23 2019, the Argentine Congress passed a bill approving a new economic emergency law aimed at aligning public accounts and boosting the economy with a package of measures (most of them related to taxes and foreign exchange issues). A week later, the executive branch issued Decree 99/2019 to provide some clarifications and regulations on the new measures.
The package introduces relevant changes to the tax system. It is to note that some of these measures would have effects for fiscal year 2019. Among the relevant changes introduced by the law, we can highlight the following ones:
Corporate income tax
The law established a suspension to the corporate income tax rate reduction set forth by the 2018 tax reform (keeping suspended the 25% rate until fiscal years starting as from January 1 2021 included). As a result of that, the 30% rate would still apply to fiscal years starting on or after January 1 2020. In this regard, the increase in the withholding tax rate for dividend payments (from 7% to 13%) was also suspended for the same term.
In regard to the tax adjustment for inflation, the amount pertaining to the first and the second fiscal years beginning as from January 1 2019 must be allocated as follows: 1/6 of the amount in said fiscal year and the remaining 5/6 in equal parts over the following five fiscal years. Under the prior rule, the inflationary adjustment had to be allocated 1/3 in the first fiscal year and the remaining 2/3 in the following two fiscal years.
Effective as from fiscal year 2019, the tax rates to be applied to Argentine individuals shall be increased ranging from 0.5% to 1.25% and in case of taxpayers with assets located abroad, Decree 99/2019 established a different scale with higher rates – that go from 0.7% to 2.25%.
Further, the law set forth for an increase in the tax rate applicable to Argentine shares and ownership interests - substitute taxpayer - from 0.25% to 0.50%.
For non-resident taxpayers, the rate applicable to assets located in Argentina is also increased from 0.25% to 0.50%.
Finally, the amendment included a migration from the ‘domicile’ criterion to the ‘residence’ criterion, as established under the income tax law.
Tax for a solidary and inclusive Argentina (PAIS)
The law introduced a temporary 30% tax (the so-called PAIS tax for its Spanish acronym), which would apply over a period of five fiscal years on the following transactions:
a. the purchase of foreign currency for treasury or accumulation with no specific purpose;
b. purchases made abroad, including cash withdrawals, using credit and debit cards or any other payment method;
c. purchases made online invoiced in foreign currency;
d. purchases of services rendered by non-residents in the country through credit or debit cards or any other payment methods;
e. purchases of touristic services rendered abroad through travel agencies; and
f. purchases of transportation tickets to destinations outside Argentina, except land transportation to neighbour countries.
Medical services, purchases of medicines, purchases of books, educational platforms, certain research projects and purchase of materials and equipment for firefighting and civil protection of the population are tax exempted.
The tax would be payable by the Argentine resident, whether individual or corporation, that carries out the above transactions. However, payment of obligations for a specific purpose would not be subject to the PAIS tax, meaning that most commercial transactions carried out by an Argentine entity would not be taxable.
It is to note that the acquisition of digital services, as defined in the VAT law, would be subject to a reduced rate of 8%.
The new law granted powers to the Argentine executive branch to set export duties within the framework of the Customs Code, but the applicable rate shall not exceed 33% of the taxable price or the official free on board (FOB) price.
However, the maximum duty rate was set to 15% for those goods that were not subject to export duties (or were subject to a 0% rate) as of September 2 2018.
According to the new measures, export duty rates for industrial goods (including agro-industrial products of regional economies) and services has been set not to exceed 5% of the taxable price.
The former cap to export duties (i.e. AR$4 or AR$3 per dollar exported) has been eliminated.
Export duty rates for hydrocarbons and mining may not exceed eight percent (8%) of the taxable price and under no circumstances may an export duty for hydrocarbons reduce the well head value for the calculation and payment of royalties to the producing provinces.
Additionally, by virtue of Decree 99/2019 the government extended the application of export duties to export of services transactions to December 31 2021 – export duty on services was originally set to expire on December 31 2020 - and at a 5% rate with no nominal cap as it used to have.
The schedule to unify the tax rate of employers’ contributions to 19.5% was suspended by virtue of the law and as a result of that, employer’s contributions would be 20.4% for private sector employers whose main activity is related to services or trade, provided that their total annual sales exceed certain thresholds and 18% for the rest of the private sector employers, falling within the scope of Laws nos. 23551, 23660 and 23661 and those of the public sector falling within the provisions of Section 1 of Law 22016.
Further, the monthly deduction to determine the taxable basis for employers’ contributions was eliminated as it was subject to annual indexation and replaced by a fixed amount which may be increased for certain specific activities.
In addition, employers having a payroll of up to 25 employees will enjoy an additional AR$10,000 monthly deduction.
Other relevant measures
The law also included a tax amnesty program and installments plan for small and medium-sized enterprises (SMEs), the application of the tax on financial transactions at a rate of 1.2% on cash withdrawal transactions carried out by Argentine entities, other than SMEs, and some changes on the excise tax applicable to vehicles above a given acquisition value.
While most taxpayers are still trying to catch up with the tax reform introduced in 2018, this law would represent a significant challenge for them, as the newly learnt rules have been, to some extent, amended, postponed, rolled back or even repealed by the new measures.
Although some complementary regulations are still pending, the recent changes requires a deeper and careful analysis to assess the potential impact on the day-to-day operations of local and multinational companies in Argentina.
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Juan Manuel Magadan
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