With great fanfare, in December 2010, Repsol YPF, in the company of the Argentine president, announced the discovery of an extensive unconventional oil and gas reservoir. This site, located in the provinces of Neuquén and Río Negro and referred to by the rather odd name of Vaca Muerta (dead cow), was the largest of its type in Argentine hydrocarbon history.
Later – in May 2012 – Argentina decided to expropriate Spanish Repsol's shares in YPF, a company that from that point on was once again controlled by the Argentine government, as had been the case since its creation until it was privatised in 1992.
In July 2013, a cable from Argentina's national news agency, TELAM, reported that the Energy Information Administration (EIA), the statistical and analytical agency within the US Department of Energy, had indicated that in the area of the discovery, the technically recoverable reserves (the volumes of oil and natural gas which can be produced using current technology, regardless of production costs and prices) through fracking are estimated at 27 billion barrels of oil, while estimates for gas stand at 22,710 trillion cubic meters. These figures would position Argentina as the second and fourth world producer of shale gas and shale oil, respectively.
These statistics sound very promising. However, EIA has also noted that despite Argentina being South America's largest natural gas producer and a significant producer of oil, "the heavily regulated energy sector includes policies that limit the industry's attractiveness to private investors while shielding consumers from rising prices. Consequently, demand for energy in Argentina's rapidly growing economy continues to rise while production of both oil and gas are in decline, leading Argentina to depend increasingly upon energy imports…".
This situation has been generated over a period of time not much longer than a decade; by divestment, and a consequent loss of reserves bordering on alarming levels (more than 40% for natural gas and 10% for oil), thus pushing Argentina further away from the self-sufficient position it was in until a few years ago.
A decade of restrictions, regulations and sliding-scale export duties have marked the transition from a self-sufficient model, to one of dependence, with the need to import in order to meet Argentina's growing consumption, both consumer and industrial. While 10 years ago the energy sector contributed about $6 billion in exports to the trade balance, this year's deficit is estimated to exceed $4 billion.
Undoubtedly, Argentina faces an unprecedented crisis in its oil and gas industry. However, etymologically speaking, the word crisis does not necessarily have a negative connotation, as it derives from a word translatable as "judgment". And it is precisely in a time of crisis when those who are in charge should use their good judgment to decide where to go and how to get there, to turn the industry's course away from a direction that would lead Argentina's energy policy to become a most tragic failure.
This great hope labelled Vaca Muerta, which has sparked considerable controversy in the assessment of its potential, has triggered a small internal revolution leading to a series of events which would insinuate the beginning of the process of change expected from a crisis of the nature described. It has thus been witnessed that the solutions, though not free from difficulties and still in an embryonic stage, are available to the government.
Certainly, some specific measures undertaken by the Argentine government in its role as the manager of YPF might indicate that the transformation in the sector is possible. These measures include:
- The search for trade partners to develop Vaca Muerta;
- Certain flexibility in the foreign exchange restrictions prevailing in Argentina for those who invest in the development of these deposits;
- A decrease in the sliding-scale export duties applied to all producers for the exports of crude oil; and
- Signs indicating that the government wishes to expand and intensify YPF's activities towards other productive areas and, potentially, make an acquisition from one of its traditional competitors also holding assets in Argentina.
A certain level of excitement was also noted in the senior ranks of companies already present in Argentina, and operating in the sector (local and foreign, production and service-related), and, at the same time, this enthusiasm is also found among those others that are evaluating their return or possible arrival in Argentina, as a result of the hints given in the business sector with these announcements, especially with regards to the international significance of the issue as a result of the EIA article mentioned earlier.
In these expressions of optimism and potential opportunities, not only exractive companies should be included, but also all those engaging in activities that are closely related to the growth of a sector highly demanding of goods and services, whether referring to, for example, studying and developing the areas, or anything involving the infrastructure necessary for working the deposits.
As guidance, therefore, the following paragraphs include some tax considerations and mention certain developments in the sector that the foreign investor should be aware of when evaluating the possibility of doing business of this nature in Argentina.
General tax comments
Private companies can embark upon and engage in this activity in Argentina, in terms of both exploration and production, as well as with regard to the services that are specifically related to this activity (drilling, seismic, engineering services, and so on). However, there is the Argentine government's current influence to consider, as indicated previously, through its control of YPF, the largest local company in the industry.
Argentina has a federal system, which means taxes are levied on business activities at three different levels: federal, provincial and municipal, of which the first two are the most significant.
Taxation powers are jointly exercised by the federal and provincial governments up to three nautical miles offshore, measured from the lowest tide line. However, the federal government has exclusive taxation power up to 200 nautical miles offshore.
The most common business association types used by foreign investors to do business in Argentina are: stock corporations (sociedad anónima), limited liability companies (sociedad de responsabilidad limitada) and branches (sucursales). Unincorporated joint ventures are commonly used by companies in the exploration and development of oil and gas projects.
Without focusing on the legal aspects related to each one of these entities, it should be noted that from a tax point of view, they are all treated equally and subject to the same general tax system and treatment.
The players in this activity, producers and suppliers of specific goods and services, will generally be subject to the general tax system applicable in Argentina.
At the federal level, the most important include income tax, minimum presumed income tax, tax on personal assets, tax on bank account transactions and VAT.
It should be noted that transfer pricing rules apply with regard to income tax and they are in keeping with the guidelines issued by the OECD.
At the provincial level, the main applicable taxes for all companies are turnover tax and stamp tax. For upstream companies, royalties also apply.
A brief overview is shown in Table 1.
|Corporate income tax (CIT)||35% on net income|
|Withholding tax (WHT)||Dividends 0% (equalisation tax may apply); Interest 15.05%/35%; Royalties 21%/28%/31.5%|
|Minimum presumed income tax (MPIT)||1% on assets tax value|
|VAT||21% (general rate); Exports exempt|
|Stamp tax||1% (average rate)|
|Turnover tax||2.5% to 4% (depending on jurisdiction Involved); Exports exempt|
|Customs duties||Import taxes (rates on cost, insurance
and freight (CIF)), importation duty 0%/35.0%, statistical rate 0.5%,
VAT 10.5%/21% and withholding on: |
income tax 0%/6%/11%,
VAT 0%/10%/20% and
turnover tax 0%/1.5%
|Tax on bank checking accounts||0.60%|
|Personal assets tax||Equity interest on local entities: 0.5%|
|Social security taxes||Employer 23% to 27%; employee 17%|
|Royalties||12% of the wellhead value of the products|
For a further exploration of the scope and taxable events, see the Argentina section of EY's Global oil and gas tax guide.
In its relationship with the rest of the world, Argentina is a party to double taxation treaties with the following countries: Australia, Belgium, Bolivia, Brazil, Canada, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Russia, Sweden, the UK and Uruguay. These treaties allow the use of reduced rates in certain cases. A treaty has been signed with the US but it is not in force.
Other important matters
One aspect worthy of specific mention is the variable withholding system in effect in Argentina, which is applicable to the export of crude oil.
Specifically, crude oil exporters are subject to a sliding-scale withholding system which involves a withholding on the export value equal to the difference between the sales price and $70 per barrel. Thus, the amount of the sales price in excess of the $70 shall be collected by the government as a withholding on a foreign trade transaction.
Though this system poses a restriction on producers exporting crude oil, it should be noted that until not too long ago, that amount was only $42 per barrel. This allows one to infer certain indicators of changes in the game rules, and a certain relaxation of the mechanisms applied up to the present time.
In this same vein, an Argentine executive decree was published, creating the "Promotion System for Investments in Hydrocarbon Operations", having as its highest priority self-sufficiency in oil and gas, as well as in oil and gas exploration, operation, industrialisation, transportation, and sales.
Given the situation the sector is going through, these provisions, which are in line with the above-mentioned intentions of the Argentine government, state that they establish as principles of that development policy, among others, the need to foster "the integration of public and private and national and international capital, in strategic partnerships aimed at exploring and operating conventional and unconventional oil and gas". If this political commitment were to materialise, it would represent concrete opportunities for investors betting on the sector's growth.
This system is intended for those presenting investment projects of at least $1 billion and which would make disbursements during the first five years of the project. Under these conditions the following benefits will be enjoyed:
- Investors will be able to trade 20% of liquid and gaseous hydrocarbon production from the project freely on the foreign market after the fifth year of the project, without having to pay export duties;
- Investors would have free availability of the foreign currency obtained as a result of the sale of this 20% (there are certain conditions that must be satisfied), without the obligation of entering that money into Argentina; and
- When domestic demand prevents the producer from exporting the above-mentioned 20%, those producers will be guaranteed a local price that is equivalent to the export benchmark (without the effect of withholdings, which would not apply in this case) and they will have privileged rights to obtain freely available foreign currency on the official exchange market up to the amounts equalling the abovementioned percentage.
Furthermore, in a bid to promote investment and an increase in the production of natural gas, the Programme for the Promotion of Excess Natural Gas Injection was created. Though it was established for a limited period of time, if it is successful it could be recreated in the future. It specifically provides for the intervention by a commission to assess and approve those projects that, in the commission's opinion, generate greater activity, investment and employment levels in the sector, in addition to contributing to Argentina's self-sufficiency in oil and gas, by increasing gas production and its placement into the domestic market.
For the investors involved, this programme basically entails an increase in the price of natural gas placed on the domestic market in excess of each company's base placement volume (adjusted at an annual rate of decline to be determined in each case), at $7.5 per million BTU (British thermal units). This figure is a lot higher than the price producers are receiving so far for selling the above-mentioned hydrocarbon, and it will become effective through a monthly payment consisting of the difference between that price and the price actually received for the sales.
In sum, these systems are indicators of a change in direction that was necessary and which should be supported through persistent conviction and a progressive view by political decision-makers.
According to the facts described above, Argentina is facing an important challenge in its oil and gas sector, mainly because of a deep crisis caused by the growing pressure of domestic consumption and, simultaneously, a marked decline in investments and reserves over the past decade.
The flip side of the coin is the availability of vast unconventional resources (in addition to the improperly-developed conventional resources) which are added to Argentina's stock of reserves, and which place Argentina in an uncharacteristically privileged situation on the global scene, especially in terms of scarce, non-renewable resources.
The solution to this crisis, which is also clearly an opportunity for the sector's growth, lies in effective development and the correct use of those resources.
This means the Argentine authorities will play a key role, as they will have to promote investments in the sector and, as tends to be necessary in these cases, encourage investors to actually go through with the necessary capital outlays, by using attractive promotional programmes.
This growth, and the search for international investors, should undoubtedly be brought about based on a set of clear-cut rules, and within a context of legal certainty that most definitely needs to be reinforced in today's Argentina.
Government authorities, though incipiently, have acknowledged the problem, sometimes implicitly, and at other times even explicity, and have begun acting accordingly, providing some alternatives (though limited in scope) to shield new investors from some of the restrictions that have been applied up to now on companies in the sector.
From a tax point of view, the game rules have not changed considerably over the past few years, though some additional stimuli or a relaxation of certain rules are necessary to boost growth.
It is firmly believed that this is a turning point for the oil and gas industry in Argentina and that this represents an opportunity for all those companies that both wish to do business in this country as those changes are taking place, and come in before their competitors. In this manner, they will be immersed in the activity, and in tune with the sector's local situation. This will put them in an advantageous position when the growth mechanisms and processes are fully in motion.
Pablo is a tax partner at EY Argentina. He has more than 16 years of experience as a tax adviser to both Argentine and multinational companies.
Pablo is a Certified Public Accountant (University of Buenos Aires, 1997)
He is an assistant professor at the University of Buenos Aires, School of Economics, teaching Accounting, Tax Theory and Techniques I.
Since 2003, he has been working as coordinator of the Tax Analysis III seminar of the Tax Specialisation postgraduate course in the University of Buenos Aires' School of Economics.
Pablo has attended numerous tax-related courses and seminars and has authored and co-authored various articles and bibliographic material on his areas of expertise.
Daniel has been a tax partner within the Business Tax Services area of EY Argentina's tax division since July 2002. He is in charge of the Tax Quality and People matters and he leads the Tax Energy, Chemical & Utilities (ECU) practice.
Over twenty one years with EY, Daniel has actively participated in all the work related to corporate taxes, providing tax advice and compliance, tax planning and fiscal audit to numerous clients in different industries, being engaged in widely prestigious companies through the course of his professional experience.
Daniel is a Certified Public Accountant and Bachelor in Business Administration (University of Buenos Aires); Professor of Tax Theory and Technique I at the University of Buenos Aires; Professor of Tax post-graduate courses at the University of Buenos Aires, the University of Salvador, the University of Belgrano and the University of La Plata; and a guest professor at the Argentine Association of Tax Studies (AAEF).
He has lectured at different seminars and training courses in tax matters at EY and in certain specialised entities throughout the country. He is author and co-author of different articles on tax issues; and additionally, has participated in books related to minimum presumed income tax (October 1999 – February 2009), personal assets tax (May 2003 – October 2009) and international taxes (June 2005).
He is an active member at AAEF and a member of the International Fiscal Association (IFA).
Carlos leads the tax division of EY Argentina. Previously he was the tax partner in charge of the International Tax Services and Transfer Pricing division of EY Argentina.
He renders tax advisory services to multinational companies carrying out business activities in Argentina. He has more than nineteen years' experience in tax issues and specialises in tax planning for businesses in Argentina and abroad, international taxes and transfer pricing.
Carlos is a Certified Public Accountant (Universidad Católica Argentina). He has participated in seminars and conferences held in different countries and he usually lectures in numerous international seminars on tax issues and investments abroad. He has published various articles related to tax matters. He is a professor at the post-graduate school of Universidad de Buenos Aires and Universidad de San Andres.
Carlos is a member of the Argentine Association of Tax Studies (AAEF) and International Fiscal Association (IFA).