Tax Aspects of Structuring Business in Argentina.
- Argentina
- 08/26/2003
- Hourbeigt Ruiz Martinez & Padilla
1. General Introduction
The purpose of this memorandum is to make a brief and general explanation of the main topics of the Tax Framework applying to foreign companies doing business in Argentina. It does not contain an all-inclusive analysis of the tax planing aspects involved in structuring operations in Argentina. It is only aimed to provide a basic and non-inclusive description of the Argentina Tax Framework.
Foreign companies willing to do business in Argentina should be aware that tax planning is efficient if, and only if, it is comprehensive. That is, designed to address, at the same time, worldwide tax planing goals (i.e. those basically referred to the international aspects of foreign country’s Income Taxation) while minimizing overall exposure to Argentine Federal taxes on one side, and Argentine provincial and/or local taxes on the other.
From the point of view of the foreign company, some usual concerns of tax planning could be the following:
-to select a business entity that would be regarded as fiscally “transparent” for the foreign country’s tax purposes, so as to allow flow through of foreign losses or to credit directly foreign taxes;
-to structure foreign-holding-companies structures without diminishing the benefits under the foreign country’s indirect tax credit regime;
-to prevent the applicability of the foreign country’s Income Tax anti-deferral rules, if any (e.g. Subpart F for United States’ regime); among other objectives.
Regarding issues exclusively related to Argentine taxation an efficient tax planning should minimize overall tax exposure to Federal and Provincial taxes, in a way consistent at both levels.
Finally, it should be noted that the Argentine tax system provides a number of alternatives for efficiently planing the financing of Argentine ventures. Thus, the continuously-expanded Double Taxation Treaty framework of Argentine provides a number of opportunities for those foreign companies which have business activities in a large number of countries. However, no Double Taxation treaty does currently exist in force with the United States.
2. Argentine Tax Laws. General Principles
There are three levels of tax authorities in Argentina: the Federal, Provincial and Municipal governments. According to the Argentine Constitution (i) customs duties may be levied exclusively by the Federal Government; (ii) indirect taxes may be imposed by both the Federal and Provincial Governments; and (iii) direct taxes may be levied by the Provinces and, in special circumstances, by the Federal government in a temporary manner and proportionately throughout the country.
The most important levies collected by the Federal government are the Income Tax, Value Added Tax, Personal Asset Tax, Minimum Presumptive Income Tax, Custom Duties, Excise Taxes and Social Security Contributions. On the other hand, the principal taxes collected by the provinces are the Gross Turnover Tax, the Stamp Tax, and the Real State Tax. Municipalities, under provincial jurisdictions, collect a variety of business and other licenses and permits.
3. Income Tax. Taxation of Business Income
3.1. Key Principles
Income Tax applies to both permanent establishments of foreign companies and locally incorporated business organizations, at the standard rate of 35%. Dividends and profit distributions are taxed to the extent they are made out of income which has not be taxed at the corporate level (“equalization tax”).
Argentina adopted the worldwide taxation principle. However, locals branches of foreign companies are taxed on income arising from Argentine sources, while subsidiaries are taxed on a worldwide-income basis. There is no special rate applicable on capital gains, which are taxed at the same rate of ordinary income.
To avoid double taxation, section I of the Income Tax Law provides for a credit method, so that any Argentina taxpayer who obtains foreign-source income is able to credit taxes charged at the source, as long as (i) such taxes have been effectively paid - in the relevant foreign country - due to the activities performed therein; (ii) such taxes are analogous to the Argentine Income Tax; (iii) the amount of taxes credited in Argentina does not exceed the increase of argentine income tax due to the inclusion of such foreign-source taxable income. Neither the Income Tax Law nor its implementing regulation provide any guidance as to what constitutes a creditable income tax.
3.2. Taxation of Business Income to Non-Argentine Residents
Non-Argentine residents are only taxed on income arising from Argentine sources. Different effective withholding rates apply to income paid to non-residents; this is because a set percentage of the gross amount paid is deemed to be deductible expenses by the law. The percentage vary depending on the type of income and the location of its beneficiary (i.e. if located in a jurisdiction where Double Tax Treaty standards do alter the general income tax treatment). If no Treaty to avoid double taxation applies, the Income Tax Law establishes effective withholding rates on gross income paid to foreign persons. Special rules may apply for certain business activities.
4. Value Added Tax (VAT)
VAT has a very broad scope, as it is levied at all stages of importation, production and trading, including retailing, as well as on a wide range of services (including bank charges and interest). The standard rate is 21%. All sales of movable property on the local market (as well as imports thereof) are taxed unless specifically exempt under the VAT Law. Practically the only exemption regarding movable property concern publications, shares and other securities, certain food products, sales of medicines, etc.
The leasing and rendering of services is in general subject to VAT as well, with very few exceptions. Exports are not subject to VAT, and exporters may in addition recognize a tax credit for the VAT billed to them for the goods exported. Imports are subject to VAT, at the rates corresponding to the items involved.
Tax payments are determined monthly by deducting the fiscal credits arising from the tax billed by suppliers of inputs (including fixed assets) connected with taxable revenue (or those stemming from the tax paid upon the customs clearance of imported goods) from the fiscal debits generated by applying the tax rate to billings rendered to customers.
Registered taxpayers or the Customs House (ANA) are required to bill and collect from those of their purchasers (or importers) who are liable but no registered for VAT an excess tax (currently equivalent to 9%).
There exist also a system of standard collection and withholdings under which liable parties of a certain financial size (who are registered as collection and withholding agents), the Customs House and other bodies are required to act as VAT collection or withholding agents with regard to sale, purchase or import transactions undertaken by parties who are registered and liable for VAT (for example sales of grain, cereals and oilseeds).
5. New Personal Asset Tax on Non-resident shareholders
Law 25,585, published in the Official Gazette in May 2002, extended the Personal Asset Tax (PAT) to non-resident holders of equity interest in Argentine companies.The tax rate is 0.5% per annum, and it will apply on the net asset value of the equity interest owned by the taxpayer. The reform only implies a new tax burden on non-resident aliens, since resident taxpayers were already subject to PAT. In fact, prior to the tax reform, non-resident aliens were either excluded from the scope of the tax or not subject to any enforceable mechanism of collection. Now PAT is broadly applied on Argentine resident individuals, undivided states, and non-resident aliens—be they companies, individuals or undivided estates—holding any type of equity interest in Argentine companies (e.g. shares of a corporation, quotas of a Limited Liability Company, etc.).
The tax burden is now imposed on the issuer of the stock or shares, who is required to deposit the tax with the Argentine Revenue Service. Said issuer is allowed, in turn, to enforce a reimbursement of the tax from the shareholder. This final legislative outcome would prevent the Argentine issuer from deducting PAT for Income Tax purposes. A number of conflicts have already been triggered in connection with Double Tax Treaties executed by Argentina which cover asset taxes or provide specific most-favoured nation clauses and non-discrimination provisions.
6. Financial Transaction Tax and Foreign Accounts
Let us not forget about the Financial Transaction Tax, also levied during 2001. Its current version results from Law 25,453, which provides for a standard rate of 0.6% on debits and credits in checking accounts. To mitigate tax elusion, other taxable events have been included so as to tax set transactions in savings accounts, as well as “organized systems of payment” that take place outside the banking system. These transactions are subject to a tax rate, which doubles the standard one. Use of foreign accounts by Argentine resident taxpayers has become more common. In such cases, tax advisors need to evaluate and address two issues carefully: (i) whether any such collection would not be made in violation of the tax procedural law, that provides for set mechanisms of payments and collection in order to mitigate tax evasion; (ii) whether the 1.2% tax rate of this financial transaction tax would apply or not. The answer to such questions would depend on the facts and circumstances of each case at the time of determining the existence of “organized systems of payment”.
7. Minimum Presumptive Income Tax (Corporate Asset Tax)
7.1. General
A 1% Corporate Asset Tax is levied annually on the worldwide assets of Argentine businesses owned at the end of the fiscal year, calculated according to a specific valuation criteria. The following taxpayers are subject to this tax: (i) Companies domiciled in Argentina (e.g. corporations, partnerships, etc); (ii) Foundations and non-profit Associations; (iii) Sole proprietorship businesses belonging to Argentine residents; (iv) Resident individuals in connection with their farm or rural exploitations; (iv) Trust governed by Law 24,441 other than financial trusts; (v) Closed-End Mutual Funds; (vi) Argentine permanent establishments of non-resident aliens, such as a branch, a factory, a construction, an office, a workshop, etc.
Those individuals or legal entities domiciled in Argentina who have the possession, use, deposit, administration or otherwise hold or take care of the taxable assets belonging to non-resident aliens, are regarded substitute obligors for the purpose of collecting the MPIT.
7.2 Exemptions
There are several exemptions such as the ones listed below:- shares and any participation in the capital of other entities subject to MPIT - irrevocable contributions for future capital increases, as long as they do not carry a financial charge such as the one that would be charged by independent parties in an arm’s length financing. - financial trusts, participation certificates and debt securities, in the proportion allocable to the value of the shares or other interests in the capital of institutions subject to the tax, which form part of the trust fund, etc.
The law provides for a specific threshold amount. Assets located within the country, with a total value under or equal to $ 200,000 are exempted from the MPIT. Should there be assets located abroad, then this threshold amount may be increased according to set calculation provided by the law.
7.3. “Non computable” Assets
In addition, there are non-included assets such as:
- new depreciable movable assets, in the fiscal year in which they have been acquired and the subsequent year; - construction of new buildings or improvements, in the financial year in which they have been acquired and the next one; - Dividends and profit distributions from other MPIT taxpayers, corresponding to the fiscal period in which the holding company assess the MPIT.
7.4. Tax Offsetting
The fiscal year Income Tax paid is creditable as a payment on account of this business asset tax. However, a taxpayer will never pay less than the MPIT, which functions as a tax on a hypothetical-minimum profit tax.
Should there be any excess income tax —not offset against MPIT—, it shall not generate a credit in favor of the taxpayer, neither shall he be entitled to file a petition for reimbursement or set off.
If the Income Tax paid on account of MPIT is insufficient to fully offset the MPIT liability in a certain fiscal year, then any MPIT so paid would be creditable against the Income Tax, provided that (i) during any of the ten subsequently-following fiscal periods an Income Tax surplus is generated, as a consequence of an excess of Income Tax over MPIT in such period (i.e. a non-offset amount of income tax), and (ii) MPIT may be credited only up to the amount of such Income Tax surplus. No refund is allowed.
8. Excise Taxes
These nationwide federal taxes are levied on the manufacturers or importers of tobacco, spirits, alcoholic beverages, tire, fuel and lubricants and other specific products. Excise taxes are paid on the basis of sworn returns or through stamps affixed to the products sold. Rates vary considerably.
9. Tax on Gross Revenue
These taxes are levied by the provinces and the city of Buenos Aires on the gross receipts from primary, manufacturing, business and service activities carried out within their respective jurisdictions. Deductions from gross sales are usually allowed for discounts, returns and excise taxes; the non-recognition of VAT is also allowed. Export transactions and trading in government securities are exempt in the city of Buenos Aires and most of the provinces. The tax applies largely to trade and services, with a standard rate of 3%.
10. Stamp Tax
The stamp tax is a local tax imposed in most of the Argentine provinces, which applies on the amount of the relevant agreement. In general, the stamp tax may apply not only in the jurisdiction where the agreement is executed but also where the underlying assets are located or the agreement has “effects”. The term “effects” is defined by each Provincial Fiscal Code and encompass certain acts occurred in the relevant jurisdiction, such as negotiation, performance, acceptance, protest, demand, etc.
Although in many provinces the general stamp tax rate is 1%, specific attention should be regarded to each kind of agreement and province as lower and higher tax rates could apply. It should be considered that, except for deed of sale of real states, no stamp tax is imposed in the City of Buenos Aires, where most of the Argentine corporations have their legal domicile.
11. Foreign Trade
11.1. General
The basic Customs legislation is contained in the Customs Code Law governing all the operating systems for imports, exports, transit, transshipment and other forwarding of merchandise, and in general follows the guidelines of international agreements for harmonizing and simplifying customs systems.
For purposes of the regulations governing international traffic, merchandise is classified according to the Customs Cooperation Council Classification and its legal and explanatory notes.
Argentina, Brazil, Uruguay and Paraguay setting up a common market known as MECOSUR. Foreign trade between MERCOSUR countries may be subject to special rules.
11.2. Registration
In order to engage in foreign trade, a firm must register with the National Customs Department. Requirements for this purpose has been recently amended.
11.3. Custom Duties or Tariffs
The following levels of import duty currently in effect ranges in general between 20% to 0%. Certain exemptions applies.
In addition to customs duties imports are also subject to other charges as, for example, statistical charge, VAT, excise taxes, income tax prepayment, etc.
11.4. Export Taxes
Certain exports are subject to export taxes which may vary from time to time. Currently, for example, agricultural products are subject to export taxes. Though these export taxes vary with each good, rates range from 5% up to 20%.
11.5 Export Promotion System
The following export incentives may apply: recovery of VAT, recovery of excise taxes, drawbacks, reimbursement of taxes paid on the domestic market, based on a percentage of the FOB value of the goods and additional reimbursements. Exports reimbursement will no longer be exempted from the federal income tax until 12.31.03 (Law 25,731).
12. Foreign Exchange and Banking Regime
Though the devaluation was implemented at the beginning of the year 2002, foreign exchange restrictions started at the end of 2001. Effective 1 December 2001, the Argentine Federal Government, through the issuance of Decree 1570/01, re-established exchange-control restrictions in Argentina (which had not been in effect for more than ten years). Since then, remittances of funds abroad have been generally prohibited without prior authorization of the Central Bank. During the succeeding months, and up to date, Congress, the Argentine Federal Government and the Argentine Central Bank have been issuing numerous regulations concerning devaluation and exchange-control matters. In this process, the milestone was the previously mentioned Law 25,561, called “Public Emergency and New Exchange Regime Act”. This law repealed the most significant provisions of the Convertibility Law, thus providing the legal framework for the first devaluation in more than ten years. Since then, the general scope of exchange-control restrictions has been fixed by the Federal Government—usually through the issuance of decrees—and then implemented by the Argentine Central Bank through the issuance of Communications. The legal framework is complex and extensive. Although the Federal Government has been easing restrictions it still does require regular advice from Argentine experts, since it varies by the day.
Following the delegation of certain legislative powers in the Executive Branch pursuant to Law 25,561; numerous Decrees have been issued to fully implement the new forex regime. For example, Decree 71/02 of the National Executive Power (published in the Official Gazette on January 10, 2002) initially established both an Official Exchange Market and a Free Exchange Market. The Official Exchange Rate was fixed at 1.4 Pesos = 1 Dollar and applied only to trade-related transactions. Subsequently, the dual exchange rate system originally created by Decree 71/02 was repealed. Pursuant to Decree 260/02 of the National Executive Power (published in the Official Gazette on February 8, 2002) the Official Exchange Market was abolished and therefore it was determined that all exchange transactions will be made exclusively through the Free Exchange Market. As of the date hereof the Free Exchange Rate is about 3 Pesos for 1 US Dollar.
The legal framework under analysis is continuously changing, especially at the lower regulatory level, i.e. communications of the Argentine Central Bank. In a nutshell, the new foreign exchange and banking regime has the following features:
1. Central Bank Approval for Transfers of Currency Abroad: Prior approval of the Central Bank is required to transfer currency abroad in order to pay dividends and profits, as well as interests and principal on cross-border financing facilities, among others.
2. Exports: Exporters of goods and services, in turn, are required to repatriate the export proceeds and to exchange such currency within the local financial market. Set deadlines are provided by the regulations. For example, exporters of services have a deadline of 15 days to repatriate the currency—counted as of the payment date—and of five days to exchange it within the local financial market. In connection with exports of goods, the Secretariat of Industry is the agency that establishes the deadlines, which vary according to the exported good.
3. Imports: As far as imports are concerned, Argentine resident importers are required to make payments abroad according to the timeframe set forth by the Secretariat of Industry. Such timeframe varies according to the type of good (as classified in the Foreign-Trade Tariff Schedule) and the FOB value of the import. The payment periods under analysis vary from 45, 90, 180 and up to 360 days, counted as of the date of shipment. There are set exceptions to this rule: for example, certain “critical” goods could be paid abroad in advance. Later, the importer has to evidence that such critical goods have been cleared through the Customs within 90 days following payment.
13. Tax Treatment of Subsidiaries and Branches
13.1 The Arm’s Length Standard
Intercompany dealings between a foreign-controlled domestic company and the foreign persons which directly or indirectly control it are treated as if parties were unrelated, provided that the terms and conditions of such dealings are similar to those that independent parties could have agreed upon.
In connection with loan transactions between such related parties may be subject to specific Central Bank regulations.
Funds that have been disbursed by the foreign parent (or controlling company) to the Argentine affiliate under any loan or transfer of technology agreement, without complying with the arms-length standard, are treated as capital contributions. The full amount of interest or royalties, in turn, paid by the foreign-controlled domestic company are treated as a profit distribution to the foreign beneficiary (i.e. net income to the foreign parent).
Funds that may have been disbursed by the foreign parent (controlling company) to the Argentine affiliate under any other kind of agreements, whose terms and conditions are not in accordance with normal market practices, are deemed capital contributions and, in turn, payments by the Argentine counter party are deemed profit distributions (net income of the parent), but only to the extent that such payments exceed what could have been paid by an unrelated domestic company in similar circumstances. Net income to the foreign parent corporation pursuant to the foregoing rules is taxed at a 35% percentage rate without prejudice to the deductibility of payments made by the local corporation when they qualify as allowable expenses.
13.2 Branches / Separate Accounting
Annual income of a local branch is determined on a separate accounting basis. However, if the local branch’s accounting records are inadequate or do not accurately reflect net income from Argentine sources, the tax authorities may treat branch and the foreign head office (including its other branches or subsidiaries, if any), as a single economic unit and arbitrarily determine the portion of taxable income of the local branch. There is no “force of attraction” rule under Argentine tax law. Therefore, except where local office records are inadequate or inaccurate, income of a local services or other activities carried out in Argentina directly by the foreign office without intervention of the local branch. Such income is subject to withholding at the source (see I, 1.2., above), and need not be reported by the local branch.
13.3. Income Tax differences between Branches and Subsidiaries
The basic tax burden on branches and subsidiaries is similar. The Income Tax Law - currently at the rate of 35% - applies to both domestic subsidiaries and local branches (and permanent establishments) of foreign companies. Remittance of profits to the foreign head office of local branches and dividends paid to foreign shareholders are not subject to any additional income tax or withholding.
Taxable income of a branch of a branch or subsidiary is determined by deducting all allowable expenses from the entity’s gross income. Expenses incurred abroad may also be deducted provided that the taxpayer demonstrates that they were incurred for purposes of generating taxable income in Argentina.
