The tax reform
In its commitment to modernising the tax system, but also with an eye on monitoring the fiscal deficit, the Argentine Congress passed, on 27 December 2017, a large tax reform package that became effective on 1 January 2018.
Profits tax rate reduction
The most significant change in the tax reform is a profits tax rate reduction that applies in two phases. For the first two taxable years starting on or after 1 January 2018, the profits tax rate is reduced from the prior 35% rate to 30%. For taxable years beginning on or after 1 January 2020 and on a going-forward basis, the tax rate is further reduced to 25%.
This measure is offset by the introduction of a withholding tax (WHT) on dividend distributions and branch profit remittances at rates of 7% (while the applicable profits tax rate is at 30%) and 13%, respectively, going forward. The WHT on dividends and branch profits can be reduced by tax treaties. The tax reform has also abolished the so-called ‘equalisation tax’ for profits generated in taxable years starting on or after 1 January 2018, although it remains applicable on dividend and branch profit distributions made out of earnings accumulated prior to 1 January 2018 and which were in excess of tax earnings as of the year-end prior to the relevant distribution.
Transfers of Argentine shares
The tax reform has confirmed that the transfer of Argentine securities that occurred after 23 September 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 Depository Receipts (ADRs) made by non-residents through stock exchanges (whether local or foreign).
The tax reform now provides that it should be the seller, and not the buyer, that is the party responsible for withholding the tax. In this regard, Resolution No. 4227 has established a new mechanism regulating how non-resident sellers should pay the tax on the capital gain for transactions that have taken place on or after 1 January 2018. In summary, the non-resident seller should pay the tax directly through an international wire transfer unless there is a local withholding agent (i.e. local buyer or local custodial institution) involved in the payment.
Non-residents are now exempt from tax on capital gains realised on the sale of shares in publicly traded companies but only to the extent that the shares are actually sold through the local stock exchange. Furthermore, non-residents continue to be exempt from tax on capital gains arising from the sale of sovereign bonds and corporate bonds issued in an initial public offering (IPO). 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 having an exchange of information agreement with Argentina and the funds coming 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. In these cases, both the income and the capital gain are subject to tax at a rate of 5% tax. If the tax cost cannot be determined in the case of a sale, the tax is 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 also due if any of these thresholds were met during the 12-month period prior to the sale. The indirect transfer of Argentine assets, however, is only subject to tax to the extent those assets are acquired on or after 1 January 2018. Furthermore, indirect transfers of Argentine assets within the same economic group do not trigger taxation, provided the requirements to be set by regulations are met.
Other income tax changes
In line with the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital guidelines, the tax reform limits the concept of 'ancillary or preparatory' in order to limit the type of activities that are not deemed to constitute a permanent establishment (PE).
The tax reform has also replaced the 2:1 debt-to-equity thin capitalisation rule with the base erosion and profit shifting (BEPS)-based rule, where 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 also been introduced to relax the so-called ‘sixth method’ for transfer pricing analysis in cases involving commodity transactions with foreign intermediaries.
The Argentine controlled foreign company (CFC) rules have also been amended. Thus, an Argentine taxpayer is immediately taxed on the passive income generated by a CFC that is directly or indirectly held by the Argentine taxpayer 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 also confirms that ADRs generate Argentine-sourced income. However, as stated, a non-resident is exempt from the current 15% capital gains tax on the sale of ADRs if one resides in a jurisdiction having an exchange of information agreement with Argentina.
Other tax changes
A new 10% excise tax has been introduced on drinks with caffeine and taurine. The excise tax rate on certain automobiles has been reduced.
The tax reform has also increased the tax on financial transactions that is creditable against the profits tax liability.
With respect to value-added tax (VAT), the tax reform provides for an expedient VAT 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. VAT legislation has also been amended to include ‘digital transactions' (e.g. digital services, hosting, on-line technical support, software services, Internet services) as a taxable event. Hence, these types of services are now subject to VAT at a 21% rate if they are supplied by a non-resident entity to an Argentine customer, provided that that they 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.
Tax on asset revaluations
As part of the reform package, the Argentine Congress also approved a one-time tax aimed at offsetting the absence of inflation adjustments rules with an optional revaluation of assets for companies and individual entrepreneurs.
Under this revaluation tax, taxpayers are entitled to adjust their tax basis in fixed and movable assets (except automobiles), shares in Argentine companies, and intangible assets. Assets that have been fully depreciated are excluded. The revaluation has to be made by computing certain factors, although an external appraisal instead of those factors can be used for real estate that is not treated as inventory as well as for movable assets, provided that the revaluation does not exceed 1.5 times the revaluation that would have resulted had those factors been applied.
The tax is levied on the amount of the adjustment at a rate of 8% in the case of real estate (15% if it is considered inventory), 5% for shares if held by individuals, and 10% for other assets. The taxpayer can select which class of assets to adjust, but once the category has been selected, all of the assets included in that category have to be adjusted.
The basis adjustment is depreciable over the remaining useful life with a minimum of five years, except for basis adjustments in real estate and intangibles, where the depreciation must be made over the longer of either ten years or 50% of the remaining useful life. 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, as inflation adjustments have been reinstated for those assets.
Taxpayers opting to revalue their assets must withdraw judicial or administrative proceedings claiming inflation adjustments for past or future taxable years.