The year 2018 was difficult economically for Argentina. The Macri administration in its third year faced a series of adverse international and local conditions that interrupted the recovery and macroeconomic ordering that had begun to take shape during 2017.
Between December 2017 and December 2018, the exchange rate devalued by 114%; the year began with an exchange rate at 19 pesos per dollar (the average of January 2018) and ended at 37.8 pesos per dollar (the average of December 2018). In this context, Argentina asked the IMF for assistance twice, accumulating a standby loan granted by the IMF of $57 billion, thus securing the debt commitments for the remainder of 2018 and much of 2019. Within the framework of these agreements, the government undertook to accelerate the decline of the fiscal deficit, assuming a new objective of zero primary deficit for 2019 and a surplus of 1% of the GDP by 2020.
The aforementioned depreciation of the Argentine currency and the continuous tariff adjustments aimed at reducing the amount of subsidies granted by the Argentine State generated inflation. The year 2018 left an average price increase of 47.6%, but regulated prices rose significantly to 53.5%.
With regard to economic activity, official data shows that the GDP fell 2.5% in 2018 compared to 2017. This decline affected all sectors of demand except for exports that, in real terms, showed zero variation. Investments, which played a key role during the previous year, dropped 5.8% year-on-year, followed by public consumption (-3.3%) and private consumption (-2.4%). The sectors that suffered the sharpest decline are agriculture, livestock, hunting and forestry (-15.1%), manufacturing industry (-4.8%) and wholesale, retail and repairs (-4.5%).
As regards tax results, in 2018, the government surpassed the primary deficit target of 2.7% of GDP and reached 2.4%, as in 2017. This was the result of total revenue growing 30.2% and primary expenses increasing 22.4%.
Exports grew 5% as a result of the devaluation of the peso and the recovery of the demand of some products from Brazil, Argentina's main business partner. Imports fell 2.2% mainly because of the decline in economic activity; 68% of imports are linked to the productive process and to investment (work in process, capital goods and components and accessories for capital goods). Meanwhile, the balance of services had a deficit of $9.7 billion.
In this context, 2019 looks like a complex year. Being an election year, certain increase in volatility of macroeconomic (especially financial and monetary) variables may occur, as long as the uncertainty as to the outcome of the election is unsolved. However, certain structural bases (such as the development of Vaca Muerta or growth in the export of knowledge-based services) have been established and/or consolidated in recent years that could allow Argentina to improve the results of its external accounts.
Tax developments
Argentina amends income tax regulations
On December 27 2018, Argentina's executive branch issued Regulatory Decree 1170/2018 , which regulates several aspects of the amendments introduced to the Income Tax Law (ITL) by the reform enacted by Law 27,430.
The most relevant issues for multinational companies investing in Argentina covered by the regulations cover transfer pricing (TP), capital gains, dividend withholding and thin capitalisation rules.
Transfer pricing
Most importantly, the decree contains more details on the information requirements related to the import and/or export of goods carried out through international intermediaries, in addition to:
- further guidance on the methodology for the valuation of exports of commodities carried out through international intermediaries;
- an upgrade to the decree status of the list of situations that are deemed to constitute an 'economic relationship' for documentation purposes, as well as additional guidance regarding jurisdictions that are considered low or no tax (tax havens);
- introduction of further guidance regarding comparability analysis, risk assessment of the transactions, and TP methods consideration; and
- permanent establishment (PE) clarifications on the dependent agent status.
Capital gains tax on indirect transfers
The decree also provides further guidance regarding situations under which an indirect transfer of Argentine assets may be exempt from tax under intra-group relief.
The rule notes that a transfer is considered to have been executed within the same economic group when:
- a transferor holds, directly or indirectly, 80% or more of the contributed capital to the transferee (or vice versa), or when one or more entities jointly hold, directly or indirectly, 80% or more of both the transferor and the transferee; and
- this relationship has existed for a period of at least two years prior to the relevant indirect transfer.
The exemption shall not apply if the only purpose of the transfer is to obtain a more favourable tax treatment to the one that should have corresponded without the existence of such an economic group.
Dividend withholding and equalisation tax
The regulations introduced some clarification on how dividend withholding would apply during the transitional period where the rate goes from 7% to 13% (i.e. profits between 2018 to 2020).
Additionally, the decree has established procedures to calculate the equalisation tax when the taxpayer distributes pre-2018 profits. It is worth noting that equalisation tax – repealed from 2018 but still applicable on pre-2018 profits – applies on dividend distributions in excess of accumulated tax earnings at a rate of 35%.
In this sense, the decree clarified that post-2018, tax profits (those corresponding to financial years starting on or after January 1, 2018) should be included in the determination of the accumulated taxed profits for the purposes of determining the excess subject to withholding. Similarly, the decree also established that post-2018 profits that have already been subject to corporate income tax at the former rate of 35% would not be subject to dividend withholding.
For the sake of clarity, pre-2018 and post-2018 refers to profits generated in fiscal years starting before and after January 1 2018, respectively.
Thin capitalisation rules
The decree also sets forth that interest paid to a non-resident, and in situations where a corresponding withholding tax is made (even when reduced by an applicable double tax treaty), would not be subject to the newly enacted thin-cap rules. However, the above exception would not cover foreign exchange losses arising from intercompany financing granted by a foreign related party, as those losses are not subject to taxation in Argentina.
Given the wide scope, nature and relevance of the income tax reform, and the enacted regulations, multinational companies that operate and organise their businesses in Argentina should carefully review how the new rules may impact their investments as well as existing financing and cash repatriation structures. In particular, initial practical experiences on the application of the new corporate tax rules show that several issues have to be attended on a case-by-case basis.
Argentina updates its global tax treaties with key economies
In early December 2018, Argentina signed two new double tax treaties (DTT) with China and Turkey. In the first half of 2019, DTTs with Luxemburg and Japan were signed.
This shows how Argentina has been actively negotiating DTT's to expand its current treaty network showing a trend to broaden the treaty network that has traditionally focused on European countries and other strategic economies.
Below are the main features of each of those new agreements.
Tax treaty with China
Like other OECD model-based treaties, this one introduces relief on domestic withholding taxes (WHT) on cross border payments for:
- interest (12%);
- royalties and technical assistance services (3%, 5%, 7% and 10%); and
- dividends (10% provided the interest held is greater than 25% and it has been held for the 365-day period before the dividend payment).
Taxation on capital gains derived from the transfer of shares is capped at 10% or 15%, depending on the participation held.
With respect to the permanent establishment (PE) definition, exceptions included in Article 5 are subject to the 'preparatory or auxiliary' condition. Finally, the treaty includes the 'principal purpose test' as a general anti-abuse provision.
Tax treaty with Turkey
The treaty has similar features to those described for the treaty with China, most importantly a limitation on domestic WHT for:
- interest (12%);
- royalties and technical assistance services (3%, 5% and 10%); and
- dividends (10% provided the interest held is greater than 25% and it has been held for the 365-day period before the dividend payment).
Like the treaty with China, Argentina and Turkey have agreed to include the 'principal purpose test' as a general anti-abuse provision.
Congressional approval and ratification would be needed before the treaty becomes applicable.
Tax treaty with Qatar
In general terms it includes features similar to those of the treaties with China and Turkey, particularly with respect to limitation on withholding taxes at source, a definition of PEs, and general anti-abuse provisions (i.e. principal purpose test).
A distinctive feature is that WHT on royalty payments is capped in all cases to a 10% rate.
The treaty has already been ratified by the Qatar government, although Argentine congressional approval is still pending.
Tax Treaty with Luxembourg
On 13 April 2019, the Luxembourg and Argentine Governments signed a new DTT, together with an accompanying Protocol. This new DTT still needs to go through the ratification process.
This DTT is mostly in line with OECD post-BEPS 2017 Model Convention, and notably includes the Principal Purpose Test as a general anti-abuse provision.
The Treaty introduces relief on withholding tax at source on payments of interest, royalties and technical assistance services, and dividends, among others.
As regards capital gains taxation, the treaty may provide full relief in Argentina in case of an indirect transfer of Argentine shares (except in the event of a land-rich entity).
With respect to the elimination of double taxation, Argentina adopted the credit mechanism while in Luxembourg the exemption with progression method would be applicable.
Tax Treaty with Japan
On 27 June 2019, authorities of Argentina and Japan signed the first DTT between these two countries.
In order for it to be enforceable, internal approvals and a subsequent exchange of ratification documents are still needed.
Like the treaty with Luxembourg, the DTT with Japan generally follows the OECD Model (post BEPS) and adopts the Principal Purpose Test as a general anti-abuse provision.
Similar to other OECD Model-based treaties, this one includes relief on dividend withholding as well as on interest and royalty payments.
Notably, the royalty definition included in the treaty specifically excludes payments for the provision of technical assistance (which would in principle by covered by the provisions of the Business Profits article).
This may have a significant impact on existing treaties signed by Argentina with OECD countries, as the treatment granted to technical assistance payments under the DTT with Japan (once in force), will automatically apply to those treaties where the most favourable nation clause covered the provision of technical assistance.
Argentina imposes export duty tax for services in 2019/2020
Decree No. 1201/2018, published in the Argentine Official Gazette on January 2, 2019, established a new tax for the export of services.
The 12% tax applies to services rendered in Argentina where: (i) there is no employment relationship between the supplier and recipient of the service; and (ii) where the service is used or exploited abroad. This includes the exportation of software-related services, as well as consulting services rendered in Argentina and used abroad.
This use or exploitation refers to an immediate use, or the first act of disposition made by the recipient of the service.
The export tax, which is levied at 12%, may not exceed ARS 4 for each US dollar. The tax must be expressed in ARS (Argentinian Peso) using the exchange rate of the Argentine Central Bank on the business day that immediately precedes the date the transaction is reported. This would likely reduce the effective rate considering that it would be a deductible expense for income tax purposes.
Micro and small exporters will be subject to tax once their annual revenues from the export of services exceed $600,000. The export tax is effective since January 1, 2019 for services rendered and invoiced from that date, even if the contract was signed before. This new tax applies temporarily until December 31. 2020.
New tax promotional regime for knowledge-based activities
The Argentine Official Gazette, on June 10, included Law No. 27,506, which contains a new regime promoting knowledge-based activities. The regime's main tax benefits include application of a tax stability agreement and a reduced corporate income tax rate of 15%.
The new regime will be effective from January 1, 2020, through December 31, 2029. It aims at encouraging the creation, design, production and implementation – or adaptation – of products and services (and the associated technical documentation) related to, among others, the following 'Promoted Activities':
- software, computing and digital services
- audiovisual production and post-production activities
- certain scientific and engineering activities
- geological and prospecting services
- exportation of professional services
- activities related to the industrial sector using '4.0 technologies'
New tax benefits
Argentine companies that apply to the regime to promote knowledge-based activities will benefit from the following tax incentives:
- Corporate income tax rate of 15% versus the standard 25% rate applicable to fiscal years beginning on or after January 1, 2020).
- Taxpayers will be entitled to execute tax stability agreements with federal tax authorities that will ensure the federal tax burden on income from Promoted Activities cannot increase until December 31, 2029 (when Law 27,506 expires). The stability agreements will also extend to provincial and municipal taxes if the provinces and municipalities adhere to Law 27,506.
- Taxpayers will be entitled to claim a foreign tax credit for income or withholding taxes paid, regardless of whether the income is characterised as Argentine or foreign-sourced (with certain limitations).
- Taxpayers benefiting from the regime will not suffer VAT withholding under domestic regimes.
- Reductions on the effective rate of social security contributions and an additional tax credit related to that saving to offset Corporate Income tax and/or VAT liabilities. The tax credit would be materialised through a certificate that if not used can be transferred once to other taxpayers.
Main requirements
Taxpayers will be entitled to apply for the regime if Promoted Activities generate more than 70% of their gross revenues. Furthermore, taxpayers will need to register with the National Registry of Beneficiaries of the Knowledge-based Economy Promotional Regime (Registro Nacional de Beneficiarios del Régimen de Promoción de la Economía del Conocimiento), and satisfy at least two of the following conditions:
- Demonstrate continuous improvement to the quality of their services, products or processes.
- Prove a minimum R&D or training expenditure.
- Export at least 13% of their goods/services from the promoted activities (70% in the case of professional services).
Taxpayers will be required to pay, annually, a percentage of the tax savings obtained under the regime:
- 4% to cover costs incurred by public authorities for controlling and supervising the regime's administration.
- 1.5% to fund the Trust Fund for the Development of Entrepreneurial Capital (Fondo Fiduciario para el Desarrollo de Capital Emprendedor).
Expected regulations may provide additional guidance on the type of activities that can qualify as Promoted Activities, the registration process and the mechanism to pay the contributions to finance the regime (4% and 1.5% on tax savings obtained, as described above).