INSIGHT: Argentine Tax Reforms and Developments

In the fast-changing global tax landscape, Argentina is no exception. Following the presidential elections and the change of the federal government in 2019, the tax outlook presents several points of attention for 2020. Law 27,541 (the Law)
together with Presidential Decree 99/2019 and other regulations (the tax reform) have introduced changes shaping the tax system and the business environment.

This article provides an overview of some of the main features relevant to foreign investors and companies doing business in the country.

Corporate Income Tax

While it was originally provided that the 30% corporate income tax rate would be reduced to 25% for 2020 (and the 7% dividend withholding rate would increase to 13%), the tax reform postponed the change. For 2020 the 30% and 7% rates will continue to be in force, and in principle for 2021 the rates would change to 25% and 13% respectively. Even if the text of the Law gives space for some ambiguity about the entry into force of the new rates (i.e. for 2021), it is expected that this uncertainty should be clarified shortly.

For foreign shareholders the overall taxation on income in one or other scenario would be around 35% (considering the corporate rate plus the dividend withholding on the after-tax profits); however, the envisaged rate changes need to be taken into account, for example for tax modeling purposes and for deferred tax calculations.

Another relevant aspect is the effect of inflation on the overall economy, and on income tax calculation in particular. The annual inflation rate for 2019 was 53.8%, and it is expected that for 2020 it will not be lower than 40%. Argentine regulations have admitted the integral adjustment for income tax purposes when certain inflation thresholds are exceeded. However, even with an inflationary economy , certain financial year-ends (different from December 31) may not meet the thresholds indicated by law, and formally the adjustment would not be applicable to those tax years.

In addition, the tax reform indicates that for tax years 2019 and 2020 the inflation adjustment effect will be allocated gradually to the income tax calculation over a six-year period. For tax years beginning on or after January 1, 2021, taxpayers would include 100% of the negative or positive inflation adjustment in the year in which the adjustment is calculated.

There continue to be legal cases in which the specific situation of the taxpayer is assessed in connection with the calculation and application of the income tax inflationary adjustment; favorable decisions are generally obtained when a confiscatory effect is proved for the unadjusted income tax calculation.

Foreign Exchange Regulations and Tax Developments

In the context of decreasing foreign currency reserves and devaluation of the Argentine peso, the Argentine Central Bank has reintroduced foreign exchange regulations since September 2019. The rules include the obligation to settle in the foreign exchange market any collection from exports of goods and services. The rules also require a prior authorization for dividend payments to foreign shareholders or services payments to foreign related parties, among others. These requirements were initially intended to be implemented until December 31, 2019 but have been extended.

Foreign exchange controls can bring tax implications. For example, royalties, technical assistance, interest and other concepts owed to foreign related parties are deductible for income tax purposes upon payment (or certain equivalent acts). In the case of delays or restrictions to making these payments, the deduction for income tax purposes may be delayed or restricted as well and should be monitored.

Another relevant development is the creation of a new tax basically levied on certain transactions that involve the purchase of foreign currency. The tax reform established a “tax for an inclusive and supportive Argentina” (Impuesto PAIS) that will apply to the following transactions for five years:

• purchases of foreign currency (i.e., “constitution of foreign assets”) without a specific purpose by Argentine residents, under the limitations imposed by the Central Bank;
• purchases of goods or services from abroad or purchases by Argentine residents abroad through credit, debit or purchase, including cash withdrawals made outside Argentina;
• purchases made online through portals or virtual websites in foreign currency;
• purchases of services rendered abroad through Argentine travel agencies, and purchases of ground, air and water passenger services with destinations outside Argentina (except ground passenger services to neighboring countries), including those paid in cash where subsequent access to the foreign exchange market to buy foreign currency is needed to pay the foreign service provider.

Both Argentine individuals and entities are subject to the tax. The tax rate is 30% and applies to taxable purchases, except for the purchase of digital services, which will be subject to an 8% rate. Argentine intermediaries such as financial institutions, credit card issuers, travel agencies and transport companies are required to act as collection agents of the tax.

The regulations have clarified that transfers abroad made for specific purposes in accordance with the rules established by the Argentine Central Bank are not covered by this collection regime.

Other Tax Developments

As regards taxation on wealth, applicable to tax year 2019 and onward the reform increases from 0.25% to 0.50% the annual tax on the accounting net equity value of Argentine companies owned by Argentine individuals and foreign individuals or entities. For foreign individuals (nonresidents) with assets in Argentina, the Law increases the tax rate from 0.25% to 0.5% for the assets held in Argentina. Those individuals must designate a local substitute taxpayer to pay the tax.

The tax reform also included amendments (effective January 1, 2020) regarding the application of export duties which were already in force. The Executive has been allowed to increase export duties up to 33% for exports of soybeans, 15% for exports of other products that were not subject to export duties as of September 2, 2018, and 5% for industrial products and services. As regards the exportation of services, the application of duties has been extended until December 31, 2021. The rate is 5% without limit (previously a maximum limit applied of 4 Argentine pesos per each U.S. dollar exported).

Planning Points

The tax environment currently in force in Argentina includes some unique taxes, such as the export duties applicable to services and the newly created tax on the purchase of foreign currency. It is important to map existing transactions and flows (especially cross-border) to understand the corresponding impacts and evaluate alternatives, if applicable.

As regards financing, Argentine subsidiaries and branches of foreign companies will need to evaluate the appropriate mix between debt and equity considering, among other things, foreign exchange obligations regarding inflow and outflow of funds, and the impact of the inflationary adjustment for income tax purposes.

With respect to intercompany charges to the Argentine operations, special attention is advisable regarding the “payment” requirement for income tax deductibility purposes, in the context of the foreign exchange regulations in force.

Finally, as regards the overall effect of inflation in the income tax calculation, it is advisable to perform detailed estimations of the future tax liability and evaluate suitable actions in relation with the prepayments due during the year, and eventually, litigation strategies in line with available jurisprudence.

Gustavo Scravaglieri and Ariel Becher are Tax Partners with Pistrelli Henry Martin y Asociados SRL, and Pablo Baroffio is a Senior Tax Manager with the Latin American Business Centre, Ernst & Young LLP (UK).

The authors may be contacted at: gustavo.scravaglieri@ar.ey.com; ariel.becher@ar.ey.com; pablo.baroffio@uk.ey.com

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.