Tax Amendments Aim to Prevent Evasion - International Law Office

Income Tax on Export and Import Transactions
Transfer Pricing Rules
Expense Allocation
Financial Matters
Revenues of Local Taxpayers from Tax-Haven Countries
Other Provisions

On June 17 and June 18 2003 the government placed various bills before Congress in order to amend certain provisions of the Income Tax Law, the Value Added Tax Law, the Tax Procedure Law and the Criminal Tax Law. The main purpose of the amendments is to prevent tax evasion. However, there are certain provisions that are not directly related to this purpose, but which may be also relevant for foreign investors.

Income Tax on Export and Import Transactions

Income tax on exports and imports currently applies to net profit (ie, sale or purchase price minus costs). For such purposes, the sale or purchase price is the highest of (i) the price agreed between the parties, or (ii) the wholesale price existing at the place of destination (in case of exports) or at the place of origin (in case of imports). However, if the wholesale price is not generally known then certain transfer pricing rules specifically included in the Income Tax Law apply.

According to the bill, as a general rule, the sale or purchase price of import or export transactions must be agreed by applying the arm's-length principle (certain information must be provided to the local tax authorities to this effect). In the case of commodities and other goods publicly traded in the markets, the sale or purchase price must be determined by the market price.

Additionally, transfer pricing rules apply (i) if the parties are related and the prices are not agreed according to the arm's-length principle,or (ii) if the foreign counterparty is incorporated or domiciled in a tax-haven country.

Transfer Pricing Rules

The existing transfer pricing rules require the application of certain general methods expressly included in the Income Tax Law and regulations. As provided, the transfer pricing rules apply to transactions carried out by local corporations and entities with (i) foreign-related counterparties, or (ii) foreign counterparties incorporated or domiciled in a tax-haven country.

The bill specifically provides a new transfer pricing method for exports if the following conditions are fulfilled:

• The export is performed between related parties;
  
  
• The export assets are commodities or other goods publicly traded in the markets; and
  
  
• The export is performed through an international intermediary which is not the effective consignee.

In this case the price to be considered would be the greater of either (i) the traded/market price of such assets at the shipping date, or (ii) the price agreed with the international intermediary. This method will not apply if the foreign intermediary meets certain conditions, including the following:

• It must have real presence in its jurisdiction;
  
  
• It must perform non-passive income activities as its main activity; and
  
  
• International trade transactions conducted with economic groups of the Argentine exporter do not exceed 15% of its total transactions.

Expense Allocation

Under the Income Tax Law, payments made by foreign-controlled local companies to foreign-related parties can be deducted for income tax purposes only once such payments are effectively made (despite the general rule that allows companies to deduct expenses on an accrual basis). Under the bill, such treatment would be extended to payments made by local corporations to non-related foreign parties incorporated or domiciled in a tax-haven country.

Financial Matters

Thin capitalization rules
Under the existing Income Tax Law certain thin capitalization rules apply to local companies (excluding financial entities) as a general rule for the deductibility of almost all interest payments. Thus, 40% of interest payments are directly deductible by such companies, while certain limitations apply to the deductibility of the remaining 60%. The non-deductible interest (60%) is based on the proportion of the greater of either (limitations apply only if both criteria are failed): (i) the total amount of interest-bearing liabilities at the fiscal year over 250% of the net worth of the company, or (ii) the interest over 50% of the taxable net income. The amount of interest that is not deducted in a certain year may be carried forward to subsequent years and can be deducted if any of the these criteria are met.

Under the bill, the existing thin capitalization rules will no longer apply. Instead, new thin capitalization rules will apply, but only in case of interest payments (other than those that are subject to 35% withholding tax) made by local taxpayers (excluding financial entities) to foreign-related parties. The new thin capitalization rule will state that liabilities related to such payments cannot exceed 200% of their net worth at the end of the fiscal year. Payments that are not deductible pursuant to such rule will be treated as dividends.

Withholding tax rates for interest payments made to local individuals
Under the bill, interest under credit paid by local corporations to local individuals and local undivided estates will be subject to definite income tax withholding at a rate of 35%.

Withholding tax rates for interest payments made to foreign residents
Under the existing legislation, interest payments made abroad by local taxpayers are subject to a general withholding tax rate of 35%. However, a 15.05% withholding tax applies if the borrower is a local bank. It also applies if the borrower is not a local bank and the lender is a bank or financial institution based in a country whose central bank or similar government authority has adopted the international supervisory banking standards established by the Basel Committee on Banking Regulations and Supervisory Practices (included in the list provided by the implementing decree of the Income Tax Law), and is entitled under the laws and regulations of that country to receive deposits from, and grant loans to, residents of that country.

The reduced withholding rate of 15.05% will have a broader scope under the proposed bill. Among other instances, this rate will apply if (i) the borrower is a local bank, or (ii) the borrower is not a local bank and the lender is a banking or financial institution located in a jurisdiction which does not qualify as a tax-haven country according to the Income Tax Law and its regulations, or has signed an exchange information treaty with Argentina, and the local regulation of which does not establish banking or financial secrecy rules for information requirement purposes.

Revenues of Local Taxpayers from Tax-Haven Countries

Certain non-justified revenues obtained by local taxpayers are currently subject to certain incremental taxation. Thus, the full amount of such revenues is subject to income tax at the incremental rate of 45% (ie, the general rate of 35% plus an additional 10%).

Under the bill, all types of revenue derived from a tax-haven country will be subject to this incremental tax rate. This will also have consequences with respect to value added tax and other federal taxes.

Other Provisions

The bill also includes many provisions that will amend the Tax Procedure Law in order to prevent evasion (basically, it creates and increases penalties).

With respect to the Criminal Tax Law, the bill creates a crime of 'illegal tax association' for which prison sentences may be imposed where three or more people are guilty of collaboration on tax evasion.

The bill is now under discussion in the Deputy Chamber. If it is approved it must also be passed by the Chamber of the Senates and promulgated by the executive power.

For further information on this topic please contact Matías Olivero Vila or Analía Miqueri at Bruchou, Fernández Madero, Lombardi & Mitrani by telephone (+54 115 288 2300) or by fax (+54 115 288 2301) or by email (taxes@bfmlym.com).