Austria’s Federal Law Gazette publishes Argentina’s denouncement of the Argentina – Austria Double Tax Treaty
By P. Sebastian Lopez-Sanson and Lucia Ibarreche-Bruhl
Estudio O'Farrell
After numerous rumors existing for the last 2 years, presuming that Argentina may have denounced its income tax treaty with Austria, on July 10th, 2008, the Federal Law Gazette for the Republic of Austria published the denouncement of the Argentina – Austria Double Tax Treaty (the "Treaty") by the Argentine Government.
According to the text of the Austrian Federal Law Gazette, Part III, Section 80, the Argentine Federal Chancellor has denounced the Treaty, through a note dated June 26th, 2008 (sent on June 27th).
In accordance with Section 29 of said Treaty, the agreement will turn ineffective become invalid as from January 1st, 2009. The Treaty establishes that, in case the written notification of the denouncement by one of the parties is filed within the first six months prior to the end of any calendar year (thus, before June 30th), its provisions shall cease for both parties as from the beginning of the following calendar year.
The Treaty, drafted under the OECD model, entailed tax exemptions in Argentina on assets held in Austria, and on interests and dividends paid out of an Austrian company to Argentine beneficial owners.
It is believed that the denouncement might have been triggered by the J.P. Morgan tax scandal, which arose when Hernán Arbizu (a J.P. Morgan’s ex employee), alleged that the bank abused of the Treaty’s provisions in order to facilitate tax avoidance. Nevertheless, the denouncement is not fully attributable to the J.P. Morgan affair.
J.P. Morgan has already filed criminal charges against former banker Arbizu.
Rumors affirm that the tax avoidance procedure took place through the purchase of Austrian government bonds near the end of December without any business purpose whatsoever. In this context, the holdings were declared tax-exempted before the Argentine Tax Authority, claiming the Treaty’s previsions, and immediately sold during the first days of January.
However, legitimate use of the Treaty was also widespread, and its repeal poses new challenges to a number of Argentine taxpayers.
The denouncement has not been officially disclosed by the Argentine government. Yet, legislative mechanisms will soon have to be started in order to legally abolish the Tax Treaty Law through another national law.
However, it has become evident that no other means to thwart the undesired effects of the Treaty were considered (such as the Federal Tax Agency’s auditing capacities and the possibility of information exchange between the Argentine government and the Austrian Tax Authorities).
As a result, as from January 1st, 2009, Argentineans holding Austrian government bonds will have to pay Income Tax on interest payments and Wealth Tax at a 1.25% rate. It is then expected that a massive Austrian bond sale will occur.
Argentina President, Cristina Fernandez de Kirchner, and Ministry of Finance repealed increase in grain export taxes imposed on March 11.
On July 18th, the Argentine President and the Ministry of Finance revoked the increase in grain export taxes that had been imposed on March 11 via Ministry of Finance Resolution No 125. Argentina's lower house had approved a bill ratifying the Resolution, but the Senate rejected on July 17th, which triggered enormous pressures from farm producers and organizations for the Resolution to be revoked.
Resolution 125 implemented an increasing-scale system pegged to global commodity prices for export taxes on grains and oilseeds.
After a hot 18-hour- debate in the Senate and two separate votes of 36-36, Vice President Julio Cobos, who also serves as president of the Senate, on July 17thg broke the tie by unexpectedly voting against the measure.
However, Resolution 125 remained in effect until a new Resolution or Decree revoke it.
Following pressures from producers, agribusiness organizations and Congress representatives, the Executive Power announced on July 18th that it repealed the Resolution by means of Decree No. 1176/2008 and Resolutions (Ministry of Finance) 180/2008, 181/2008 and 180/2008, published in Argentina’s Official Gazette on July 21st. 2008. Referred regulations reinstated export tax rates in force prior to March 11th, which ranged from 20% to 35%.
Had not the government repealed the Resolution, an enormous amount of legal claims would have been brought before the courts on constitutional grounds.
The Supreme Court had unofficially disclosed that it would have ruled against Resolution No. 125 on unconstitutionality grounds.
Argentina to withdraw from the Argentina – Austria Double Tax Treaty?
Following up on last Thursday’s WTD report on former JP Morgan exec implicating firm in tax evasion, hearsay about Argentina denouncing the Argentina – Austria Double Tax Treaty (the “Treaty”) spread.
A by-product of an Argentine private banker at JP Morgan was a report on the use of the Argentina – Austria Double Tax Treaty for tax avoidance purposes. Journals reported that according to the banker’s allegations, JP Morgan helped clients in taking advantage of a Treaty provision by means of which Argentine individuals would purchase Austrian government bonds near the end of December, reporting the holdings to Argentine authorities as untaxable under the treaty and then selling the bonds early in the new year to pursue better investments, therefore, avoiding a 1.25 percent wealth tax.
The Treaty has been on the spot for long. Rumors about filing for withdrawal from the Treaty by the Argentine Federal Government run for the last 24 months.
This time, a reputable source whom requested not to be disclosed informed that Monday, 30th, the Argentine Ministry of Foreign Affairs may have denounced the Treaty via the appropriate diplomatic channels. Denounce might have been triggered by the JPMorgan news in the media, although not fully attributable to the JPMorgan affair.
Any form of treaty suspension or termination needs to comply with Part V of the Vienna Convention on the Law of Treaties. There are a number of reasons and types of treaty suspension or termination, each with different requirements. No information was released by sources on the type of treaty termination, and on whether the termination would be in part or in whole (the Vienna Convention on the Law of Treaties allows, under certain circumstances, to cease a treaty only in part).
The Treaty was executed back in 1979 mainly following the OECD model then in use. Some particular features of this Treaty make it attractive from a legitimate tax planning perspective. It provides for a Wealth Tax exemption in Argentina with respect to assets held in Austria, such as shares of Austrian companies which subsequently hold assets around the globe.
It also provides for exemption of interests and dividends paid out of an Austrian company to Argentine beneficial owners.
This benefits, coupled with internal Austrian tax regulations and practices render an interesting, legitimate framework for tax planning from an Argentine investor’s perspective.
Rumors about potential reasons behind withdrawal from the Treaty - such as Treaty abuse where bonds are purchased and sold within 3 days without any legitimate business purpose – do not suffice. On the contrary, Argentine tax regulations provide the Federal Tax Agency legal tools to audit any type of structure or transaction. Moreover, the Argentine government can exchange information with the Austrian tax authorities to further strengthen collection.
The Treaty also provides for legal certainty for foreign investors in Argentina, where an Austrian person is somehow involved, and enhances the treaty network, which is a value itself.
We do not think that the lack of auditing capacity should lead to killing the Treaty. More thoughtful analysis should be (or should have been) put to it.
In any case, under Section 29, effect enforceability of Treaty provisions should not cease prior to January 1st. 2009.
