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.
posted by P. Sebastian Lopez-Sanson @ 8:28 AM
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