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.
posted by P. Sebastian Lopez-Sanson @ 11:04 AM
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