Argentina imposes an assets tax (the Personal Assets Tax “PAT”) on, among others, stock and other equity interests issued by Argentine legal entities owned by legal entities and individuals domiciled abroad. The applicable rate is 0.5% upon the net worth of the local Company as of 31 December of the relevant year.
However, PAT is not applicable on equity issued by Argentine companies held by foreign holders residing in countries that have entered into double tax treaties (“DTT”) with Argentina which provide that the assets of an enterprise are only taxable by the State of residence or domicile of the person. For example, the Argentina-Chile DTT provides in Article 19.1. that “…stock or other forms of equity of an enterprise can only be taxed in the Contracting State in which its owner is domiciled”. Accordingly, stock held by Chilean stockholders is not taxable in Argentina under the PAT. The same can be argued in respect of the treaties signed by Argentina with Bolivia, Spain and Switzerland (the wording of the relevant provisions differ from the Argentina – Chile Treaty, although it yields the same result).
Are nationals of other Latin American countries also exempt from PAT?
Although arguments can be made that nationals of Uruguay, Brazil, Venezuela, Colombia, Ecuador, Mexico, Paraguay and Peru could claim a PAT exemption under the most-favored-nation rule of the Tratado de Montevideo (1980) (the “Treaty”), the Argentine Federal Tax Agency (“AFIP”) released Nota Externa # 5 AFIP (Official Gazette Aug 4, 2008) making clear the it will reject and challenge said exemption should it be applied with respect to nationals of the above referred countries.
Brazil, Argentina, Uruguay and other Latin American countries are parties to the Treaty. The Treaty sets the framework for the “Asociación Latinoamericana de Integración” (“ALADI”) and is aimed at reaching a Common Latin American Market.
Former Argentine Subsecretario de Ingresos Públicos, Mr. Eduardo Ballesteros (an officer within the Ministry of Finance), officially interpreted back in 2002 that Brazilian stakeholders on Argentine companies shall not be subject to PAT on the grounds that Article 48 of the Treaty provides for a most-favored-nation rule applicable to the capitals owned by the parties to the Treaty. In so ruling, Mr. Ballesteros sustained that although the Treaty might generally not be applicable to tax matters, referred most-favored-nation clause shall apply to taxes on assets. Accordingly, since certain DTTs entered into by Argentina prevents the Argentine Government from applying the PAT on stock - issued by Argentine companies - owned by persons residing or domiciled in such countries (e.g. Spain), likewise, the most-favored-nation clause prevents the Argentine Government from applying PAT to residents of the countries that have entered the Treaty.
Referred interpretation had been confirmed by Memorando # 1000/2002 (Nov 6, 2002) released by certain technical department, also within the Ministry of Finance (“Dirección General de Asuntos Jurídicos”).
A number of foreign stakeholders followed that interpretation and failed to pay PAT.
However, a year later, in 2003, the Ministry of Foreign Affairs interpreted the opposite, that is, that nationals of Treaty countries could not claim a PAT exemption under the most-favored-nation rule of the Treaty.
On June 30, 2006, the chief of the Federal Government’s attorney (“Procurador del Tesoro”) issued Dictamen # 170 confirming denial of PAT exemption under the Treaty, which was subsequently confirmed by the AFIP on August 4, 2008 under the following grounds:
- The Treaty does not expressly include tax matters neither is it intended to address tax issues; every state has the right to regulate its tax affairs domestically.
- Argentina has never included tax provisions in investment treaties entered into with other nations. In particular, the Protocolo de Colonia, which will supersede and replace the Treaty, expressly excludes tax matters.
- Multilateral treaties need to be interpreted restrictively to avoid expansion of effects not sought after by the parties at the time the relevant treaty was entered; and referred principle should be enhanced when tax matters are at stake.
However, arguments can be made by taxpayers before the courts should they decide to litigate this matter or the penalties imposed as per the failure to pay the tax, among others,
- The Treaty does not exclude tax matters (see Articles 46 and 47).
- Some precedents to the Treaty foresaw the implementation of treaties which could include tax matters within ALADI.
- An assets tax on equity goes against the regional integration sought by the Treaty.
- Under the Vienna Convention on the Law of the Treaties to which Argentina is a party, the PAT exemption should be interpreted in light of the goals of the Treaty, and regional integration is definitively not enhanced by a PAT on equity, which affects capitals sourced in Treaty countries.
- An imbalance is produced by the PAT exemption applicable to residents of non-Treaty Countries (Spain, Switzerland). Equity aimed by the Treaty is neutralized.
- Under decades-old Argentine Supreme Court doctrine, the interpreter of the law should not read the relevant provisions in a manner different from its actual wording. Article 46 of the Treaty should be actually construed as an aim at avoiding tax discrimination and, accordingly, an interpretation sustaining that tax matters are excluded from the Treaty would violate the above referred interpretation principle.
- Under the Interpretation Guidelines to certain Treaty predecessors, the most-favored-nation rule should be read far-reaching, including tax, customs and currency control matters.
- The Protocolo de Colonia, which will supersede and replace the Treaty, expressly excludes tax matters; the Treaty’s text does not.
At last, it would be interesting for practitioners in other Treaty countries that also levy an assets tax on stock held by foreigners to analyze how the most-favored-nation rule would apply to their particular countries’ tax.
posted by P. Sebastian Lopez-Sanson @ 5:51 AM
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