Foreign Investment in Argentina¿Hay barreras a la inversión externa? El Decreto 1853/93, hoy vigente, dispuso que "los inversores extranjeros pueden efectuar inversiones en el país sin necesidad de aprobación previa, en iguales condiciones que los inversores domiciliados en el país". Esa norma, q en gral no se recuerda, tiene impacto cierto en algunas situaciones de discriminación contra la inversión externa.
Argentine Banking Tax Exemption Still Applicable for Structured Finance PurposesThe Argentine Federal Tax Agency (AFIP) on October 16 confirmed that the exemption from the banking transactions tax still applies for financial trusts that are provided relief under section 10(c) of the decree implementing the Banking Transactions Tax Law.
As previously reported, Decree 1207/08 abolished a preferential tax deduction that had been available for some closed-ended mutual funds and financial trusts as of August 1, restricting the regime to financial trusts related to infrastructure works to be used in the provision of public services. However, it was not clear what effect Decree 1207/08 would have on relief provided by section 10(c), under which financial trusts and closed-ended mutual funds are granted a tax exemption if they meet the requirements established in section 70.2 of the executive order implementing Argentina's Income Tax Law. (For prior coverage, see Doc 2008-17030 [
PDF] or 2008 WTD 152-2
.)
Nota Externa AFIP 9/2008, published October 16 in Argentina's official gazette, confirms the exemption from the banking transactions tax still applies for a financial trust that meets the following requirements:
the trust is created with the sole purpose of carrying out the securitization of homogeneous assets;
the trust's underlying assets are not replaced with other assets;
the trust's term, in cases of underlying debt securities, is linked to the term for the final cancellation of the trust's assets or the underlying creditor rights;
90 percent of the trust's gross benefit is derived from income arising from the trust's underlying assets and its sale and some other temporary portfolio holdings; and
the trust's securities are offered publicly.Although Decree 1207/08 made financial trusts less attractive for structured finance purposes, financial trusts can still be beneficial. In general, individuals and foreign companies are still exempt from capital gains tax derived from the alienation of trust securities and from income tax on interest paid by the trust on debt securities. VAT exemptions are also still available. Also, thin capitalization rules and equalization tax regulations are not applicable to financial trusts under certain conditions.
Multilateral Integration Treaties and Taxes on Assets in Latin America. The Most Favored Nation rule and the Montevideo Treaty. Argentina as a Sample Case.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.
Argentina abolished tax relief for mutual funds and financial trusts
Under Decree No. 1207/08 (published in the Official Bulletin on August 1, 2008), the National Executive Power has amended section 70.2 of the Decree implementing Income Tax Law (ITL) to abolish the preferential treatment afforded to close-ended mutual funds and financial trusts, with the relief remaining in force only as it applies to financial trusts related to infrastructure works to be used in the provision of public services.
The previous scheme
Section 70.2 of the executive order implementing the ITL granted close-ended mutual funds and financial trusts a preferential treatment for income tax purposes provided they met certain requirements established under subsections a) through d) of such implementing regulation. Such relief meant they were allowed to deduct from the taxable base any amounts which, however denominated, were to be allocated as profit distribution (normally, the yield on “pass-through certificates”). Thanks to this relief, big appliances store chains, among other players, managed to grow mass consumption in under-banked segments of the population. During 2007, major issues included Confibono, Megabono, Secubono, Consubond and Consubono, among others.
Effective date of the new scheme
Last August 1, the financial community was hit by the release of Decree 1207, according to which the amendment becomes effective on the same date it is published in the Official Bulletin. Therefore, in view that the Income Tax is a yearly tax, the Tax Authority is very likely to (i) consider that the preferential treatment is abolished for all fiscal years ending after August 1, 2008 and, thus, (ii) require that income tax advance payments be made in such cases.
Impact on the exemption from the banking transaction tax
The Executive Order does not refer to the effects that this amendment may have on the relief provided by section 10, subsection c) of the Decree implementing the Banking Transactions Tax Law, whereby financial trusts and close-ended mutual funds are afforded an exemption insofar as they meet the requirements established in section 70.2. As a result, unless the Executive Power issues a regulation to clarify this point, it is not clear whether (1) the exemption from the banking transaction tax remains in force only for financial trusts that both meet those requirements and are related to infrastructure works destined for the provision of public services, or (2) upon satisfaction of requirements established in subsections a) through d) of section 70.2, the exemption from the banking transaction tax applies whether or not financial trusts are related to such specific purpose.
Based on the information above, the following preliminary conclusions may be drawn:
· The preferential treatment under income tax –which allows the deduction of amounts characterized as profit distributions– is no longer applicable to close-ended mutual funds and financial trusts that are not related to infrastructure works to be used in the provision of public services.
· This limitation to the relief applies to yields earned on “pass-throughs”, as they represent profit distributions; yet, it does not apply to debt instruments, which continue to be fully deductible.
· Since Executive Order 1207 becomes effective as from its release in the Official Bulletin, the Tax Authority can be expected to consider that the elimination of this preferential treatment applies to all fiscal years ended after August 1, 2008 and, therefore, require that income tax advance payments be made in such cases.
· Since no reference was made to the exemption from the banking transaction tax, it is not clear whether for the exemption to apply the financial trust should be related to infrastructure works to be used in the provision of public services once Executive Order 1207/2008 becomes effective.
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.
How the Agassi Case would be treated under Argentine Tax Law? And what about under other Latam country's regulations?In a recent ruling, the House of Lords has released its decision in the Agassi Case (
http://www.publications.parliament.uk/pa/ld200506/ldjudgmt/jd060517/agasro-1.htm). In brief, the Court ruled that Andre Agassi -
http://www.agassiopen.com/ -(a US resident) was subject to tax in the UK not only with respect to prizes earned while taking part in tournaments in the UK, such as Wimbledon, but also with respect to certain monies paid by Head (
http://www.head.com/) and Nike (
http://www.nike.com/) to Agassi Enterprises Inc., a non-UK legal entity wholly owned by Mr. Agassi. Said monies were paid in consideration for contracts under which Mr Agassi sponsored and advertised the manufacturers' products.
Neither Nike nor Head was resident in the United Kingdom in the 1998/1999 tax year, nor did either company carry on any trade in the United Kingdom. Nor were their payments to Agassi Inc. made in the United Kingdom. In fact, the payments were not particularly to related to his performance in any UK tournament.
In short, Agassi was personally held liable to UK income tax in respect of income earned by a wholly owned enterprise (which was not disregarded for tax purposes) where none of the subjects involved nor the payments were territorially linked to the UK in a direct manner, but for Mr. Agassi's performance in UK which renders not a direct but an indirect link to the streams of income .
I believe this is a landmark case for sportsmen and artistes not only in the UK but in the world.My view is that under Argentine Law (and also under other Latam countries tax laws), the case would be entered opposite to the UK Agassi case, and that is because in general our tax regimes lack Sections similar to UK Sections 555 and 556 under which income can be deemed owned by the stakeholder of the legal entity. However, attention should be paid to general domestic anti-avoidance rules, together with the relevant Tax Treaty regulations that may take part in the particular case.
