Amendment to Argentina and Brazil’s Treaty to Avoid Double Taxation

1. Introduction

In 1980, the Argentine Republic (“Argentina”) and the Federal Republic of Brazil (“Brazil”) signed the Treaty to Avoid Double Taxation and Avoid Tax Evasion (the Treaty), specifically regarding Income Tax and the Tax over prospective and analog benefits of Brazil that were then in force.

Most of the treaties signed by Argentina follow the model proposed by the Organization for Economic Co-operation and Development (“OECD”). In this case, the Treaty was a combination of different models, adjusted to each country’s needs.

Unlike other treaties where certain specific maximums were established for tax rates applicable to different kinds of income as of their signing, this Treaty had no such rules. It set forth a dual method to avoid double taxation, applying different methods for Brazilian residents from those applied to Argentine residents.

As time went by and commercial developments followed, a need arose to update the rules included in the Treaty in light of a new international context and, in particular, to standardize the different treaties executed by Argentina. Such need was also motivated by the Project led by the OECD called “Base Erosion and Profit Shifting” (“BEPS”) and the recent Multilateral Convention executed on June 7, 2017. (see "Argentina Signs OECD Multilateral Convention").

Consequently, at a meeting held by the authorities of both countries, a proposal was put forward to update certain aspects of the Treaty. Initially, the purpose was to adapt the text to the OECD Model and to incorporate a tax credit mechanism to allow for relief of the tax burden in certain sectors of the economy. Both countries soon agreed to update the Treaty by incorporating the BEPS Project recommendations to avoid abusive tax planning practices and facilitate information exchanges.
 

2. Main amendments

The main changes were as follows:

• Scope of the text: Unlike other treaties signed by Argentina, the original Treaty only included clauses to avoid double taxation regarding Income Tax. The Protocol extends the applicability of the Treaty to tax over estate, such as personal assets tax in Argentina.
• Permanent Establishments (“PE”): Concepts that are excluded from the PE definition are specified, which allows for a greater certainty when analyzing a specific case, since Argentina has no definition for PE in its Income Tax Law. Excluded activities must be ancillary or preparative activities. Regarding insurance companies, they will be considered to have a PE in the other Contracting State if (i) collecting fees in such other State or (ii) providing insurance for risks located in such other State through a person that is different from an independent agent.
• Dividends: Maximum tax rates are enforced for tax over dividends in the country of origin, establishing a limit of 10% or 15%, as applicable to a specific case.
• Interest: Similarly to dividends, interest may be subject to tax in the State of origin but a maximum tax rate of 15% applies.
• Royalties: Royalties are amongst the most common concepts of income in international transactions, as they are directly related to the provision of services. A maximum tax rate of 15% is established for brand licenses or permissions and a maximum tax rate of 10% in all other cases.
• Double taxation avoidance mechanism: The original Treaty differentiates in the method to avoid double taxation depending on the residence of the taxpayer. In the case of Brazil, a tax credit that was equivalent to the tax paid in Argentina was granted as long as a given limit was not surpassed, except for dividends paid by Argentine companies, where an exemption method was applied. Nonetheless, for Argentina, the exemption method was applied for all the income sourced in Brazil. The Protocol unifies the method for both countries, as it establishes a tax credit for equivalent tax paid in the other State. This way, the exemption method mentioned above is deleted. This change is very important as, up to this moment, Brazilian-sourced income obtained by Argentine residents was, in general, exempt from taxation in Argentina.
• Limitation to Benefits: According to the BEPS Project, the Multilateral Convention, and following the treaties to avoid double taxation entered into with Chile and Mexico, a limitation of benefits clause is included. This clause provides that no Treaty benefits will be granted when it could be reasonably concluded that, considering the facts and circumstances of a specific case, the collection of tax benefits was one of the main purposes of an agreement or transaction, except if the granting of benefits in that case would be consistent with the purpose and provisions of the Treaty.
   

3. Effective date

The Protocol was signed by the Foreign and Finance Ministers at the Mercosur Summit held in Mendoza on July 21, 2017.The next step is for each country’s Legislative Branch to approve the Treaty according to each country’s internal procedures.