Tax Reform: Main International Tax Aspects

Transfer pricing

The reformed Income Tax Law (“ITL”) includes modifications to two technical concepts used in the transfer pricing section of the ITL. The term “fixed establishment” was replaced by the term “permanent establishment” in section 14, thus describing one of the fact patterns where transfer pricing regulations apply: transactions between a “permanent establishment” and a foreign entity. Furthermore, the ITL extends the application of transfer pricing rules to both “low tax jurisdictions” and “non-cooperative jurisdictions”. The ITL provides an updated definition for each concept.

The substantial modifications to the transfer pricing rules are focused on export and import operations (sixth paragraph of ITL) and the “sixth transfer pricing method” (seventh paragraph of the ITL). Export and import operations with an international intermediary are subject to additional scrutiny by tax authorities as the taxpayers must show that the intermediary´s fee is reasonable considering its functions, risks and assets. This additional scrutiny applies only where: (i) the intermediary is controlled by or related to the local entity; or (ii) the local entity and the final exporter/importer are related entities. Unlike the previous “sixth transfer pricing method”, the ITL does not force the taxpayers to use a specific transfer pricing method to validate the fee charged by the intermediary. Therefore, the most appropriate method rule applies to this fact pattern.

The application of the “sixth transfer pricing method” was limited to export operations in which the exporter and the buyer or the intermediary are related entities. It is worth mentioning that when the Executive Branch issued Decree 916/04 regulating the “sixth transfer pricing method”, it extended the applicability of this method to any triangulated export operations regardless of whether the parties to the transaction where related entities or not, thus exceeding the scope established by Law 25,784. This resulted in several judicial actions against the validity of Decree 916/04. The “new sixth method” requires that the exporter (i) shows that the fee charged by the intermediary is in accordance with the arm´s length standard; and (ii) registers the export agreement with the Tax Authority. This registration must include information regarding the relevant characteristics of the contract as well as comparability differences that impact the price of the goods vis a vis the relevant market price at the shipping date. If the taxpayer does not comply with the mandatory registration, the Argentine source income will be determine based on the market price at the shipping date and taking into account the necessary comparability adjustments and excluding the intermediary´s fee.

Finally, the ITL establishes that the regulations should include a minimum threshold based on returns or volume of related party transactions under which the annual transfer pricing report will not be mandatory.

Non-cooperative jurisdictions and low tax jurisdictions

Two new unnumbered sections were added to the ITL following its section 15. The first one defines the term non-cooperative jurisdiction as any jurisdiction or country that: (i) has not signed an information exchange agreement with Argentine; (ii) has not signed a convention to avoid double taxation with Argentine; or (iii) has signed either agreement or convention but does not comply with its obligation to share information with Argentina. The Executive Branch is responsible for issuing a list of non-cooperative jurisdictions.

The second section defines the concept of low tax jurisdiction. The term includes any country, jurisdiction dominium, territory, associated state or special tax regime in which the maximum corporate income tax rate is lower than 60% of the income tax rate established in section 69 a) of the Income Tax law. Therefore, to avoid being regarded as a low tax jurisdiction, the maximum corporate income tax rate of a given jurisdiction must be equal or higher than 18% during 2018 and 2019; and 15% starting on the year 2020. One of the main consequences of being regarded as a low tax jurisdiction is that funds transferred from such jurisdictions to an Argentine entity are considered untaxed income for the local entity, regardless of the nature of the funds, e.g. loan, capital contribution, etc.

Permanent establishment

Law N° 27,430 included a definition of a relevant term which was omitted in prior reforms: the term permanent establishment. Tax advisors and Courts used to apply the definition included in the Deemed Minimum Income Tax Law and the conventions to avoid double taxation signed by Argentina.

The new definition follows the guidelines from the Organization for Economic Cooperation and Development (“OECD”), that is, section 5 of the 2014 Model Tax Convention on Income and Capital (the “Model”) as updated in accordance with the conclusions from the Base Erosion and Profit Shifting (“BEPS”) project and the 2017 draft update to the Model. 

We highlight two element of the new definition of permanent establishment. First, the term includes the case of a person or entity physically present in the country which acts on behalf of the foreign entity and in such capacity executes contracts or (the following is the new element of the definition) plays a relevant role that results in the contracts being executed. Secondly, the new definition limits the use of and independent intermediary in the country to avoid being regarded as a permanent establishment. The definition of independent intermediary for permanent establishment purposes excludes those intermediaries which act solely or mainly on behalf of a foreign entity or group of related entities.

Thin capitalization

The following are the current subjective and objective conditions that trigger the application of the thin capitalization regime per Law N° 27,430.

Subjective conditions:

1. The local receiving the loan and paying the interest must be a legal entity not qualified by Law 21,256 as a financial entity.
2. The lender must be a resident or non-resident entity that controls the borrower.

Objective condition:

1. The interest deduction is limited to 30% of the net income of the fiscal period, before taking the deduction. The Executive Branch may establish a different parameter. Loans used to purchase goods or services are excluded from the regime.

Effects:

1. The interest shall not be deducted for tax purposes.
2. Interests that cannot be deducted under the new regime are subject to the sane withholding rates as deductible interests.

The ITL allows taxpayers to carry forward interest paid in excess of the established limits for up to 5 fiscal years.