Bill allows Argentine Residents to Inflation-proof Certain Assets

The Argentine Executive Branch filed a bill of “Tax and Accounting Re-evaluation” of certain Argentine residents’ assets before Congress.[1]

Regarding the tax re-evaluation, the bill grants individuals, undivided successions and corporations contemplated in Section 49 of the Income Tax Law the option to re-evaluate, as a one-off exception, in relation to Income Tax, the value of the assets allocated to generating Argentine-sourced income subject to tax, as from the fiscal period closing after the entry into force of the bill.

If taxpayers adhere to this regime, the new fiscal value of the assets will be the one arising from a re-evaluation carried out by an independent professional, or the one arising from applying a “re-evaluation factor,” established by law for each year or for the period of acquisition or construction of the asset, over the original tax value. The last one will be the only method available to re-evaluate certain non-depreciable assets such as real estate considered as an exchange good, company stocks and shares, etc.

The bill provides a special tax applicable on the difference arising from the amount of all the re-evaluated assets and the tax value determined pursuant to Income Tax Law at the moment of the end of the fiscal period after the entry into force of the bill, in accordance with a 5%, 8%, 10% and 15% tax rate, depending on the asset involved.

Special terms for the calculation of the relevant depreciation on the higher amounts of assets re-evaluated are established, and special dispositions for the case in which those assets are disposed of in the two following fiscal years, excepting those destined to selling real estate as exchange goods, for which the higher tax rate of the special tax is applied.

With this bill, the Argentine Government aims to lower the litigation related to the application of the inflation adjustment proceeding since it establishes that taxpayers adhering to the special regime must renounce the promotion of any judicial or administrative proceedings by means of which they claim, the application of adjustment proceedings of any nature, and withdraw any proceedings which were initiated to such purpose.

Regarding the accounting matter, the bill proposes for those entities which must prepare accounting statements, the possibility of re-evaluating the values of the assets stated on their accounting statements and normalizing their assets. To that end, any of the methods contemplated for the fiscal re-evaluation may be used.

Lastly, the bill modifies Income Tax Law Sections 58, 89 and 95.

The bill establishes that the inflation adjustment proceeding set out in Title VI will be applicable as long as the variation of the Internal Prices Index (Indice de Precios Internos al Por Mayor) published by the Argentine Statistics Institute (INDEC), accumulated in the 36 months prior to the closing of the annual fiscal year, is more than 100%. These dispositions will be applicable to fiscal years initiated as from January 1, 2018, establishing certain parameters for its application in relation to the first two years after its entry into force.

The bill also allows for the application of the re-evaluation mechanisms mentioned in Income Tax Law Section 89, to acquisitions or investments of different assets in fiscal years initiated as from January 1, 2018.

The bill sent by the Executive Branch is a step towards the re-evaluation of assets allocated to generating income. However, a series of limitations (e.g. selling assets before the two-year period) might make this option less attractive for taxpayers. The same happens with inflation adjustment proceeding, however positive its reestablishment might be, the limit set for its application (the variation of the Internal Prices Index of 100% accumulated in 36 months previous to the closure of the fiscal year) might appear to be high and even act as an incentive to generate higher levels of inflation.

On the other hand, the bill states that inflation-proofing is applicable to fiscal years to be initiated as from January 1, 2018, and does not correct the accumulated situation of previous periods.Main aspects of the assets’ re-evaluating bill:

• Subjects covered: individuals, undivided successions and Argentine resident companies.
• Assets subject to the regime: those located in Argentina allocated to the generation of taxed income. Real estate whether they are considered as exchange goods or not. Depreciable movable assets (vehicles only when their exploitation is the main purpose of its activity); Company stocks and shares issued by entities located in Argentina; Mines, quarries, woods and similar industries; Intangible assets, included concession rights and those similar to them; Other assets excepting exchange goods and vehicles.
• Assets not subject to the Regime: Assets with an accelerated depreciation regime; Assets disclosed pursuant to Law No. 27,260; Assets that are completely depreciated; Assets acquired after the entry into force of the law.
• Determination of the residual value of the re-evaluated assets: the acquisition or construction cost determined pursuant to Income Tax Law multiplied by the “re-evaluating factor”. For real estate –not when considered exchange goods, nor depreciated movable assets – it may be opted to determine the residual tax value at the moment of closure of the “Option Periods”, based on the estimation made by an independent professional, with certain limitations.
• Reassessment value: is the difference arising from the residual tax value of the assets (with the re-evaluation done) and the residual determined value pursuant to the income tax laws (historical value).
• Disposal of assets re-evaluated in the two fiscal periods following the option period: the residual value of the re-evaluation will be considered as selling cost, but it will be reduced by a 60% or 30% if the asset is disposed of in the first or second fiscal year, respectively.
• Special Tax on the re-evaluated amount: Real estate not considered as exchange goods: 8%; Real estate considered as exchange goods: 15%; Company stocks and shares possessed by individuals: 5%; Remaining assets: 10%.
• Special Tax and “Re-evaluated Amount” tax effects: The special tax will not be deductible from income tax; Income generated by the “Re-evaluated Amount” will be exempt from income tax and will be considered distributable free from equalization tax; Re-evaluation will not be taxed on the liquidation of the Presumed Minimum Income Tax.

[1]  File No. 0017-PE-2017. Parliamentary Treatment No. 127, September 15, 2017.