Amendments to the Income Tax Law

Law No 25,784, published in the Official Gazette on October 22, 2003, introduced several amendments to the Income Tax Law. This is part of a set of bills aimed to fight tax evasion reported in “Fighting tax evasion” published in Marval News # 19 of July 31, 2003. Below is a more completed version of the part approved although regulations for this are still pending.

1.     Foreign trade transactions and transfer pricing

Foreign trade transactions entered into between related parties with prices or conditions not agreed on an arm’s length basis must be adjusted under transfer pricing provisions. It is presumed that such transactions are not agreed on an arm’s length basis where they are entered into with an individual or entity set up, located or domiciled in a tax haven.

In foreign trade transactions involving goods with a world price established in market conditions, such price shall be used in order to assess the Argentine-source net income, unless otherwise evidenced.

In foreign trade transaction involving goods that do not have a world price established in market conditions entered into between non-related parties, taxpayers could be obliged to submit to the tax authorities information connected to the transaction in order to demonstrate that the prices were agreed on an arm’s length basis.

As regards exportation of cereals, oil grains, fruits, ground products or other goods with a known price in transparent markets, where an international intermediary that is not the effective receiver of the goods participates in a given transaction, the best method deemed to assess the Argentine-source income is the quotation value of the good in the transparent market on the day the goods are loaded, without considering the price agreed with the international intermediary. If the price agreed with the intermediary were higher, this price must be used. This method can be disregarded if some requirements are met.

A separate Procedural Tax Law bill, recently approved by Congress, establishes a special fine for not fulfilling the obligation to inform the transactions of exportation or importation between independent parties.

2.     Deductions for transactions with tax havens

In general terms, Argentine companies assess their income according to the accrual method. An exception to this principle are expenses incurred by local companies resulting in Argentine-source income for foreign individuals or entities with whom those local companies are related. In such cases, the expenses may only be deducted when paid. This limitation was extended to the expenses incurred by the same companies with individuals or entities set up, located or domiciled in tax havens, whether related or not.

3.     Limits for the deduction of interest

The thin capitalization rules, which establish certain limits to deduct interest, were amended. It was added that interest on debts (except the ones that, in general terms, have a withholding rate of 35%, similar to the companies’ tax rate) for loans incurred by Argentine companies (except financial entities subject to Law No 21,526) with non-resident individuals or entities that control them shall not be deductible in the proportion corresponding to the debt in excess of twice the net worth of the Argentine company as of that date. Interest not subject to deduction has the same treatment as dividends. From the wording of the amendment it seems that these provisions replace the prior provisions on thin capitalization.

4.     Amendment to withholding rates over interest on payments abroad

At a first stage, a withholding at a reduced rate of 15.05% was applicable to the payment of interest abroad, when the creditor was a bank or financial entity located in jurisdictions applying certain bank standards. The amendment establishes that the reduced rate is only applicable if those entities are located in countries not deemed tax havens, or in jurisdictions that have entered into agreements of exchange of information with Argentina and, besides, are jurisdictions where bank secrecy, secrecy pertaining to stock exchange transactions or of other kind can not be alleged, in accordance with its local provisions, upon a request by the respective tax authorities. Financial entities referred to in this paragraph are those under the supervision of the relevant Central Bank or equivalent agency.

The previous provision referred to interest payments whereas the new one embraces “interest, retribution paid for credits, loans or placement of funds of any nature”. This just clarifies the concept but it does not apply to tax fees charged for services associated to financing, such as structuring fees, since often, as admitted in different rulings issued by the tax authorities, they do not generate Argentine source income and, are therefore not subject to income tax for non-Argentine residents.

A withholding rate of 35% is, in general, applied when the borrower is an Argentine entity (excluding financial entities) and the creditor does not fulfill the requirements of the above mentioned paragraph. If the borrower is a financial entity, a withholding rate of 15.05% would apply.