Province of Buenos Aires Tax Reform: PossibleTax on Provision of Digital Services by Foreign Residents

If the bill is passed, the Province of Buenos Aires would follow the steps of the Argentine Government, which taxes these services with Value Added Tax. Other provinces have also adopted or may adopt similar positions, such as the Province of Córdoba, which has incorporated services rendered from abroad since 2018 to the taxable event of the turnover, and the Provinces of Mendoza and Salta, which also have proposed amendments to their respective regulations with the same purpose.

However, the Province of Buenos Aires is adopting a novel technique, taxing only the services provided by foreign residents who have a "significant digital presence" in the Province. We recall that, for the purpose of taxation on income, the sufficiency and scope of this concept as a link between the income obtained by a resident of a country and the country where the services provided are used or consumed, are being analyzed by the the Organization for Economic Cooperation and Development (OECD) and the European Commission, regardless of the unilateral measures adopted by some countries. To date, there is no a consensus among the countries.

On the other hand, the Province understands that there is a "significant digital presence" when, in the previous fiscal year or the proportional fraction of time of the current fiscal year, as established by the tax authority, the foreign resident:

1. obtains a gross income in excess of the amount established annually by the applicable tax legislation, derived from the provision of digital services to individuals domiciled in the Province (ARS 500,000 –approximately USD 13,000– for the 2019 fiscal year); and/or
2. the number of users domiciled in the Province is higher than the one established annually by the applicable tax legislation (1,000 for the 2019 fiscal year); and/or
3. the number of transactions, operations and/or agreements with users domiciled in the Province is higher than the one established annually by the Tax Law (10,000 for the fiscal year 2019).

The bill defines digital services as "...whatever the device used for downloading, viewing or using them, those carried out through the internet network or any adaptation or application of the protocols, platform or technology used by the internet or another network through which equivalent services are provided, that by their nature are basically automated and require minimal human intervention...”. Then it makes a non-exhaustive list of the services included. The main purpose would be to reach the services that allow the diffusion, access or download of images, text, video, music, games, movies and other audiovisual content, such as Netflix, Spotify, etc.

The payment of the tax is the responsibility of the beneficiary of the service (i.e. the Argentine user) at a rate of 2%, as substitute obligor. Having said that, further regulations would probably designate Argentine entities facilitating or managing payments to foreign beneficiaries as collection agents (for example, credit cards).

The intention of the provinces and, ultimately, of the City of Buenos Aires to tax the services provided by foreign residents, will generate difficulties and controversies derived from some questions such as the following: Are these jurisdictions constitutionally allowed to tax activities materially carried out outside their territory? Is there a unilateral amendment to the provisions of the Tax Coparticipation Law No. 23,548 that allocates tax resources to the different government levels? Is it equitable that digitally concluded operations are not taxed when the products are delivered through conventional channels? Will any mechanism that will effectively prevent double taxation be established? How will the practical difficulties associated with the implementation of a collection regime or to audit the beneficiaries of the services be mitigated?

Although these questions have no conclusive answers yet, since the end of 2017 the provinces have begun to focus on taxing the income derived from this kind of operations that impact economically and socially in Argentina.