Payments of royalties: withholding rate

On September 20, 2005 the Supreme Court of Justice ruled in re: “Picapau S.R.L. v. D.G.I”. In this case, it was argued whether the payments of the royalties made to a foreign entity should have been subject to an effective withholding rate of 12.25% or of 31.5%.

This case involved payment made for the use by the local company of products of Walt Disney Co., granted under the exclusive license of Disney Consumer Products International, through the years 1990 to 1994.

In accordance with the position of the tax authority, these payments should have been subject to the withholding rate set forth in section 93 h) of the Income Tax Law (“ITL”) that establishes an effective withholding rate of 31.5%; and in accordance with the position of the local company, these payments should have been subject to the withholding rate established in section 93 b) of the ITL, at an effective withholding rate of 12.25%.

In the first stage, the Argentine Tax Court (Tribunal Fiscal de la Nación) revoked the assessment carried out by the tax authority, supporting the taxpayer’s position. However, the Argentine Court of Appeals in the Contentious and Administrative Matters (Cámara Nacional de Apelaciones en lo Contencioso Administrativo Federal) revoked. The local company appealed such resolution by means of an extraordinary appeal to the Argentine Supreme Court, which gave place to the resolution under analysis.

Section 93 b) of ITL set forth a presumption of Argentine-source net income of 35% - and an effective withholding rate of 12.25%- for the payments made to foreign beneficiaries because of the use in the country of copyrights. Such withholding rate applies if the right is duly registered before the Argentine Direction of Authors’ Rights and if the payment fits in the exemption set forth in Section 20 j) of the ITL. Section 20 j) of the ITL sets forth an exemption for payments up to an amount of $ 10,000 given that, for what is here important,the tax should otherwise be directly levied on the author or on his/her heirs.

If Section 93 b) of the ITL is not applicable, Section 93 h) comes into play. It presumes an Argentine-source net income of 90% - and an effective withholding rate of 31.5%.

The Supreme Court of Justice confirmed. Both instances shared, in essence, that Section 20 j) of the ITL was aimed to ensure that the creators of the work and their heirs were not taxed. In this sense, both considered with special concern the rationale of the exemption and its parliamentary records to conclude that its objective has been to promote intellectual creativity and to ensure creators and their heirs a more favorable tax treatment. Analyzed in this light, it was resolved that the payments made to Disney Consumer Products International were not received by the “author” or any heir and that the gain obtained by the foreign beneficiary did not constitute the situation that the law was intended to protect. Consequently, since the exemption resulted not to be applicable, it was solved that the payments should have been subject to the 31.5% effective rate, as the Tax Authority claimed.

The importance of this ruling of our superior court of justice should be noted, as it defines an issue that has provoked different interpretative criteria, and in consequence, much uncertainty.