For the local economy, 2019 was a complex and volatile year, mainly due to the electoral uncertainty. The country was in recession the whole year and economic activity in general contracted month after month, except for the rise in activity in May and July, mainly triggered by the agribusiness sector.

During the second quarter, a trend of appreciation of regional currencies, including that of Argentina, was evidenced, mainly due to a combination of domestic policies and the calm of global financial markets. This led to a slowdown in inflation, which brought some calm.

However, this state came to an end in August, when the PASO (open and mandatory primary elections) were held. The unexpected victory by such a large difference in favor of the opposing candidate (Alberto Fernández) virtually prognosticated who was going to be the next president since December and had an impact on Argentina’s fragile macroeconomic balances. In a single day, the peso devalued by 22.7% and the country risk grew from 872 basis points to 1,467 basis points.

The above gave way to political uncertainty and a continuous devaluation of the peso, with its subsequent impact on the inflation rate that had been experiencing a slowdown until then, forcing the government to impose foreign exchange restrictions to stop the outflow of reserves from the Central Bank.

The elections held on October 27 confirmed the outcome of the PASO and resulted in a new president elected for the 2019-2023 period. Foreign exchange restrictions were heavily tightened immediately after.

Following the increase in the real exchange rate resulting from the peso devaluation, exports of goods amounted to $65.115 billion in 2019, accounting for an increase of 5.4% compared with 2018. Imports reached $49.125 billion, accounting for a drop of 25% compared with the previous year. This resulted in a trade surplus of $15.990 billion, the highest since 2009. Meanwhile, the balance of services had a deficit of $5.183 billion.

With regard to economic activity, official data show that GDP contracted by 2.2% in 2019 compared with 2018. This decline affected all components of aggregated demand, except for exports that, in real terms, showed an increase of 9.4%. Investment fell by 15.9% year-on-year, while private and public consumption fell by 6.4% and 1.5%, respectively.

In 2019, the National Public Sector recorded a primary fiscal deficit of 0.44% of GDP. This was the result of total revenue growing 51.4% and primary expenses increasing by 37.2%.

Debt renegotiation has been among the top priorities of the new administration. During the first and second quarters of 2020, the scheduled payment of principal and interest exceed the country’s payment capacity in a context of closure of voluntary credit markets.

There are still many challenges ahead in 2020. The pandemic caused by the COVID-19 outbreak amidst a context of economic weakness will have consequences that are difficult to estimate at the moment. It is important to note that Argentina started facing the COVID-19 crisis in an already existing environment of financial restrictions and macroeconomic imbalances, although the national government has announced control measures both to aid the worst affected sectors and to mitigate disruption to the payment chain and employment to encourage demand once the lockdown is eased and the supply-side shock has been restored.

Tax developments: New government introduced major tax reform

On December 23, 2019, the Argentine Congress passed a bill approving a new economic emergency law aimed at aligning public accounts and boosting the economy with a package of measures (most of them related to taxes and foreign exchange issues). A week later, the executive branch issued Decree 99/2019 to provide some clarifications and regulations on the new measures.

The package introduces relevant changes to the tax system. It is to note that some of these measures had effects for fiscal year 2019. Among the relevant changes introduced by the law, we can highlight the following ones:

Corporate income tax

The law established a suspension to the corporate income tax rate reduction set forth by the 2018 tax reform (keeping suspended the 25% rate until fiscal years starting as from January 1, 2021 included). As a result of that, the 30% rate would still apply to fiscal years starting on or after January 1, 2020. In this regard, the increase in the withholding tax rate for dividend payments (from 7% to 13%) was also suspended for the same term.

In regard to the tax adjustment for inflation, the amount pertaining to the first and the second fiscal years beginning as from January 1, 2019 must be allocated as follows: 1/6 of the amount in said fiscal year and the remaining 5/6in equal parts over the following five fiscal years. Under the prior rule, the inflationary adjustment had to be allocated 1/3 in the first fiscal year and the remaining 2/3 in the following two fiscal years.

Wealth tax

Effective as from fiscal year 2019, the tax rates to be applied to Argentine individuals shall be increased ranging from 0.5% to 1.25% and in case of taxpayers with assets located abroad, Decree 99/2019 established a different scale with higher rates – that go from 0.7% to 2.25%. Further, the law set forth for an increase in the tax rate applicable to Argentine shares and ownership interests – substitute taxpayer – from 0.25% to 0.50%. For non-resident taxpayers, the rate applicable to assets located in Argentina is also increased from 0.25% to 0.50%.

Finally, the amendment included a migration from the ‘domicile’ criterion to the ‘residence’ criterion, as established under the income tax law.

Tax for a solidary and inclusive Argentina (PAIS)

The law introduced a temporary 30% tax (the so-called PAIS tax for its Spanish acronym), which would apply over a period of five fiscal years on (i) the purchase of foreign currency for treasury or accumulation with no specific purpose; (ii) purchases made abroad, including cash withdrawals, using credit and debit cards or any other payment method; (iii) purchases made online invoiced in foreign currency; (iv) purchases of services rendered by non-residents in the country through credit or debit cards or any other payment methods; (v) purchases of touristic services rendered abroad through travel agencies; and, (vi) purchases of transportation tickets to destinations outside Argentina, except land transportation to neighbor countries.

Certain items like medical services, purchases of medicines, purchases of books, educational platforms, among others are tax exempted.

Payment of obligations for a specific purpose would not be subject to the PAIS tax, meaning that most commercial transactions carried out by an Argentine entity would not be taxable.

It is to note that the acquisition of digital services, as defined in the VAT law, would be subject to a reduced rate of 8%.

Export duties

The Argentine executive branch has powers to set export duties within the framework of the Customs Code, but the applicable rate shall not exceed 33% of the taxable price or the official free on board (FOB) price. However, the maximum duty rate was set to 15% for those goods that were not subject to export duties (or were subject to a 0% rate) as of September 2, 2018. According to the new measures, export duty rates for industrial goods (including agro-industrial products of regional economies) and services has been set not to exceed 5% of the taxable price. The former cap to export duties (i.e. AR$4 or AR$3 per dollar exported) has been eliminated.

Export duty rates for hydrocarbons and mining may not exceed eight percent (8%) of the taxable price and under no circumstances may an export duty for hydrocarbons reduce the well head value for the calculation and payment of royalties to the producing provinces.

Additionally, by virtue of Decree 99/2019 the government extended the application of export duties to export of services transactions to December 31, 2021, and at a 5% rate with no nominal cap as it used to have.

Employment taxes

The schedule to unify the tax rate of employers’ contributions to 19.5% was suspended by virtue of the law and, as a result of that, employer’s contributions would be 20.4% for private sector employers whose main activity is related to services or trade, provided that their total annual sales exceed certain thresholds, and 18% for the rest of the private sector employers, falling within the scope of certain specific laws.

Further, the monthly deduction to determine the taxable basis for employers’ contributions was eliminated as it was subject to annual indexation and replaced by a fixed amount which may be increased for certain specific activities.

In addition, employers having a payroll of up to 25 employees will enjoy an additional AR$10,000 monthly deduction.

Other relevant measures

The law also included, among other measures, a tax amnesty program and installments plan for small and medium-sized enterprises (SMEs), which has been extended due to the pandemic context to individuals and to any size of companies under demanding requirements.

Argentina moves to strengthen bilateral treaties

On December 6, 2019, Argentina signed a new double tax treaty with Austria and an amending protocol to the treaty with France. The new treaty and the amended protocol would enter into force once the relevant internal approvals and notifications between the countries are completed.

These developments show how Argentina has been actively negotiating double tax treaties in recent years to expand its existing treaty network. New treaty developments should be monitored by multinational groups as well as how the multilateral instrument (MLI) is finally implemented to affect existing bilateral treaties.

Tax treaty with Austria

Representatives of the governments of Argentina and Austria signed a new double tax treaty (DTT) between the two countries. This treaty replaces the old treaty signed in 1979, which had been terminated by Argentina in 2008. Like other OECD model-based treaties, this one introduces relief on domestic withholding on cross border payments of (i) interest (12%); (ii) royalties and technical assistance services (3%, 5%, 10% and 15%); and, (iii) dividends (10% provided the interest held is greater than 25% and it has been held for the 365-day period before the dividend payment). Taxation of capital gains derived from the transfer of shares is also capped at 10% or 15%, depending on the participation held. Furthermore, capital gains derived from the indirect transfer of Argentine shares should be taxable only in Austria if the entity is not land-rich.

With respect to the permanent establishment definition, in line with the election made by Argentina for purposes of the MLI, the exceptions included in Article 5 are subject to the “preparatory or auxiliary” condition. Additionally, the permanent establishment definition includes the provision of services for more than six months in any twelve-month period.

The protocol to the treaty also includes a definition for “technical services”, which are defined as those of a customised nature that involve the application of a non-patentable special knowledge, ability or experience. Standardised services are specifically excluded from the technical services definition.

Finally, the treaty includes the “principal purpose test” as a general anti-abuse provision. The treaty would have effect from January 1 of the year following in which the treaty enters into force, for which internal approvals and the subsequent exchange of ratification documents must be completed.

Protocol to the treaty with France

Argentina signed an amending protocol to the DTT signed with France in 1979. For instance, the protocol amends the permanent establishment definition to include the provision of services and the exception for activities of a preparatory and auxiliary character.

Regarding the interest article, the protocol reduces the limitation on the taxation at source from 20% to 12%. Similarly, the cap on royalty withholding is reduced from 18% to 3%, 5%, 10% or 15%, depending on the type of royalty income paid.

The capital gains article is also updated by the protocol to include special provisions in case of transfer of shares, providing taxing rights to both states, but in case of non-land-rich companies the taxation at source cannot exceed 10% (when a seller owns at least 25% of the capital) or 15% (for all other cases).

Notably, the protocol does not provide for the inclusion of a general anti-abuse provision, though it has been the case of recent DTTs signed by Argentina.

Congress approval and the subsequent exchange of ratification documents would be needed before the treaty becomes applicable.