The year 2017 was one of consolidation of economic activity and a continuity in the normalisation of macroeconomic variables. At the end of his second year in office, President Mauricio Macri has strengthened his position; with firm leadership after the congressional elections of October 2017 at the local level, and receiving support from world leaders at the international level.

According to official figures, GDP grew by 2.9% in 2017 compared with 2016. Investment was the main driver of this recovery, with 11.3% year-on-year growth and a 20.5% GDP share (the highest figures since 2011), followed by a 3.6% increase in private consumption. Within sectorial activity, 13 of the 16 economic sectors grew in 2017 compared with the previous year. The most prominent were construction (+10.4%); financial intermediation (+5.1%); and rental, real estate and business activities (+3.19%).

As for inflation, prices rose by 24.8% in 2017. There was a strong increase in regulated prices, which increased by 38.7% due to the adjustment of rates implemented by the current administration in 2016. Despite this figure, the consumer price index (CPI) dropped 16 percentage points in relation to the prior year, although it was outside the 17% target initially established by the Central Bank (BCRA).

Measures taken by the BCRA to reduce inflation involved maintaining positive real interest rates, which encouraged income from foreign currency with financial objectives.

In 2017, the government surpassed the primary deficit target of 4.2% of GDP, as in 2016. The public sector has significantly modified its pattern of financing. Up to 2015 its main source was through the BCRA. From 2016, funding has come mainly through borrowing in the capital markets. The government’s tax strategy involves a gradual decrease in the fiscal deficit, using indebtedness to finance this transition, while the economy grows and allows for the reversal of the deficit through higher tax revenues and lower GDP expenditures. However, this strategy faces a challenging international situation, where increases in interest rates could make financing more expensive and reduce the availability of funds for emerging countries such as Argentina.

The commercial channel of foreign trade left a negative balance in 2017, rising to $8.515 billion, after showing a rise in 2016. Exports only grew 0.9%, affected by a slowdown in the Brazilian economy (Argentina’s main business partner) and a decline in soy-related products exports due primarily to a fall in production (as well as a high comparison base in 2016 due to the relaxation of the tough exchange currency environment and the reduction / repeal of export duties). Recovery of economic activity helped increase imports to 19.7%, with 68% of imports linked to the productive process and to investment (work in process, capital goods and components and accessories for capital goods). Meanwhile, the balance of services had a deficit of $9.778 billion.

The beginning of 2018 showed changes in the international context. Interest rates rose in the US and currencies depreciated against the dollar, which together with internal factors (among them the drought strongly affecting soybean production), generated a crisis of confidence in the country. Its consequence was a strong devaluation of the peso (in May, the peso depreciated 17% compared to April) even though the benchmark interest rate rose to 40%.

In this context, the government agreed an IMF supporting line of credit, strengthened the fiscal commitment of deficit reduction and moved away from the inflation target of 15% set for this year, recognising inflation would be ranging from 27% to 32%.

Tax Developments

Argentine Congress passes comprehensive tax reform

The Argentine Congress passed the proposed tax reform on December 27 2017 and it became effective on January 1, 2018. Some changes introduced are important, including an immediate transitional reduction in the corporate income tax (CIT) rate from 35% to 30% for the two taxable years beginning on or after January 1, 2018. For taxable years beginning on or after January 1, 2020, the CIT rate will decrease again, to 25%.

The two-step corporate tax rate reduction is offset by a new withholding tax on dividend/profit distributions at a rate of 7% (while the applicable corporate income tax rate is at 30%) and 13% (when the corporate rate lowers to 25%).

The tax reform also has abolished the so-called ‘equalisation tax’ for profits generated in taxable years starting on or after January 1, 2018. The equalisation tax was a withholding tax levied at a rate of 35% on dividend distributions in excess of tax earnings, which still applies to dividend and branch profit distributions made out of earnings accumulated before January 1, 2018 that exceeded tax earnings as of the year-end before the relevant distribution.

Transfers of Argentine shares / securities

The tax reform confirmed that the transfer of Argentine securities that occurred after September 23, 2013, including transfers of Argentine shares made between non-residents, is subject to tax. The tax, however, does not apply to the sale of shares made by non-residents through Argentine stock exchanges and the sale of American or global depositary receipts (ADRs or GDRs).

For transactions between non-residents, before the tax reform, the rules required the buyer to withhold tax on the capital gain. However, in practice, taxes have not been withheld on those transactions because there was no legal mechanism to do so. In July 2017, the Argentine tax authorities issued Resolution No. 4094-E, establishing the mechanism for paying the capital gains tax due by non-residents for those transactions that occurred on or after September 23, 2013. Because of the turmoil this resolution caused, the tax authorities later published Resolution No. 4095-E, suspending the previous resolution for 180 days. The tax reform provided that the seller, and not the buyer, should be the party responsible for remitting the tax. On January 11, 2018, Resolution No. 4190-E repealed Resolutions Nos. 4094-E and 4095-E. It stated that tax authorities were going to establish a new mechanism for how non-resident sellers should pay the tax on the capital gain derived from transactions that take place on or after January 1, 2018, and how non-resident buyers should comply with their withholding tax obligations with respect to taxable transactions that occurred between September 2013 and December 2017. These aspects, as well as tax payment mechanism for other scenarios, were finally ruled by Resolution 4227, issued in April 2018.

Non-residents are now exempt from tax on capital gains realised from the sale of shares in publicly traded companies, but only to the extent that the shares are sold through the local stock exchange. Furthermore, non-residents continue to be exempt from tax on capital gains from the sale of sovereign bonds and corporate bonds issued in an IPO. The yields from those bonds also are exempt from Argentine tax. In all cases, the exemption is conditioned on the foreign seller being a resident in a jurisdiction that has an exchange of information agreement with Argentina and that the funds come from these jurisdictions. Only yields and capital gains derived from specific securities issued by the Argentine Central Bank (LEBACs) do not benefit from this exemption and are subject to a 5% tax. If, for capital gains derived from their sale the tax cost cannot be determined, the tax can be levied at a rate of 4.5% over the sales proceeds.

Indirect transfers of Argentine assets (including shares) are now taxable under the tax reform, provided that (i) the value of the Argentine assets exceeds 30% of the transaction’s overall value; and (ii) the equity interest sold in the foreign entity exceeds 10%. The tax is due if any of these thresholds were met during the 12-month period before the sale. The indirect transfer of Argentine assets, however, is only subject to tax to the extent those assets are acquired on or after January 1, 2018, and the transaction does not take place within the same economic group, provided the requirements to be set by regulations are met.

Other income tax changes

  • In line with the OECD Model Tax Convention, the concept of ‘ancillary or preparatory’ limits the scope of the activities that are excluded from being deemed to constitute a permanent establishment.
  • The 2:1 debt-to-equity thin capitalisation rule is replaced with the BEPS-based rule. The deduction on interest expense and foreign exchange losses with local and foreign related parties is now limited to 30% of the taxpayer’s taxable income before interest, foreign exchange losses, and depreciation. The taxpayer is entitled to carry forward excess non-deductible interest for five years and unutilised deduction capacity for three years.
  • Amendments have been introduced to relax the so-called sixth method for transfer pricing analysis in cases involving commodity transactions with foreign intermediaries.
  • Argentine CFC rules have been amended. Thus, an Argentine taxpayer is immediately taxed on the passive income generated by a CFC that is directly or indirectly held to the extent that more than 50% of that CFC’s income is passive and is effectively subject to a tax that is lower than 75% of the applicable Argentine income tax rate. Similar rules would apply if the foreign entity lacks substance or tax personality in its jurisdiction.
  • The tax reform subjects Argentine individuals to tax on both the sale and yields of sovereign bonds and corporate bonds issued in an IPO. The tax, however, is levied at a rate of 5% if the bonds are issued in Argentine currency and 15% if they are issued in foreign currency. Before the tax reform individuals were exempt from tax on this type of income.
  • The tax reform also confirms that ADRs/GDRs generate Argentine-sourced income. However, a non-resident is exempt from the prevailing 15% capital gains tax on their sale if they reside in a jurisdiction that has an exchange of information agreement with Argentina and the underlying shares are also publicly traded in Argentina.

Other tax changes

  • With respect to VAT, the tax reform provides for an expedient recovery mechanism for VAT credit balances on certain infrastructure and investments in capital goods, to the extent that companies have not been able to recover the VAT within six months. The VAT legislation has also been amended to include ‘digital transactions’ (such as, digital services, hosting, on-line technical support, software services, and internet services) as taxable events. As a result, this type of service is now subject to VAT at a rate of 21% if it is supplied by a non-resident entity to an Argentine customer, provided that that the services are effectively used in Argentina.
  • The tax reform also updates the minimum thresholds to characterise a tax omission as tax fraud and introduces other amendments to the Tax Procedure Act, including some provisions ruling mutual agreement procedures (MAPs) and advanced pricing agreements (APAs).
  • Argentine employers are also exempt from paying social security contributions for the first ARS12,000 ($430) per month per employee. The change will be implemented gradually over a five-year period (from ARS2,400 in 2018 to ARS12,000 in 2022 and thereafter). Also, the different social security contributions rates are converging to 19.5% in five years.
  • Negotiations with the provinces are expected to reduce provincial taxes, such as the turnover tax and the stamp tax.
  • Finally, the tax reform also included an optional one-time tax aimed at offsetting the absence of inflation adjustment rules with an assets revaluation. It would allow Argentine individuals and companies to update the tax cost of fixed assets – except automobiles but including mines, quarries, forests and similar goods – shares and/or other participations in Argentine companies and/or intangible assets. Goods completely amortised are excluded.

The tax rates are 8% for real estate properties (15% if considered as inventories), 5% for shares in Argentine companies, only when held by individuals, while a 10% rate would apply to the revaluation of any other assets. The taxpayers can opt for each class of goods to be revaluated but once the category is selected all of the items have to be updated (namely, (i) real estate property as capital goods; (ii) real estate property as inventories; (iii) shares; (iv) intangible assets; and (v) movables assets). The tax would allow taxpayers to enjoy a higher amortisation deduction for the larger of the remaining useful life or the following five or ten year-term (the latter for real estate and intangibles and the comparison would be with 50% of the remaining useful life in these cases). It would also enable to keep updating the tax cost moving forward since the same reform re-established the inflation recognition for newly acquired assets including those revaluated.

Those taking this option must renounce to promote judicial or administrative proceedings demanding general tax inflation recognition and alleging tax confiscatory scenarios for past years and may be prevented from initiating them for years in which the revaluated amount is amortized.

The revaluation must be made by considering “factors” (ratios) provided by the Law. However, for real estate property not considered as inventories and/or movable assets, an external appraisal can be used with a ceiling of 1.5 times the revaluation that would have resulted if “factors” had been applied.

Argentina increases tax on financial transactions credit

The tax on financial transactions is levied at a 0.6% rate on any Argentine bank account movement (i.e. deposits and withdrawals).

Since inception, there has been a portion creditable against income tax and minimum notional income tax, as well as their respective advanced payments, amounting to 34% of the tax paid on credits or 17% of the tax paid in the specific cases in which the tax rate was 1.2% due to movement of funds without using Argentine bank accounts.

Now through Decree 409/2018, the creditable amount has been increased to 33% of the 0.6% tax paid on debits and on credits and of the 1.2% tax paid on the movement of funds described above.

If those specific cases in which the tax on financial transactions applies at lower rates (i.e. not-for-profit organisations exempted from income tax purposes) the credit is limited to 20% of the debits and credits in Argentine bank accounts.

Also, the amount creditable is increased from 50% to 60% for those manufacturing companies that benefitted from the regime established by Law 27.264 (specific tax treatment for small or medium-sized enterprises [SMEs]).

This measure covers the tax on financial transactions paid since January 1, 2018 and the incremental credit amount can be used against the income tax and/or minimum notional income tax, and their respective advanced payments corresponding to fiscal periods, starting on or after the same date – January 1, 2018.

Tax Treaty developments in Argentina

On July 5, 2018, the Argentine Foreign Affairs Ministry announced the entry into force of the Amendment Protocol to the Double Tax Agreement (DTA) between Argentina and Brazil. According to the official announcement, the DTA entered into force as from July 29, 2018, being applicable to withholdings for payments to be made as from January 1, 2019, or taxable events to occur in fiscal years commencing as from that date.

On the other hand, on July 4, 2018, the Chamber of Deputies ratified the DTA between Argentina and the United Arab Emirates (UAE), which now needs the approval of the Chamber of Senators to be passed into law and continue the ratification process.

Double Taxation Treaty between Argentina and Brazil

The Amendment Protocol introduced relieves on withholding tax on payments of interest, royalties, technical assistance services and dividends. However, the most important feature is that it leaves behind the exemption method to avoid double taxation now stating the foreign tax credit method. It also includes other provisions aligned with the OECD Model Tax Convention and BEPS-oriented provisions.

Some other particular features the treaty provides are as follows:

  • The new Title and Preamble to the Treaty clearly state that it seeks to prevent tax avoidance.
  • A new Permanent Establishment (PE) clause addressing commissionaire arrangement and similar strategies, as well as making PE exclusions subject to a “preparatory or auxiliary” condition.
  • A new clause addressing Taxation of Capital.
  • The protocol includes a “LOB – Limitation of Benefits” clause. Although these LOBs may be relaxed and some relief may be provided by the relevant contracting state under certain specific facts and circumstances, they are clearly aligned with current global trends (e.g. BEPS) mainly aimed at avoiding treaty-abuse practices and double non-taxation scenarios.
  • Treaty benefits are also recognised when income is assigned by a resident of a contracting state to a permanent establishment located in a third country but only to the extent the taxation level in that third state is at least 60% of that which should have applied to in the residency state.
  • Although it repeals the exemption method available in the original DTA, it would reduce withholding taxes at source and may allow the exporter of services to compute foreign tax credit, which has been an issue negatively affecting competitiveness in cross-border transactions between Argentina and Brazil.

Double Taxation Treaty between Argentina and the United Arab Emirates

On November 3, 2016, in the city of Dubai, Argentina and the United Arab Emirates signed a DTA. After more than one and a half years, the Argentine Chamber of Deputies approved the text that will be now passed to the Chamber of Senators to be formally ratified.

The subsequent exchange of instruments of ratification, will make it effective as from January 1 of the year following such ratification process.

The treaty introduces relief on the withholding of payments of (i) interest, 12%; (ii) royalties and technical assistance services, 10%; and (iii) dividends, 10% or 15% (which may pose a reduction in corporate income taxes for fiscal years 2020 and the following ones in Argentina), among others.

Following the recent DTA developments, the DTA includes an LOB clause.