Tax Roundup: 2003 Tax Reforms

This edition of Argentine Business Law Watch1 responds to our readers? clamor for a†summary of the various tax reforms recently signed into law by Argentine President NÈstor†Kirchner. In June 2003, Argentine Business Law Watch reported on four tax reform bills†sent by the executive branch to Congress. Laws 25,784 and 25,795 represent the first of†these reforms to be enacted.

Overview

Laws 25,784 and 25,795 (collectively, the "Amendments") aim to enhance public revenue†by closing certain perceived loopholes. Law No. 25,784 introduces substantive changes to†the Argentine Income Tax Law, expanding presumptions favorable to tax, enhancing the†tax authority?s power to disallow credits and deductions, and creating new rules to control†international transactions. Law No. 25,795, enacted last month, modifies various†procedural matters to counteract tax evasion. The Amendments, centered on transfer†pricing, thin capitalization rules, withholding tax on interest payments and expense†accounting for transactions with foreign related parties, are directed primarily at corporate†taxpayers.

International Trade

Until the Amendments, Argentine exporters reported their tax on income from international†trade based on the higher of the export price or the market price for the goods at†destination. Non-Argentine exporters were not subject to Argentine withholding tax unless†the import price for the goods exceeded the prevailing wholesale price at origin. If the†import price did exceed the wholesale price at origin, the difference was taxed as Argentine†source income for the foreign exporter. Insurance and freight were always added to the†transaction price when comparing the prevailing wholesale price.†

The Amendments repeal the prevailing wholesale price method, adopting a clearer rule in†which foreign exporters are never subject to Argentine income tax on gains from exports to†Argentina. Instead, tax adjustments will be made to the Argentine counterpart?s income tax†burden and commodities or other products with a determinable international fair market†value will be assigned that value to determine the tax. When Argentine taxpayers enter into†international trade transactions with foreign related parties or entities located in tax†havens,2 these adjustments will be made according to transfer pricing rules. Alternatively,†the tax authorities will apply a yet-to-be-regulated method to international trade†transactions between unrelated parties, which exceed a not-yet-defined annual aggregate†amount.

Transfer Pricing

The Amendments subject related-party exports to stricter transfer pricing rules to determine†the arm?s length price of the transaction. Argentine commodity exporters will be required†to apply the "comparable uncontrolled price method" when selling products abroad through†a foreign broker that does not take physical custody of the goods. In this case, the†comparable uncontrolled price means the fair market value of the commodity on the date of†shipment if this value exceeds the recorded price of the sale. This method may prove†adverse to Argentine commodity exporters accustomed to fixing a sales price at the date of†sale. The Amendments effectively preclude exporters from hedging against price†fluctuation between sale and shipment Moreover, the rules could mean a change in the†current accrual method of accounting, which books the transaction as of the sales date.

The comparable uncontrolled price method does not apply if the foreign party is the final†purchaser of the exported goods. Moreover, the Amendments provide a safe harbor under†which the method will not apply, even if the counterparty is a foreign broker. Under this†exception, the foreign broker must meet all of the following:

It conducts business in its country of domicile, with "sufficient material and human†resources" to engage in brokerage activities, and assets, risks and functions†compatible with the transacted volumes.

Its principal business activity is neither passive...