Ernst & Young, Argentina: The List from Black to White – Argentina Redefines Income Tax Law

Introduction

To further our previous contribution – Tax Havens: The Argentine Government Issues a New Tax Regulation on Low or Nil Taxation countries (CFI Spring 2014) – we can now provide an update based on legislation published during the last months.

It is worth noting that the legislation introduced a significant change in how income tax is regulated in relation to the so-called “low or nil taxation countries”. Previously, Argentine law adopted the black-list criterion when defining jurisdictions as low or nil taxation countries. The new regulations take the opposite criterion – the “white list” approach.

This means that the Income Tax Law’s administrative order empowers AFIP (Federal Public Revenue Agency) to create a list of countries, domains, jurisdictions, territories, associated states and special tax systems considered to be cooperative for fiscal transparency purposes. These are then deemed cooperative countries or jurisdictions.

In this regard, the decree established that countries with which Argentine Government has signed either a tax information exchange agreement or a double taxation avoidance treaty with a broad information exchange clause – provided the information exchange functions effectively – shall be considered cooperative for tax transparency purposes. Also, countries which have begun negotiations to establish such an agreement or treaty shall be regarded as cooperative jurisdictions.

“The significant tax consequences to transactions carried out between local taxpayers and uncooperative countries will highly depend on the tax authorities’ definition of cooperative and uncooperative countries.”

According to the new legislation, all the countries or jurisdictions not included in this list are regarded as uncooperative. Therefore, the transactions carried out with parties domiciled in such countries are subject to a burdensome income tax treatment as opposed to the much more streamlined procedures befalling transactions carried out with parties domiciled in jurisdictions not classified as such.

New Regulation

The presidential decree was duly regulated by AFIP General Resolution No. 3576, published in the Official Bulletin on December 31, 2013. This resolution informs that the list of cooperative countries will be available on AFIP website (www.afip.gob.ar) as of January 1, 2014. Schedule A lists the countries, dominions, jurisdictions, territories, associated states or special tax systems considered to be cooperative for tax transparency purposes.

Although the list was made available on the AFIP website only on January 7, 2014, a reasonable interpretation would lead us to believe that the list came into effect on January 1, 2014.

A comparison of both lists – the old Jurisdictions considered Tax Havens and the current Jurisdictions Considered Cooperative – shows that some jurisdictions were moved to the cooperative category. For instance, the Commonwealth of the Bahamas and the Cayman Islands were considered low or nil taxation countries before and are now classified as cooperative. This would seem to make sense since both countries signed tax information exchange agreements with the Argentine government on December 3, 2009, and October 18, 2011, respectively.

The Published List

The new resolution establishes that to apply income tax transfer pricing provisions, the status of the country with which transactions take place should be considered based on the list published on the AFIP website. A given country’s status is in effect as of the beginning of the fiscal year to which the income (or losses) of such transactions are to be allocated.

Although the resolution only refers to transfer pricing provisions, it should be understood that the effective date of the list is applicable to all the provisions in laws related to “low or nil taxation countries”.

It should be recalled that income tax law sets forth particular provisions for transactions carried out by Argentine taxpayers with parties domiciled in tax havens (now “non cooperative countries for tax transparency purposes”): (i) CFC regulations; (ii) deductibility of certain expenses on a cash basis; (iii) increaded whitholding rates; (iv) transactions with “uncoperative” countries would not be considered to be carried out under arm´s length conditions; etc.

Classification of Cooperative Countries

The resolution under analysis also provides that the countries considered as being cooperative for tax transparency purposes are classified into 3 (three) categories:

• Cooperative countries that have signed a double-taxation treaty or a tax information exchange agreement with a positive assessment of the effective compliance with information exchange clauses;
• Cooperative countries that have signed a double-taxation treaty or a tax information exchange agreement, but without an assessment of the effective implementation of the information exchange; and
• Cooperative countries with which a negotiating process has started or that are about to ratify a double-taxation treaty or tax information exchange agreement.

It should be highlighted that the list would be subjected to changes and that tax authorities are empowered to provide ongoing updates of the list. In the near future, tax authorities may classify the different jurisdictions based on the oversight of the agreements signed and the actual compliance with the exchange of information provisions.

Moreover, new income tax regulations could be issued on a particular tax treatment for each category. All of these are possible future scenarios since the resolution was only recently introduced and there are still some issues that need clarification.

In short, the significant tax consequences to transactions carried out between local taxpayers and uncooperative countries will highly depend on the tax authorities’ definition of cooperative and uncooperative countries. In other words, the tax agency is also the one that establishes which countries may be included or excluded from the white list. Tax payers will have to carefully analyse treaty network and public information about compliance when evaluating or anticipating cross-border transactions with certain jurisdictions.

About the Authors

Sergio Caveggia is a tax partner currently in charge of the Transaction Tax Area in Argentina. He joined the tax division of E&Y Argentina in 1994, and has developed strong expertise over twenty years in international taxation and mergers and acquisition matters. He is highly experienced in acquisition structures for inbound and outbound investments, buy side, sell side and restructuring services within the transaction tax area.
Mr Caveggia has served numerous clients across a wide range of industrial sectors. He has also been involved in practically all buy-side and sell-side due diligence procedures performed by our firm over the last fifteen years.
He has given lectures at national universities and is a frequent speaker at tax seminars. He has also written several articles dealing with Argentine tax issues.
Mr Caveggia is a certified public accountant graduated from University of Belgrano in Argentina. He also obtained a tax specialist’s degree at the University of Belgrano and obtained a postgraduate certificate in business and management from Universidad Católica Argentina (UCA). He is a member of the Professional Council of Economic Sciences of Buenos Aires and the Argentine Fiscal Association.

Flavia Cimalando is a manager of the Transaction Tax Area in Argentina. She joined the tax division of E&Y Argentina in 2000. Flavia has developed strong expertise over thirteen years in tax advisory services, tax planning and due diligence for local and international companies. She specialises in international and local business acquisitions and M&A consulting.
Flavia is a certified public accountant and bachelor in business Administration graduated from University of Buenos Aires, Argentina. She worked as an assistant professor of Tax Theory and Technique I at the School of Economics of the University of Buenos Aires during the last seven years. She is fluent in English.

Schedule A: Countries, dominions, jurisdictions, territories, associated states or special tax systems considered to be cooperative for tax transparency purposes: Albania, Germany, Andorra, Angola, Anguilla, Saudi Arabia, Armenia, Aruba, Australia, Austria, Azerbaijan, The Bahamas, Belgium, Belize, Bermuda, Bolivia , Brazil, Cayman Islands, Canada, Czech Republic, Chile, China, Vatican City, Colombia, South Korea, Costa Rica, Croatia, Cuba, Curaçao, Denmark, Ecuador, El Salvador, United Arab Emirates, Slovakia, Slovenia, Spain, United States, Estonia, Faroe Islands, Philippines, Finland, France, Georgia, Ghana, Greece, Greenland, Guatemala, Guernsey, Haiti, Honduras, Hungary, India, Indonesia, Ireland, Isle of Man, Iceland, Israel, Italy, Jamaica, Japan, Jersey, Kazakhstan, Kenya, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Macau, Macedonia, Malta, Morocco, Mauritius, Mexico, Moldavia, Monaco, Montenegro, Monserrat, Nicaragua, Nigeria, Norway, New Zealand, Netherlands, Panama, Paraguay, Peru, Poland, Portugal, Qatar, United Kingdom, Dominican Republic, Romania, Russia, San Marino, Singapore, Saint Martin, South Africa, Sweden, Switzerland, Tunisia, Turks & Caicos Islands, Turkmenistan, Turkey, Ukraine, Uruguay, Venezuela, Vietnam, British Virgin Islands.