International Tax and FX

International Tax in Argentine, FX Issues.

Argentine income tax legislation has a set of tax rules for addressing FX issues when computing income. No significant changes have taken place in the legislation on FX gains or losses of Argentine source since the 1986 Argentine report but there have been significant developments in this area for other reasons:(a) In 1992 Argentina adopted worldwide criteria for applying income tax and in 1998 a tax reform introduced several rules to the ITL to establish how foreign source income is subject to income tax for Argentine residents investing abroad.

(b) As a consequence of the collapse of the Argentine economy in 2001, some events took place such as a huge devaluation, the conversion of US dollar denominated debt into Argentine peso debt and a massive default. These events gave rise to new questions on the treatment of FX gains or losses and called for reappraisal of old questions.

The changes in the economic rules in 2002 and the adoption of the worldwide principle generated many uncertainties for taxpayers and also discussion with the tax authorities. The main issues were: (a) taxation of FX gains and losses of foreign source; (b) application of tax treaties to FX gains and losses; (c) characterization of loans granted by related parties to Argentine taxpayers as equity contributions; and (d) specific measures to moderate the tax impact of the devaluation of the Argentine peso.

In certain cases, administrative and judicial decisions provide guidelines for the tax treatment of these new situations but many are still uncertain. The purpose of this report is to describe these new issues and to emphasize certain topics of the 1986 Argentine report. If an issue was analysed in the 1986 report and has not undergone any change pursuant to any legal amendment or a judicial or administrative decision, it may be taken that this report makes reference to the 1986 report.

Argentina has applied a territorial source criterion of taxation since 1932 when the ITL was enacted. In 1992, Law no. 24,073 adopted the worldwide principle; therefore Argentine residents became subject to income tax on both Argentine and foreign source income, and were allowed to compute income tax paid abroad as a tax credit. In 1998, Law no. 25,073 incorporated several rules (definition of residence, anti-deferral rules, and timing issues) into the ITL that were necessary to apply the worldwide criterion.

Entities set up in Argentina are considered to be resident in Argentina and subject to tax on worldwide income. The main forms of doing business in Argentina are basically those which exist in other countries, namely, partnerships, limited liability companies, corporations, trusts and PEs of foreign entities. Some business entities are taxable taxpayers (i.e. corporations, limited liability companies, etc.) and others are income-reporting entities (i.e. partnerships regulated by the Civil Code, business associations that are not formed pursuant to legal requirements).

Business entities are subject to a similar tax treatment. Taxation is based on the balance theory and capital gains are treated and taxed as ordinary income, at a rate of 35 per cent. Income is allocated to the fiscal years in which it accrues. However, there are certain exceptions to the general rule, such as interest paid on securities, where the income is allocated to the fiscal year in which the interest becomes due. Expenses, in the same manner as income, are generally allocated to the fiscal year in which they accrue.

In relation to the determination of income tax based on worldwide income, taxpayers must determine the tax, making a distinction between that taxable income and expenses of Argentine source, and that of foreign source.

The treatment that the law grants to those foreign losses is distinctive because they can only be compensated with profits of the same origin. Equal treatment would involve the offset of losses deriving from share disposal, and those generated by rights and obligations based on instruments and/or derivative contracts.