Argentina: Argentina To Lower Distortive Taxes

The Argentine Minister of Finance, José Luis Machinea, announced on October 23, 2000, that he and his team were drafting a tax bill aimed at reducing the impact of distortive taxes that affect the capital investment in Argentina. The tax bill was sent to Congress for debate on October 26, 2000 and it was approved unanimously by the House of Representatives on November 1, 2000. Now, it must be discussed on the Senate's floor before it is passed as law. In general, the Argentine businessmen welcomed the initiative, although they push for more reductions. The government's move is intended at reactivating the Argentine economy, which suffers its toughest recession in decades. The tax breaks to be granted relate to the tax on interest, the minimum presumed income tax, the value-added tax and the personal assets tax.

Currently, Argentine taxpayers that borrow funds from Argentine banks or issue obligaciones negociables (a tax-preferred bond) to Argentine individuals or nonresidents are subject to a 15% tax on the interest paid. This tax effectively increases the Argentine taxpayers' cost of borrowing by the rate of the tax (although such increase cannot be higher than 2.25% of the principal amount of the loan). If enacted, the tax bill would amend Title IV of the Law No. 25063 that created this tax so as to lower the tax rate to 10% effective January 1, 2001, and to 8% effective July 1, 2001, for interest payments to be made since those dates. Additionally, the amended rule would decrease the limit of the amount of tax that Argentine borrowers may be required to pay to 1.5% (1.2% since July 1, 2001) of the principal amount of the loan.

The tax bill would also incorporate a mechanism to credit the tax on interest paid against the Argentine taxpayers' Argentine income tax and minimum presumed income tax liabilities for the taxable year in which the tax on interest is paid. This mechanism, however, would only be available to a small range of taxpayers (those with Argentine bank loans not exceeding $500,000 at the end of the previous taxable year) and would be effectively limited to a $750 credit per year. Any excess credit would not be refundable to the taxpayers. If enacted, the credit could be claimed by Argentine taxpayers for those taxable years closed after December 31, 2000.

Finally, the tax bill would authorize the Argentine President to decrease the rate of this tax or to suspend its applicability under special economic circumstances.

This tax works as an alternative minimum income tax, although it is assessed on the amount of assets held by Argentine taxpayers rather than on an alternative income base. As such, any Argentine income tax paid by the taxpayers can be credited against their minimum presumed income tax liabilities. Therefore, the amount of minimum presumed income tax that Argentine taxpayers must remit to the Argentine tax authorities equals the excess of the taxpayers' minimum presumed income tax liabilities over their income tax liabilities. Currently, any minimum presumed income tax effectively paid by an Argentine taxpayer can be credited against the taxpayer's Argentine income tax liabilities of the following 4 taxable years to the extent that those liabilities exceed the minimum presumed income tax liabilities of those taxable years. The tax bill, if enacted, would amend the Title V of the Law No. 25063 that created this tax so as to extend the term to credit the minimum presumed income tax paid against the taxpayers' income tax liabilities to 10 years. In addition, the amendment would also extend the statute of limitations from 5 to 10 years for purposes of the minimum presumed income tax only. If enacted, the amendments will be effective since the creation of this tax (i.e., since December 31, 1998).

The tax bill would incorporate a new article to the VAT law, which would provide a special credit mechanism against other taxes levied by the Argentine federal government. Pursuant to this special mechanism, Argentine VAT taxpayers will be able to credit the balance of the input VAT paid upon the purchase or importation of depreciable capital assets that is not recovered through the normal VAT credit mechanism against other federal taxes, except those that are levied to finance specific activities. Any excess VAT balance that cannot be credited against a taxpayer's other federal tax liabilities will be refundable. For this mechanism to apply,

• The depreciable capital assets must be utilized in a trade or business subject to VAT;
• The input VAT from the purchase or importation of those assets must remain unrecovered by the Argentine VAT taxpayer through the regular VAT credit mechanism after a 12-month period since such purchase or importation;
• The Argentine VAT taxpayer must own the depreciable capital assets at the time of claiming the credit or requesting the refund; and
• The Argentine VAT taxpayer must not have requested the deferral of payment of VAT permitted under specific circumstances by the Argentine law.

In the case of depreciable capital assets purchased by Argentine VAT taxpayers by leasing, the balance of VAT paid during the term of the lease and upon the exercise of the purchase option would only be creditable or refundable under the special credit mechanism if it has not been recovered through the regular VAT credit mechanism until the end of the twelfth month from the exercise of the purchase option.

The tax bill also provides an ordering rule pursuant to which the VAT paid upon the purchase or importation of depreciable capital assets is recovered last through the regular VAT credit mechanism.

If enacted, this amendment would be effective since November 1, 2000.

If the tax bill were enacted, Argentine individuals would not be required to include the shares of Argentine public companies that trade in Argentina that they hold in the personal assets tax base for purposes of assessing this tax liability. For this exemption to apply, the individuals' stockholdings must not exceed $100,000. Additionally, the individuals must hold such stock during the full year in order to be able to exclude it for purposes of assessing their personal assets tax liabilities. This tax break is aimed at expanding the participation of Argentine middle-class individuals in this type of investment, although it clearly benefits the rich in the short run. If enacted, this amendment will be effective for the assessment of the individuals' personal assets tax liabilities of taxable year 2001.