During recent years, Argentine tax authorities2 have increased their sophistication and become more effective in their audits. Technological tools that allow the gathering and processing of information from taxpayers, as well as the flow of information from tax authorities of other countries have played a substantial role in that process. As a consequence, to have a dispute with the tax authorities, taxpayers need to have strong legal arguments and must assume that all the facts and circumstances surrounding the case are known by the counterparty.
In that context, there are certain incentives to avoid litigation. Among them, the tax authorities have broad powers to request seizures, attachments and the like, even during the initial stages of an audit. Also, interest rates applicable to tax debts are high, as well as costs associated with litigation (i.e., legal fees, court tax required to litigate, etc.). In addition, the Criminal Tax Regime plays a key role: taxpayers usually accept assessments made by the tax authorities with the purpose of avoiding potential criminal charges, even if there are certain chances to succeed before a court, because of the personal burden and uncertainties associated with a criminal process. Moreover, if the amounts involved in an assessment are above certain thresholds provided by the Criminal Tax Regime, the behaviour of the taxpayer qualifies as 'aggravated evasion', which entails the risk of imprisonment of the taxpayer or in the case of an entity, its directors, even during the criminal process and before a decision of the relevant court. Thus, such risk involves a high incentive to avoid litigation.
II COMMENCING DISPUTES
The Argentine Tax Procedural Law (Law 11,683, as amended (TPL)), applicable to federal taxes,3 provides that the assessment and collection of taxes is based on the tax returns filed by the taxpayers who self-assess their own taxes. There is a legal obligation to declare the taxes correctly. Tax returns cannot be amended to reduce the payable amount, except where material mistakes are involved. If the tax authorities find that there is an underpayment of taxes, they claim the deficiency through a formal process, plus interest and applicable fines. Depending on the amounts and facts and circumstances involved, a criminal case could also be initiated under the Criminal Tax Regime, as referred to above.
Under Argentine law, the term of the statute of limitations is five years, starting on 1 January of the year subsequent to the year in which the tax return is due. In addition, from time to time, a general amnesty regime is enacted under which the term of the statute of limitations is 'suspended' for one year regardless of whether the taxpayer includes unpaid taxes in such amnesty regime or not. Audits often refer to tax periods about to be statute-barred.
Matters that end up in litigation usually start with an audit from the tax authorities. This audit might be initiated as a consequence of a random process, or based on information related to the taxpayer's activities collected by the tax authorities from tax returns submitted by the taxpayer, or from information provided by other taxpayers with whom the former has a business relationship. In general, audits are broad and involve all taxes that apply to a taxpayer: at the federal level, income tax, value added tax (VAT), tax on personal assets (payable by local companies on behalf of their shareholders or owners), tax on debits and credits in bank accounts, etc. If at the provincial level, stamp tax and turnover tax are usually verified.
Once the officials of the relevant tax authorities believe that the taxpayer is not in compliance with certain obligation (e.g., the taxpayer holds that certain income is exempted from income tax, or certain activities are not subject to VAT, or the rate applied by the taxpayer should have been higher, etc.), there is an informal discussion where the officials invite the taxpayer to regularise the situation. In other words, the tax authorities usually prefer the taxpayer to 'voluntarily' amend its tax returns than initiating a formal assessment procedure.
If the taxpayer does not accept the tax authorities' position, the formal assessment procedure is initiated with a notice where the tax authorities inform the taxpayer that it has spotted an inconsistency in the tax returns and give the taxpayer a 15-day period (renewable for another 15-day period) to amend the returns or to defend itself. This notice provides a full explanation of the tax authorities' position and allows the taxpayer to offer evidence to sustain its position. If, notwithstanding the defences alleged by the taxpayer, the tax authorities decide to continue with the assessment, they issue a deficiency assessment notice.
Notwithstanding the above, the TPL was recently amended4 to include a section following Section 16 of the TPL, which provides that, before issuing a formal deficiency assessment, the tax authorities can initiate a conclusive voluntary agreement (CVA).
A CVA is an option for the tax authorities, although it can be argued that the taxpayer could request or propose it based on the constitutional right to make requests to the authorities. For a CVA procedure to be initiated, certain conditions must be met, although they are very broadly drafted:
- the agreement would be necessary to analyse the relevant facts and the correct application of the law to the case;
- the agreement would be necessary to evaluate data, information, elements or other relevant information for determining the tax obligation of the taxpayer; or
- the agreement would be necessary because the relevant situation requires a conciliatory solution due to its nature, novelty or complexity.
However, a CVA cannot be initiated if the Criminal Tax Regime was applicable. In other words, if, according to a preliminary judgment of the tax authorities, the case involves an evasion through fraudulent tax returns, malicious concealment or any other mean or device, and the discussion involves certain thresholds amounts, the Criminal Tax Regime would apply and, therefore, a CVA cannot be initiated.
Assuming a CVA can be invoked, the TPL provides for the creation of a collegiate conciliation body that would issue a detailed report in each case, in which it would recommend a conciliatory solution or its rejection. Such collegiate conciliation body would be composed of officers of the tax authorities, and must be approved by the main person responsible from the tax authorities: the Federal Administrator. In the event that the taxpayer rejects the solution, the original tax assessment procedure would continue.
The TPL provides that once a CVA is issued, the tax authorities may not ignore the facts analysed in it and may not challenge them before any other body, unless it is proved that the facts were fake. Also, a decision reached within a CVA cannot be invoked as a precedent for other cases unless the discussion was based exclusively on the interpretation of the law.
The CVA has been recently enacted and implementing regulations are still pending. Therefore, there is no actual experience in that field. It might be positive in certain cases to avoid litigation but the fact that the collegiate conciliation body would be composed of the tax authorities' officers might not provide the necessary objective view of the case as would happen, for example, in an arbitration process.
III THE COURTS AND TRIBUNALS
If no CVA is initiated, or if initiated but a conciliatory solution is not reached, because the collegiate body or the taxpayer rejects it, a formal deficiency assessment is issued and served to the taxpayer. At this point, the taxpayer can accept the tax authorities' position or appeal before the National Tax Court. The taxpayer may also choose to appeal the deficiency assessment before the tax authority itself, but this option is rarely used because the chance that the very same tax authority revokes its prior position is remote. The proceedings before the National Tax Court may take around three years in cases where substantial evidence needs to be produced. During such proceedings, interest keeps accruing but the relevant tax authority cannot claim the payment of the assessed amounts.
The National Tax Court is a body within the Executive Branch composed of accountants and lawyers specialised in tax law. It has four courtrooms devoted to analysing tax cases. Every case is assigned to a courtroom composed of two lawyers and one accountant. The National Tax Court has deep knowledge of the tax field and its decisions are generally very well sustained. Under the TPL, however, the National Tax Court has a strict limit: it cannot declare the unconstitutionality of any law, decree or regulation, unless such unconstitutionality had been declared by the National Supreme Court. Therefore, if a taxpayer invokes the unconstitutionality of a provision in which the tax authorities support their position, the National Tax Court will ignore such discussion and proceed to analyse the rest of the arguments, if any.
The decision of the National Tax Court can be appealed to the Court of Appeals. Should the taxpayer not pay the assessed liability after the unfavourable decision of the National Tax Court, except amounts corresponding to fines, the tax authority will likely initiate judicial proceedings to collect the amount involved. Thus, the obligation to pay the assessed amounts arises once the National Tax Court issues its decision, and only in case such a decision was in favour of the tax authority.
Under the TPL, the appeal to the Court of Appeals can only be based on legal arguments but not on the analysis of the facts and circumstances surrounding the case, as evaluated by the National Tax Court. Thus, the appeal before the Court of Appeals is described as a 'limited appeal and review remedy',5 although the Court of Appeals can decide to ignore such limitation in case of flagrant violation of the procedures before the National Tax Court, or if it believes that the facts were mistakenly evaluated by such court.
Whatever the resolution of the Court of Appeals is, it can be appealed to the Supreme Court of Justice to the extent certain requirements are met.
As can be seen, there are several instances in which the position of the tax authorities referred to a deficiency in the payment of taxes and the fines applied, if any, can be reviewed. However, an assessment procedure before the tax authorities might take one or two years. In addition, although it would strongly depend on the case at stake, to obtain a decision from the Federal Tax Court might take between three and four years, a decision from the Court of Appeals one or two additional years, and a final judgment from the Supreme Court an additional year or two. As a consequence, the whole process might take between six and ten years. In a context of high inflation, as was the case in Argentina during recent years, this might be an incentive to litigate because there is no requirement to pay the amounts involved during the process, although they can be judicially claimed, except for the fines, once the Federal Tax Court issued its decision. It is true that the applicable interest rate is high, but it is also true that from time to time a general amnesty regime is enacted, allowing payment of tax debts with partial or total forgiveness of interest, forgiveness of fines and criminal charges, if any, even if the case is being discussed before any of the referred courts.
iv PENALTIES AND REMEDIES
Any assessment by the tax authorities would reasonably include the application of a fine that could be for negligent tax omission or fraudulent evasion. In the latter case, a case under the Tax Criminal Regime could also be initiated.
i Tax omission
If the behaviour of a taxpayer is qualified by the tax authorities as negligent, a fine equivalent to 100 per cent of the omitted tax would be imposed. The fine increases to 200 per cent of the omitted tax in the event that such omission is related to transactions between local taxpayers and non-resident parties. In the case of recidivism, such fines increase to 200 per cent and 300 per cent of the omitted tax, respectively.
ii Tax evasion
In the event of a tax evasion, which assumes the existence of fraud, the TPL allows the tax authorities to impose a fine between two and six times the amount of the evaded tax through the misleading statements or malicious concealments.
iii Withholding and collection agents
If withholding or collection agents avoid paying the collected or withheld amounts to the tax authorities, they may be subject to fines ranging between two and six times the amounts involved.
iv Exemption and reduction of fines
Taxpayers can be released from fines if they remedy any deficiency detected spontaneously (prior to receiving any formal notice about the initiation of an audit).
The TPL also contains an incentive mechanism for taxpayers to reduce fines during the different stages of an assessment procedure: the earlier they accept the tax position (e.g., after the notice about the initiation of an audit but before a formal deficiency assessment is served, etc.), the lower are the fines imposed.
On the other hand, the TPL provides circumstances that will be considered as mitigating or aggravating graduation of the fines to be applied. Having a positive attitude and collaborating with the tax authorities during the audit, general good behaviour, etc., are considered mitigating circumstances. Having a negative attitude, lack of collaboration with the audit, not complying with formal obligations, etc., are considered aggravating circumstances.
v Criminal Tax Regime
As indicated above, when, according to the view of the tax authorities, a taxpayer evades the payment of taxes and the discussion involves certain threshold amounts, the Criminal Tax Regime applies.6 According to Section 1 of the Criminal Tax Regime, imprisonment form two to six years may apply to a taxpayer who is obliged to pay taxes7 and, through fraudulent tax returns, malicious concealment or any other means or device or deceit, evades such payment, provided that the amount of the evasion exceeds 1.5 million pesos for each tax and for each fiscal year.8 According to Section 2, the penalty will be from three-and-a-half years to nine years' imprisonment in the event of 'aggravated evasion', which occurs, among other cases, if: (1) the evaded amount exceeds 15 million pesos9 for each tax and for each fiscal year, or (2) ideologically or materially false invoices or other equivalent documents were involved, and the evaded amount exceeds 1.5 million pesos.10
The criminal case can only be initiated once a formal assessment is issued. In such event, the potential application of a fine for fraud, as described above, is suspended until a decision in the criminal case is made. In other words, the criminal process precedes the process to apply a fine for evasion.
v TAX CLAIMS
i Recovering overpaid tax
Under the Argentine Constitution, only a law can create an obligation to pay taxes. Thus, in the event of a tax paid that was not due under the law, the taxpayer has the right to claim its reimbursement plus interest as from the initiation of such claim.11 The process differs based on whether the payment was made spontaneously by the taxpayer or if it was requested by the tax authorities. In the first case, the taxpayer must file the claim before the tax authorities for them to have the chance to review the matter. In the second case, the taxpayer is allowed to initiate the claim directly before the Federal Tax Court or a judicial court, although this latter option is rarely used and taxpayers generally prefer to litigate before the Federal Tax Court.
The process ro recover overpaid taxes can be initiated by the taxpayer. Certain doubts arise in the case of withholding taxes applied by an Argentine payer to non-Argentine residents that obtain Argentine source income subject to withholding: certain court cases allowed the claim by the withholding agent, especially if it can be proved that the local payer was the one bearing the tax burden,12 while others indicate that the non-Argentine resident is the one entitled to the claim.
ii Challenging administrative decisions
As described above, any decision made by the tax authorities (e.g., an assessment) can be challenged before a court or the Federal Tax Court, and subsequent instances of review. In such instances, the taxpayer can invoke not only the relevant laws and regulations but also the principles and rights derived from the Argentine Constitution.13
Taxpayers appointed as such by the law are allowed to initiate any claim against the relevant tax authorities.
In the case of Argentine VAT, specific comments apply if the taxpayer wants to get its reimbursement. VAT applies to the sale of movable assets located in Argentina, the import of goods to Argentina, and to services provided within Argentina; sellers, importers and service providers are liable for the payment of such tax, having the buyer, importer or the beneficiary of the service, respectively, a VAT credit to offset its own VAT liabilities.14 In order to initiate a claim to get reimbursement of VAT, a taxpayer must prove that he or she bore the tax burden. In other words, it must be proved that the burden of the tax was not transferred to other party, which in the case of VAT is of its essence. Thus, claims for reimbursement of VAT are rarely seen.
During an administrative process where a tax is being discussed with the tax authorities, whether because an assessment is being contested by the taxpayer or a reimbursement claim was initiated, there is no need to have legal assistance from an Argentine attorney. Thus, taxpayers can go through such process without incurring legal costs other than interest applicable to tax debts, in case the decision is finally in favour of the tax authorities.
However, litigating before the courts or the Federal Tax Court requires involving legal assistance and, therefore, incurring certain costs.15 Also, although certain exemptions apply, both before local courts16 and the Federal Tax Court17 it is a requirement that a court tax is paid at the beginning of the process.
Notwithstanding the above, the general principle is that the party that loses the case must pay the costs derived from the litigation process.18 Thus, in case a taxpayer gets a final favourable decision, it could claim the reimbursement of court taxes, legal fees and all other costs (e.g., costs of experts involved during the evidence stage, etc.) incurred during the process.
vii ALTERNATIVE DISPUTE RESOLUTION
For federal taxes, there is a system of binding consultation that taxpayers can utilise when in doubt about their tax obligations. However, certain matters, such as issues in connection with double tax treaties are not within the scope of the regime and the tax authorities would not provide an answer on these matters. The ruling of a binding consultation must be followed both by the taxpayer and the tax authorities, although the latter can change its ruling by notifying such change to the taxpayer regarding future obligations. Taxpayers are allowed to appeal the ruling of a binding consultation where they disagree with the outcome.
Arbitration is not available in Argentina to solve matters with the tax authorities. However, from time to time, a broad amnesty regime is enacted where taxpayers can regularise their situation paying the amount of contested taxes; interest is partially or totally forgiven, as well as fines and criminal charges. Thus, although this kind of regime cannot be assimilated to an arbitration process, it could be seen as a kind of 'transaction' between taxpayers and tax authorities where the former accept to pay the amount of tax being contested but the latter accepts to quit the claim for interest and fines, as well as the criminal case, if any. These regimes are generally successful in terms of immediate collection of taxes and reduction of litigation, but indirectly involve an incentive for taxpayers that avoid paying taxes because of the benefits and forgiveness they usually include.
The TPL includes a general anti-avoidance rule (GAAR) for constructing the provisions of tax laws based upon the principle of 'economic reality', which is generally understood to be similar to the 'substance over the form' principle or the 'abuse' rules applied by other legislations. Also, and consistent with such rule, the TPL includes a provision under which transactions can be re-characterised if legal forms used by taxpayers 'lack economic substance'. Based on the latter provision, the tax authorities could disregard the legal structures used by the taxpayer if they are not coherent with the taxpayer's real economic purpose and, therefore, the fiscal situation could be determined based on the legal structure that would more properly fit the real economic intention of the parties involved (disregarding legal form).
Argentina's GAAR based on the 'economic reality principle' has been very broadly drafted and, therefore, the interpretation and its scope has never been very clear; in general, the broad scope that has been granted by the tax authorities has been narrowed down by the courts, including the Supreme Court. For example, courts have repeatedly held that taxpayers are not obliged to structure their business in the most expensive way from a tax perspective, confirming therefore that legitimate tax planning is allowed.
In the international context, this principle has been especially applied where treaty shopping situations were involved. In this sense, the mere incorporation of companies in certain tax treaty jurisdictions to take advantage of the relevant treaties was rejected by the tax authorities and such rejection upheld by the courts where the foreign companies had no real activities or substance.
ix DOUBLE TAXATION TREATIES
Argentina has double taxation treaties in force with the following countries: Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, Mexico, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, the United Kingdom and Uruguay.
Recently, the Argentine Executive signed tax treaties with Qatar, Turkey, China, Luxembourg, Japan and the United Arab Emirates, but they are pending approval by the Argentine Congress.
Most of the income tax treaties signed by Argentina follow the Organisation for Economic Co-operation and Development (OECD) Model Convention and, in certain specific aspects, the United Nations Model Convention. The treaty signed with Bolivia follows the 'Pacto Andino' Model Convention.
To take effect, treaties should be approved according to the process required by the Argentine Constitution. Furthermore, under Section 75:22 of the Argentine Constitution, international treaties prevail over domestic law.
Traditionally, tax treaties signed by Argentina do not include anti-treaty shopping rules. However, most of the tax treaties include the beneficial owner requirement for passive income such as dividends, royalties and interest. Moreover, most recent treaties signed by Argentina (e.g., tax treaties with Chile and Mexico) include general anti-treaty shopping rules. On the other hand, Argentina has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), which – once in effect – will incorporate different anti-treaty shopping rules to Argentina's treaty network. Under such Multilateral Convention, Argentina has adopted a simplified limitation of benefits clause (LoB) and the principal purpose test clause (PPT).
On 29 December 2017, Argentina published Law No. 27,430 in the Official Gazette. It involved a major tax reform to different taxes applicable in Argentina, as well as changes to the relevant procedural laws and regulations. Among such newly regulated matters, Law 27,430 includes the mechanisms to carry out mutual agreement procedures (MAP) in the context of tax treaties.
Many models of tax conventions for the avoidance of double taxation, such as the ones proposed by the United Nations and the OECD, provide this kind of procedure for dispute resolution. Through these procedures, the relevant authorities of the contracting states may intervene to resolve international taxation disputes. The contests submitted to this procedure might be related to cases of double taxation and inconsistencies in the interpretation or application of the tax conventions.
x AREAS OF FOCUS
Many of the newly regulated rules follow BEPS project recommendations, as described below:
- VAT on digital services and income tax on cryptocurrencies – BEPS Action 1.
- New controlled foreign corporations (CFC) rules included in the income tax law – BEPS Action 3.
- Modification of the thin capitalisation rules – BEPS Action 4.
- Anti-abuse clause included in recent tax treaties executed by Argentina (Spain, Chile, Mexico and Brazil) – BEPS Action 6.
- New definition of permanent establishment – BEPS Action 7.
- Regulation of joint determination of prices of international operations – BEPS Actions 8–10.
- Sanctions related to country-by-country (CbC) reporting – BEPS Action 13.
- Regulation of the MAP – BEPS Action 14.
- Signature of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – BEPS Action 15.
Based on the above, it could be expected that the tax authorities focus future audits in the newly regulated matters. Specifically, CFC, permanent establishment and transfer pricing issues.
On the other hand, having the LoB provision in certain treaties, and once the PPT starts applying, a strong scrutiny of activities and structures involving benefits under tax treaties could be expected.
xi OUTLOOK AND CONCLUSIONS
Sophistication of the tax authorities and courts in Argentina has increased during recent years. Also, it must be assumed that the tax authorities have now much more information related to the activities of the taxpayers than ever. Therefore, it could be expected that the tax authorities will be more aggressive, and litigation will increase in areas that were traditionally less audited, such as permanent establishment matters, new CFC rules, abuse of tax treaties, etc.
1 Walter Keiniger is a partner at Marval, O'Farrell Mairal.
2 We refer to federal, provincial and municipal tax authorities.
3 In this chapter, we describe the procedures applicable at the federal level. Provincial and municipal relevant laws provide for similar procedures.
4 Amendment by Law No. 27,430, published in the Official Gazette on 29 December 2017.
5 Sections 86 and 192 of the TPL.
6 The Criminal Tax Regime applies not only for federal taxes but also for taxes levied by Argentine provinces and by the City of Buenos Aires.
7 In the case of entities, criminal actions are addressed against directors, managers, and, in general, those who were part of the fraud.
8 As of January 2019, applying the current exchange rate this amount is equivalent approximately to US$25,000.
9 As of January 2019, applying the current exchange rate this amount is equivalent approximately to US$250,000.
10 As of January 2019, applying the current exchange rate this amount is equivalent approximately to US$25,000.
11 Under current regulations, the interest rate applicable to claims of refund is substantially lower than that applicable for unpaid taxes. However, during recent years, the Federal Tax Court and the Court of Appeals have declared that such lower rates are unreasonable and accepted to apply higher rates closer to those applicable at commercial courts for regular claims between private parties.
12 For example, through a 'grossing-up provision' under which the local payer is contractually obliged to make additional payments to the non-Argentine resident, so that after the deduction corresponding to the withholding tax, the latter receives the net amount agreed in the relevant contract.
13 However, as previously described, the Federal Tax Court cannot declare the unconstitutionality of laws and regulations unless the declaration has already been made by the Supreme Court.
14 Services provided abroad to an Argentine resident can also be subject to VAT if such services are effectively used within Argentina; in such cases, the local beneficiaries are obliged to pay VAT, having a VAT credit to offset future VAT liabilities in subsequent tax periods. Also, the 'digital services' are subject to VAT if certain conditions are met.
15 Taxpayers can be assisted before the Federal Tax Court not only by lawyers but also by accountants.
16 It is 3 per cent of the total amount at stake.
17 It is 2 per cent of the total amount at stake.
18 In certain cases where a reasonable doubt about the matter discussed existed, the courts can ignore such principle and decide that the parties must share the costs of the process.