International Tax and Legal in South America

The case of Argentina

Resident individuals may have four categories of income in Argentina: (a) first category: income derived from real estate (i.e. rental of real estate); (b) second category: income derived from capital investments (i.e. interest, royalties, dividends, etc.); (c) third category: income derived from carrying out an economic activity (i.e. sole proprietorship); and (d) fourth category: compensation for services rendered as an employee (i.e. remuneration, salaries) or as an independent professional (i.e. fees).

Profits obtained by Argentine entities (such as corporations, partnerships, trusts, etc.) are included in the third category. The ITL has a comprehensive domestic regime for dealing with FX fluctuations in the computation of the cost of property and services and the measurement of revenue and income in the third category and sometimes it is extended to the other categories.

Section 68 of the ITL and its decree regulate the tax treatment of FX for the third category. All transactions (such as commission, purchase and sale of merchandise or other traded goods) must be valued in Argentine currency at the exchange rate provided by the BCRA and must be recorded for tax purposes as follows: (a) for cash transactions, at the exchange rate effectively paid; and (b) for financed transactions, at the exchange rate of the day of entry, in the case of purchases, or at the exchange rate of the day of leaving, in the case of sale of merchandise or other traded goods.

The exchange differences that can be computed for income tax purposes are determined by: (a) the method of yearly revaluation of unpaid balances;12 and
(b) by the exchange differences generated between the last valuation and the total or partial payment of balances (final difference).13 The exchange differences to be included in the tax balance are those arising from transactions covered by the tax and those arising from the cancellation of credits obtained to finance them. The exchange differences generated by the entry of foreign currency into the country, or by the disposal of foreign currency by any means, arising from the above-mentioned transactions and cancellations, are considered to be Argentine source income.

In general, exchange differences are not a part of the cost of the assets; on the other hand, they have a direct bearing on the results and are comparable to financial charges. Negative exchange rates have a similar tax treatment to financial results.

FX losses arising from the conversion of a debt into another currency are not deductible, except when the debt is paid or if it is renewed. The purpose of this rule is to avoid transactions by taxpayers solely to generate currency gains or losses. It has been argued that the FX arising from the change of the currency of a debt should be allowed if the transaction is real and not fake.14 In a recent case, Los Acollarados,15 an Argentine company received a capital contribution in pesos. The company then decided that the contribution would not be converted into shares and would be reimbursed in US dollars. The Argentine company deducted the FX loss arising from the conversion of the debt into US dollars. The Tax Court denied the deduction.

The Tax Court decision was based on the fact that Argentina's income tax regulations16 establish that FX gains and losses should only be considered for income tax calculation when they originate in taxable transactions. The irrevocable contributions refund is not a taxable transaction, it is only the consequence of the company's equity reduction, especially given the fact that the firm had never considered the transaction as a loan (no interest was accrued), and it was decided to modify the original status only after the collapse of the Argentine economy in 2001 (devaluation) (substance over form principle applied).