The Agreements to Avoid Double Taxation in general define the tax powers between the signatory countries and seek to eliminate cases of double taxation. In June 2019, Argentina held a Agreement with Japan that marks a break in what had been a constant policy of inclusion in the definition of « royalties » to payments made as « technical assistance ».
Article 12 of the Agreement with Japan does not mention within the definition of royalties the amounts of any kind paid for the provision of technical assistance services. This omission is not minor and If this Agreement is approved by the Argentine Congress, it would entail consequences even in other treaties entered into by Argentina..
It is possible to point out that in previous negotiations carried out by the country and even in the position expressed by Argentina before the OECD in reference to the definitions of what should be understood by royalties, it had been consistent and respected by the management that concluded in the year 2015. That position has been unjustifiably set aside not only for the agreement with Japan but indirectly (if the latter is approved) with several other jurisdictions that maintain the most-favored-nation clause.
Because it is important?
Since the payment for « technical assistance » benefits is not included within the definition of royalties in the Agreement, the income obtained by a company resident in Japan would be taxed exclusively in that country, unless the company carries out its commercial activity at through a permanent establishment in Argentina. But it is not only a resignation of tax powers in favor of that country, but this benefit would be extended to other agreements that could apply it by virtue of containing the Most Favored Nation Clause.
With the rapid changes in modern economies, particularly with regard to cross-border services, it is now possible for a company resident in one State to participate substantially in the economy of another State without a permanent establishment or fixed base in that State; that is, without substantial physical presence in that State, remaining outside the country’s tax authority.
The position that Argentina had been maintaining
In the position established for article 12 of the OECD Model Agreement to Avoid Double Taxation, already in 2014 Argentina (along with other countries such as Brazil, Gabon, Tunisia) reserved the right to include income for » technical assistance « in the definition of royalties (point 6, position regarding article 12, History – Model 2017). This position had been consistently respected throughout the management that culminated in 2015 and had been a specific matter of consideration at the time of negotiating the agreements. As an example, it is enough to point out the agreement with Mexico (the last one that was negotiated by the management that concluded in 2015). It was also one of the points considered (and defended in favor of Argentina) when agreements such as those of Spain and Chile were renegotiated, to mention a few examples.
The implosion of Argentine international tax policy
The seriousness of this omission is even greater since this clause, which contradicts issues won after negotiations and years of international discussions, not only affects the relationship with Japan (Not a minor issue considering that it is one of the main exporters of technical knowledge), but this replicates in the form of a cascade to all those agreements that have the Most Favored Nation clause.
Put in other simpler words: with the entry into force of the agreement with Japan, other countries such as the Kingdom of the Netherlands (which has the Most Favored Nation clause in its Protocol) will be able to obtain this same benefit, and consequently technical assistance contracts that were reached and were taxed in the country, would immediately cease to be (if they do not have a permanent establishment in the country).
Likewise, and as it was mentioned recently by whoever was once Deputy Director General of Institutional Technical Coordination of AFIPThis is clearly unfavorable for Argentine businessmen who must compete with a foreign company in the provision of these services. This clear concept is developed in detail in the explanation given by the United Nations (Agreement Negotiation Manual, paragraph 11, article 12A), where it is explained that while the income for the services provided by national suppliers is subject to the tax, the Non-resident suppliers would not be subject to any tax unless they had a permanent establishment or a fixed base in that country, and furthermore, they could be subject in their country of residence only to low taxes (or no taxes at all) for those income earned. .
Of course, those who preceded the current tax administration since 2016 could not share the tax policy carried out until 2015, and they had all the powers to modify those guidelines. However, what is questionable is destroying benefits already earned by the country. This damage that is done to international tax policy is unjustifiable and even when the tax policy that was carried out by the management that concluded in 2015 is not shared, those issues already won should not be resigned or set aside, but protected. because they have been the result of the efforts of several years of negotiations and we reiterate, clearly in the interest and benefit of the country.
Surely these disagreements between the achievements in terms of tax authority and the ratification of these new conventions may be motivated by the strange configuration of international tax relations that has been reflected in the structure of the Ministry of Economy, with the Undersecretary of Public Revenues (Finance) and the Undersecretariat of International Taxation (Tax Policy) that have similar and overlapping competencies on issues related to the OECD.
The role of AFIP (unfortunately) at this stage it limits itself to collaborating on technical aspects related to participation in the different Working Groups. It would be important to return to the path of the former Evaluation and Review Commission of Agreements to Avoid Double TaxationWhile today the dispersion of criteria and the inactivity of a coordinated fiscal policy motivates this type of situation.
In other columns of this newspaper we talk about the resignation of tax powers in favor of the State of Qatar. We now highlight this unjustified transfer of tax authority to Japan and indirectly to various other jurisdictions through the most-favored-nation clause. Everything seems to indicate that Argentina has lost its way in terms of international tax policy.
*Certified Public Accountant. Master in Tax Law (U. Austral). Former Undersecretary of Public Revenue of the Nation (2010-2015).
**Lawyer. LLM in Taxation (U. of Florida).