Comments on tax agreements to avoid double taxation

In Message 6 of 2023, the government called extraordinary sessions to discuss, among other issues, various agreements to avoid double taxation between our country and other states.

It provides for the treatment of 5 international agreements to eliminate double taxation with respect to income taxes and the prevention of tax evasion and avoidance with the following countries and signed on the dates indicated below:

• With the Republic of Japan, signed on June 27, 2019,
• With the Grand Duchy of Luxembourg, signed on April 13, 2019,
• With the People’s Republic of China, signed on December 2, 2018,
• With the United Arab Emirates, signed on April 16, 2018, and
• With the Republic of Turkey, signed on December 1, 2018.

The main objective of international agreements on tax matters is to avoid double taxation, and to do so it establishes a particular treatment for each activity and indicates in which State the profit obtained should be subject to tax.

However, the other effect that these agreements have and that distorts this objective, is to generate double NO taxation, generating a hollowing out of the tax base and taking advantage of tax loopholes, transferring the source of the tax to countries or jurisdictions that have a tax of low or no taxation, as occurs in the case of tax havens or havens.

In this way, what ends up happening is that, given the zero taxation in one of the States, the fiscal purpose is broken and the income of a subject ends up avoiding and evading the payment of the tax.

Furthermore, the other undesirable objective is that the expense, for example, incurred to obtain or maintain an income subject to the framework of these international agreements, is deductible in the tax balance of the paying subject or of the person who accounts for that expense.

In the specific case of the agreement with Japan, the agreement presents a clause that is extremely worrying for our country and is the one stipulated in article 12 of the aforementioned agreement for the definition of royalties. There, the concept of “technical assistance” is omitted from royalties, so these incomes will be excluded from taxation in the source country, that is, where the income is generated, unless there is a permanent establishment in our country. country.

Permanent establishment, according to the definition in the agreement itself and in our income tax regulatory text, basically means having a fixed place of business where a subject obtains all or part of its activity.

So if a provider, for example, provides technical assistance to a Japanese company in Argentina and does not have a permanent establishment in our country, it will not be subject to tax in Argentina but in the country or jurisdiction in which that provider is located.

Several scenarios open up here:

• If the provider is located in a country with low or no taxation, double non-taxation will be generated, generating no income from the tax in either nation.
• The expense incurred by the borrowing company, located in Argentina, may deduct the expense from its tax balance. Although it is true that, if the provider is located in countries or jurisdictions with low or no taxation, he will have the limitations of the deductions established by our income tax; Even so, the deduction as an expense will exist.
• Furthermore, it implies a domino effect with other agreements already in force with our country from other nations and is the trigger for the “most favored nation clause.” This implies that, if the agreement between Argentina and Japan provides this benefit, it will be extended to other agreements signed with Argentina, where our country has approximately signed agreements with almost 30 countries.

The latter could have a strong impact on tax collection since many companies or technical assistance service providers seek to establish themselves in different countries with which Argentina has an agreement and take advantage of this tax loophole to achieve double non-imposition of the tax.

This also occurs in the case of payments of dividends, interest or other services that are paid in the other state that, by having low or zero tax rates, generates non-income of the tax obligation.

Finally, it is worth clarifying that the international agreements signed between two states seek, first of all, to promote investments in the other State and then to generate legal and tax security in order to plan the tax burden in one of the two states and avoid double taxation, but there should not be a take advantage and distort that intended objective, to achieve double NON-imposition of the tax.

That is why, taking into account the structural changes in terms of regulation of the economy proposed by the new government, the implementation or entry into force of the 5 international agreements stated above generate a much more serious analysis of debate and constructive discussion.

Certified Public Accountant