This article was first published in ARGENTINE BUSINESS LAW WATCH 1 January 17, 2003
Narrowing the Bad Debt Deduction (or How to Increase Tax Collections during a Recession)
Until recently, Argentine taxpayers could deduct bad debt write-offs from their taxable income upon a showing that the debtor was insolvent. Indeed, a recent decision, by the Argentine Federal Tax Court (Tribunal Fiscal de la Nación) had upheld, over the tax authority’s objection, a taxpayer’s bad debt deduction upon "manifest" evidence of the debtor’s insolvency.2 Undaunted, the Argentine government has acted legislatively to make bad-debt deductions harder to come by. Beginning with the 2002 tax year, a bad debt is deductible only if at least one of specified criteria (e.g. filing of an unsuccessful collection claim, debtor bankruptcy) has been met.3
For smaller debts, the new tax rules apply different criteria. These debts are deductible if the following three requirements are met: (i) the debt is outstanding for more than 180 days, (ii) payment has been demanded, and (iii) there is no further commercial relationship between the debtor and the creditor. The statutory meaning of "smaller" debts has yet to be defined by the Argentine tax authority.
The new regulations make it more burdensome to qualify a bad debt write-off for deduction. The mere choice between filing a hopeless collection claim or, worse, filing a proof of claim in bankruptcy, and losing a deduction raises a practical concern. Taxpayersmay no longer take the deduction based on the debtor’s apparent insolvency. Given the record number of business failures suffered during the last year in Argentina, the elimination of deductions, in economic terms, is likely to be considerable.
Deca Piazza: Withholding Taxes on Technology Transfer Payments Scrutinized
The Federal Tax Court recently reviewed withholding taxes applicable to payments under technical assistance and technology transfer agreements.4 Currently, payments of technical assistance fees and technology transfer royalties to nonresidents are subject to a 21% withholding tax in Argentina, as long as the technical assistance or technology is not available in Argentina. If the assistance or technology is available in Argentina, the applicable rate steps up to 28%, though in any event remaining well below the 31.5% withholding rate generally applicable to payments to nonresidents. If one of Argentina’s various income tax treaties were to apply, the withholding rate could be even less than 28% or 21%.5
For these more favorable rates to apply, the agreements governing the assistance or transfer must be registered with the Instituto Nacional de Propiedad Industrial (the Argentine Industrial Property Institute or INPI).6 Largely a ministerial task, the filing includes the Argentine taxpayer’s estimate of the total gross payments (i.e., including the withholding tax levied thereon) anticipated for the life of the agreement. Upon filing, the taxpayer must pay a registration fee equal to 0.1% of the estimated total gross payments. If this seems to give room for abuse by the taxpayer, bear in mind that if the taxpayer fails to provide an estimate of total gross payments, the agreement is considered improperly registered, the withholding tax zooms to 35% and the taxpayer is barred from treating the payments as a deductible expense.
Deca Piazza deals with the treatment of technology transfer payments that exceed the original estimate of a taxpayer. The Argentine tax authority argued that payments made under a technical assistance agreement were a deductible expense only up to the amount estimated in the INPI registration. Because the taxpayer did not update the estimated total gross payments, all excess payments, the tax authorities argued, were not deductible. The Federal Tax Court agreed, holding that the taxpayer’s estimate was "material" to the registration. Nonetheless, while the court ordered the loss of deduction it did not increase the withholding rate. While not express in the decision, presumably the court did not increase the withholding rate to avoid conflict with the Argentina-Germany bilateral tax treaty applicable to the payments.
Deca Piazza signals a potentially large victory for the government. The case is currently on appeal. If affirmed by the higher courts, the deduction for payments exceeding the originally estimated amount will be disallowed and a 31.5% withholding tax on those payments, unless prevented by an income tax treaty, will likely apply. What should Argentine taxpayers enrolled in this category do if payments have exceeded the original estimate? One option would be to adjust the originally estimated total gross amount filed with the INPI. Alternatively, it might be less costly to await a final, more favorable ruling, although, in light of Argentina’s current financial situation, that’s probably not a good bet.
Software Licenses: A Royal Withholding Tax Dilemma
Recent tax court litigation has created substantial uncertainty among Argentine software licensees concerning withholding tax rates on payments to the foreign licensor. Current statutes suggest that a licensee may treat the payments as royalties on copyrighted licenses (subject to a 12.25% withholding tax). The Argentine government thinks otherwise and insists that the payments are subject to withholding tax at the maximum (31.5%) rate.
Argentine income tax law states that payments for the use of intellectual property rights may be withheld on account of income tax at the 12.25% rate if (i) the work is registered with the relevant Argentine agency, (ii) payments are made to the work’s authors or their assignees (derechohabientes), (iii) payments are made in consideration of the licensee’s use of the work and (iv) the original work was not created "as a result of the performance of a requested service."7 Assuming the licensee complies with these requirements, the law would thus appear to qualify royalty payments under a software license for the lower withholding tax rate.
A September 2001 Federal Tax Court decision agreed, holding that a J.D. Edwards software licensee properly applied the 12.25% rate to payments made to the licensor.8 Nonetheless, the Argentine tax authority has appealed this decision, contending that the lower tax rate does not apply. While the appeal remains pending resolution, recent precedent has given software licensees a cause for concern.
In a leading case, an appellate court reviewed an Argentine licensee’s use of logos and designs licensed by a Walt Disney affiliate.9 Following a Federal Tax Court decision that the licensee had properly applied the lower withholding rate, the government appealed, arguing that the lower withholding tax rate applies only to the natural person that authored the work or that person’s assignee. Because the licensor was a corporation, it could not be considered as either the original author or the assignee, which the government argued refers to the author’s heirs and is also limited to natural persons. The Federal Court of Appeals hearing the matter agreed with the government, reversed the Federal Tax Court decision, and ordered the application of a 31.5% withholding rate to payments under the license.10 The decision has been appealed to the Supreme Court, where it awaits hearing.
Encouraged by the appellate court ruling on payments for licensed logos and designs, the Argentine tax authority issued an opinion that identical criteria would apply to royalty payments under software licenses.11 The Attorney General, in its Supreme Court brief filed in the pending appeal by the Disney licensee, has likewise adopted a position consistent with the narrow reading given by the appellate court. An outcome favorable to software licensees does not look promising.
Because the cost of withholding is generally allocated to the licensee by a "grossing-up" clause, a final decision, likely to eventually come from the Argentine Supreme Court, is economically significant. Until that time, Argentine software licensees have a dilemma. If they follow the Federal Tax Court precedent and, in good faith, assess the withholding tax at a 12.25% rate, they invite a dispute with the Argentine tax authority. If, instead, they accept the tax authority’s position, their costs may increase significantly, some (if not most) of which cannot be passed through to the retail price. This could mean that licensed products or services may be pushed out of market and, in the long run, defeat the government’s objective of increasing tax revenue.
1 "Argentine Business Law Watch" is a periodic news service provided free of charge to clients and friends of Negri, Teijeiro & Incera.
2 See In re Establecimiento Los Calvos S.R.L., TFN (August 6, 2002), Case No. 16816-I.
3 Decree No. 2442/2002 published in the Official Gazette on December 3, 2002. Decree 2442 specifies the following criteria: (i) the debt is evidenced by a proof of claim allowed in a reorganization proceeding, (ii) the debtor has been declared bankrupt, (iii) the debtor has fled or otherwise disappeared, (iv) a legal proceeding was previously filed by the taxpayer to collect on the debt, (v) the debtor’s business activity has ceased or (vi) the taxpayer’s claim against the debtor is barred by the applicable statute of limitations.
4 See In re Deca Piazza S.A., TFN (September 6, 2002), Case No. 19389-I.
5 Argentina has tax treaties with Australia, Austria, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, Netherlands, Norway Spain, Sweden, Switzerland and the United Kingdom.
6 Nonetheless, the income tax treaty currently in effect with Switzerland does not require registration to apply the more favorable treaty rate.
7 See Sections 91, 93(b) and 20(h) of Law 20.628 (1998 restated text).
8 See In re Application Software S.A., Tribunal Fiscal de la Nación, sala C, (September 20, 2001), IMPUESTOS 2002-A:394.
9 See In re Picapau S.R.L., Tribunal Fiscal de la Nación, sala C, (April 19, 1999), IMPUESTOS 2000-B:2027.
10 In re Picapau S.R.L., Cámara Nacional de Apelaciones en lo Contenciosoadministrativo Federal, sala IV, (September 29, 2000), IMPUESTOS 2000-B:2027.
11 Published Opinion (Dictamen) of the Argentine Tax Authority (DAT) 68/02 (June 28, 2002).
This article is provided as a service to clients and friends of Negri, Teijeiro & Incera. It is not intended to impart legal advice on any matter.