Argentina releases details of proposed tax reform “Anti-Evasion Plan III”The Argentine Executive Power has recently made available to the public, certain parts of a proposed tax reform containing significant amendments to the Income Tax Law, the Tax Procedural Law and other tax regulations.

According to the information available, the project (under the name of Anti-Evasion Plan III) has not yet been sent to the Argentine Congress; however, further developments in the near future must not be disregarded.

Among other important amendments, the project contemplates the elimination of the existing exemption on capital gains earned by foreign beneficiaries on the sale of shares and other securities, introduces taxation on the sale of shares for individuals, establishes additional restrictions on the computation of tax losses, increases the tax burden on transactions with tax havens and introduces an Advance Pricing Agreement (APA) regime.

Below is a summary of the main proposed changes to the Income Tax Law and Tax Procedural law.

Elimination of income tax exemption on capital gains

The project bill is proposing to eliminate the income tax exemption currently in force for foreign beneficiaries on the sale of shares, bonds and other securities, originally introduced by Decree 2284/91, ratified by Law 24,307. This means that if the reform is approved, capital gains earned by non-Argentine residents on the transfer of Argentine shares will be subject to tax in Argentina.

The bill also proposes the taxation of income earned by individuals on the sale of shares, bonds and other securities (except for those shares trading on a stock exchange). To date, such income is generally not subject to tax for individuals.

Transactions with low or nil tax jurisdictions (tax havens)

30 April 2012

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According to the proposal, the deduction of any expense charged from an entity domiciled in a tax haven would be disallowed (today the deduction is accepted, though subject to certain restrictions and subject to transfer pricing rules).

Additionally, the tax reform package includes a clause by which all payments to low to nil tax jurisdictions (including payments to entities domiciled elsewhere which operate through a bank account in low tax jurisdictions) are deemed to be Argentine source income and subject to a 35% withholding tax- even where the domestic withholding tax rate is lower (for instance, international transportation, news agencies, insurance, media and telecommunication activities, trademarks and technical assistance, copyright, etc.).

Furthermore, the project bill includes additional cases in which funds arising from tax havens may constitute “non-justified capital increases” for Argentine taxpayers.

Restrictions to the computation of tax losses

The proposed tax reform would introduce additional restrictions on the use of tax losses NOLs).

Today NOLs can be carried forward up to five years, with no limitation in the amount which can be used to offset taxable income. The tax reform proposes an additional limitation, which would cap the use of NOLs to 30% of the taxable income of a given fiscal year in addition to the existing 5-year

carry-forward limitation.

The existing categories of losses (which may only offset income arising from the same source) are maintained according to the project bill (losses deriving from sale of shares, from derivative agreements, foreign-source losses, etc.).

Advanced Pricing Agreements (APAs)

The tax reform would introduce a special regime by which taxpayers could request “Advanced Pricing Agreements” with the tax authorities, which would fix the criteria and methodology applicable for the determination of prices or margins in transaction subject to Transfer Pricing rules.

According to the project, the request would have to be formalized prior to the beginning of the fiscal year and be resolved by the tax authorities within a 360-day term, which could be extended for an additional 180 days. The agreement, which would bind the taxpayer and the tax authorities, would include pricing criteria for a maximum of three years. The project bill establishes that the tax authorities would be required to provide further regulations to enforce the regime.

Other amendments

The tax reform would change certain regulations in relation to trusts, equalizing the income tax treatment for all type of trusts (currently, certain trusts in which the grantor is also the beneficiary have different treatment) and introduces changes to trusts set up

for construction activities.

The proposed bill also includes several changes to the Tax Procedural Law, including an increase in the audit powers of the tax authorities, an extension of the term of the statute of limitations applicable to withholding agents, and the introduction of web-based tools to communicate with taxpayers, among others.

Please note that in addition to these amendments to the income tax and tax procedural law, it is known that the project includes reforms of some other tax laws, including VAT, the Minimum Presumed Income Tax and the Tax on Personal Assets. In this regard, the text of the proposed modifications in relation to these taxes has not become public to date.

Final comments

While, there is no further information on the status of the project and its treatment by the Congress, approval of this tax reform project in the near future must not be disregarded.

Companies doing business in Argentina should consider the potential consequences of the proposed changes and evaluate the impact on their current Argentine operations, especially in those cases where potential transactions prior to the enforcement of the law might allow a mitigation of its effects.

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For additional information with respect to this Alert, please contact the following:

Pistrelli, Henry Martin & Asociados S.R.L., Buenos Aires• Carlos Casanovas +54 11 4510 2270 carlos.casanovas@ar.ey.com• Gustavo Scravaglieri +54 11 4510 2270 gustavo.scravaglieri@ar.ey.com• Ariel Becher +54 11 4510 2270 ariel.becher@ar.ey.com• Pablo Baroffio +54 11 4510 2270 pablo.baroffio@ar.ey.com• Florencia Fernandez +54 11 4510 2270 florencia.fernandez@ar.ey.com

Ernst & Young LLP, Latin American Business Center, New York• Alfredo Alvarez, Director +1 212 773 5936 alfredo.alvarez@ey.com• Pablo Wejcman +1 212 773 5129 pablo.wejcman@ey.com

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