A worrisome resolution related to withholdings

1.    Legislation applicable to payments to foreign beneficiaries

Income Tax Law ("ITL") establishes a dual taxation system: residents are taxed on their worldwide income, that is to say, on their Argentine and foreign source income; on the other hand, non residents or foreign beneficiaries are taxed only on their Argentine-source income, through withholdings made by the Argentine resident payer.

Pursuant to the ITL, income arising from: (i) assets located, placed or used in Argentina; (ii) the performance of any act or activity in Argentina that produces an economic benefit; and (iii) events occurring in Argentina, is deemed to be Argentine-source income.

The ITL provides that the nationality, the domicile or the residence of the party obtaining the income or of the parties involved in the transactions, or the place were the agreements are entered into must not be taken into consideration for the tax purposes.

Besides this general rule, the LIG also contemplates other specific cases. For instance, it provides that payments due to technical, financial or other kind of advice rendered abroad that qualify as ”Technical Assistance” (asistencia técnica) are Argentine-source income, even though under the general rule they would be foreign-source income.

The general rule and the specific cases contemplated in the ITL only refer to the “economic utilization” (utilización económica) in Argentina in the case of assets, but not at all in the case of services. In other words, in the case of services, there is going to be an Argentine-source income if the service is rendered in Argentina or if it qualifies as “Technical Assistance”.

The place where a service is “utilized” is, indeed, important for purposes of the Value Added Tax (VAT). In this sense, any service rendered abroad, but utilized or effectively exploited in Argentina is taxed to the extent the party receiving the service is a VAT registered tax payer in Argentina.

2.    Recent Case Law

In “Aerolíneas Argentinas S.A.” (“Aerolíneas”)[1] and “Austral Líneas Aéreas Cielos del Sur S.A.” (“Austral”)[2], the Tax Court (Tribunal Fiscal de la Nación) had to determine the tax consequences arising from the payments for the use of the system called “Amadeus”, and reached two different conclusions.

“Amadeus” is a system that allows for the booking of air tickets, hotels, car rentals, etc. The system has been set up by different airlines. It allows any tourist agency in the world to get information related to flights and book flight seats on a real time basis. Most of the airlines use this system and to do so, it is necessary to enter into an agreement where the airlines agree to pay for the use of the service. In the cases under analysis, both Argentine airlines had entered into agreements with a Spanish counterpart.

In both cases, Aerolíneas and Austral made the payments to their Spanish counterpart without making any withholding, in the understanding that those payments were for services rendered outside Argentina. It was therefore understood that the services did not generate any Argentine-source income and that they did not qualify as Technical Assistance. On the other hand, the Argentine Tax Authority claimed, with not clear arguments, that the Argentine payers should have made withholdings on such payments.

In Aerolíneas, the Tax Court confirmed the Tax Authority’s criteria, on the understanding that “Amadeus” was a sort of asset that was economically used in Argentina and therefore, originated an Argentine-source income under the general rule provided in the ITL.

However, in Austral, the Tax Court confirmed the tax payer’s criteria, on the understanding that the payments were made for services rendered abroad and not qualifying as “technical assistance”.

The Court of Appeals has recently confirmed Aerolíneas’ case[3], thereby validating the Tax Authority’s criteria. However, the Court of Appeals’ arguments differ from those used by the Tax Court and in our opinion these new arguments do not follow the ITL.

As far as the concept of the payment is concerned, the Court of Appeals understood that they had been made in exchange for “services”, but afterwards mistook the road when analyzing where those “services” had been used. The Court of Appeals understood that the place of utilization would determine the source of the income even if the services did not qualify as Technical Assistance, but this is not what the ITL sets forth.

The place where a “service” not qualifying as Technical Assistance and rendered abroad is “economically utilized” is only relevant for VAT purposes. In other words, it is absolutely irrelevant for purposes of determining the source of the income and therefore the obligation to make a withholding. Hopefully, the criteria of the Court of Appeals will be revised, because it does not follow the ITL.