Exchange of tax information between Cayman and Argentina

Read our article in the Cayman Financial Review Magazine, eversion 

In October 2011, Argentina and the Cayman Islands entered into an Agreement for Exchange of Information on Tax Matters. The AEIT mainly follows the text of the OECD’s Model Agreement on Bilateral Exchange of Information on Tax Matters.

 

AEIT’s fundamentals

The parties shall provide reciprocal assistance through exchange of information relevant to Argentina’s Income Tax, Value Added Tax, Personal Assets Tax, and/or Tax on Presumptive Minimum Income (which are all federal taxes), or to any similar tax imposed by the Cayman Islands. Nevertheless, information provided for such purposes can be used for other taxes as well.

The information shall be deemed confidential, although it may be disclosed in public court proceedings and in judicial decisions.

Information covered includes taxpayers’ data held by financial institutions or agents (including fiduciary agents, nominees and trustees), and broad information on ownership of companies, partnerships, trusts, foundations and more (except for publicly traded investments).

However, information protected by laws or administrative practices of the requested party is not within the scope of the AEIT.

The applicant party shall provide the identity of the person under investigation, the tax purpose for which the information is sought, the grounds for believing that the information is held by the requested party or by a person within its jurisdiction, and a statement that it has pursued all means available in its own territory to obtain the information with no positive results.

The requested party shall use all available measures to obtain the information, notwithstanding that it may not be necessary for the requested party’s own tax purposes.

The information must be provided within 90 days or proper explanation must be given. 

A request may be rejected where (i) the information is neither held by the authorities nor by persons within the jurisdiction, (ii) the applicant party would not be able to obtain the information under its own laws or (iii) providing the information would be against public policy, violate any protected secret or trade process, or violate attorney-client privilege.

The AEIT will enter in force 30 days after both parties give each other notice of the completion of the procedures required by their laws for the entry in force of the AEIT. Under Article 75 sub-section 22 of the Argentine Constitution, international treaties are to be approved or rejected by Congress, and those approved prevail over the law.

However, certain agreements are granted “fast-track” approval by the executive branch with no intervention by Congress, although there is an old debate among authors about the validity and hierarchy of these “fast-track” treaties, also known as “executive agreements”.

The latter method is expected to be applied to the AEIT with Cayman, as it has been used for approval of similar AEITs, and it usually takes only a few months.

The parties may terminate the AEIT at any time after one year from the date of its entry in force, by giving written notice of termination to the other party (in 2008 Argentina used a similar mechanism to terminate a 1982 double taxation treaty with Austria). Nevertheless, after termination the parties shall remain bound by the AEIT’s confidentiality provisions.

According to the OECD, Argentina has signed 20 double tax conventions and 14 Tax Information Exchange Agreements, while Cayman Islands has executed one DTC and 25 TIEAs. 22 of Cayman’s agreements meet the OECD standard while four agreements are yet to be reviewed by that international organisation, including the one with Argentina.

In the case of Argentina, 17 agreements meet the OECD standard, four do not, and 13 are still pending review. Argentina is the only South American country which has executed a TIEA or a DTC with Cayman.

Cayman has recently entered into similar AEITs with Guernsey, India, Japan, and South Africa, all of them executed in 2011 and not yet in force. Argentina has recently executed a similar AEIT with China, which is in force since September 2011.

Argentina has also signed similar AEITs with other low-tax jurisdictions such as San Marino, The Bahamas, Andorra and Monaco in 2009, and Jersey, Guernsey and Bermuda in 2011. Among these, only the agreements with Monaco and Bermuda are in force.

According to Argentina’s income tax regulation, Cayman, San Marino, The Bahamas, Andorra, Monaco, Jersey, Guernsey and Bermuda are listed as low-tax jurisdictions, therefore having a specific tax treatment. Removal from that list is possible where:
(i) a TIEA is in force with the relevant jurisdiction,
(ii) no bank secrecy or similar is possible to be alleged under its laws upon a request for information by the Argentine federal tax authorities and
(iii) its income tax regulation follows international standards.

In recent months, Argentina’s federal tax authorities have widely publicised the signing of the abovementioned treaties with low-tax jurisdictions, including the one with Cayman, as a move against tax evasion sought by some taxpayers doing business through those jurisdictions.

They have also announced that during the first quarter of 2011, Argentina made 61 requests for information to other countries on the basis of this kind of agreements, seeking mainly undisclosed income and assets belonging to Argentine taxpayers, including both companies and individuals. A wide range of businesses is being targeted by the federal tax authorities, from transfers of soccer players to agribusiness.

Argentine authorities see TIEAs, DTCs and Agreements for Cooperation and Mutual Assistance on Customs Matters, as one set of tools aimed at a better assessment of Argentine taxes related to business in other jurisdictions since they allow discovering assets and income not properly disclosed by taxpayers, together with schemes for triangulation of exports and other operations that have negative effects on tax collection.

Argentina’s federal tax authorities continue to expand their databases in order to assess actual income and expenses by taxpayers. Further, as of 31 October, 2011, those databases are used by the government as a tool in implementing monetary policy since authorisation by federal tax authorities is a condition precedent for almost every foreign currency purchase to occur in Argentina.

This new rule aims at avoiding purchases of foreign currency taking place with proceeds from income not properly reported to the federal tax authorities and it is grounded on the government’s goal of keeping purchases of US dollars under control.

As part of OECD procedures, Argentina will undergo a peer review of its legal framework and practices for the exchange of information on tax matters in 2012 and 2013, while Cayman’s peer review started in 2010 and is expected to end by 2012.

Argentina has had no major trouble in complying with the OECD tax standards. This is not the case for its neighbour Uruguay, which had some tough times in this regard and was listed in the 2009 OECD’s Progress Report on Implementation of the Internationally Agreed Tax Standard as a jurisdiction “not committed to the internationally agreed tax standard”.

However, Argentina is facing a troublesome situation with the Financial Action Task Force, the inter-governmental body aimed at developing and promoting national and international policies to combat money laundering and terrorist financing. Indeed, by October 2010 Argentina met only two of the 49 recommendations issued by the FATF for its member countries to follow, and the FATF’s latest report addresses Argentina as a jurisdiction which in June 2011 made a “high-level political commitment” to solve these issues although “strategic AML/CFT deficiencies remain”.

Knowledge of Cayman’s major advantages over other low-tax jurisdictions, such as Cayman’s judicial system being tied to the English courts, are still to be spread among many Argentine investors and practitioners.

Offshore registrations

Since 2005 the capital city of Argentina Buenos Aires, followed by most other jurisdictions in the country, restricted the registration of offshore companies in Argentina as follows:
Offshore companies which are somehow restricted to pursue their corporate purpose in their country of origin and want to achieve it in Argentina, may only do so if registered in Argentina as a local company (ie this kind of offshore companies cannot be registered in Argentina for doing business in the country as foreign companies).

Offshore companies which are somehow restricted to pursue their corporate purpose in their country of origin and are used as vehicles for investments in Argentina, may be registered in Argentina to conduct business in the country as foreign companies provided that they supply the names of their shareholders/partners and that those shareholders/partners prove having actual economic activity in their country of origin/incorporation (eg by evidencing ownership of sufficient assets in that jurisdiction as to pursue their target business).

Economic growth

After suffering a dramatic economic (and social) crisis in 2001 which included stepping out of the convertibility system set forth by the Convertibility Law, which established that one Argentine peso was equal to one US dollar, Argentina began a period of uninterrupted economic growth showing annual growth rates around 9 per cent in some of the recent years.

Last October, President Cristina Kirchner was re-elected to remain in office for a second four year period which, added to her previous presidential period and that of her predecessor and husband Nestor Kirchner, provide Argentina with 12 years (four of those yet to come) of a continued political and economic view characterised, in words of the government, by “social inclusion” and “substitution of imports by local production”.

Such plan has been grounded on numerous regulations among which two set of legal tools can be identified as most used by the government: (i) restrictions on imports (which have been occasionally challenged as violating some of Argentina’s commitments with the World Trade Organisation) and (ii) restrictions on the free flow of funds in and out of the country by means of foreign exchange regulation.

International exchange of information for tax (and customs) purposes is expected to continue increasing, not only grounded on tax collection purposes but also on the basis of the fight against money laundering and terrorist financing.

As the information above shows, Argentina is no exception to that trend and increasing exchange of information should be expected.

It is possible that both Cayman and Argentina saw compliance with OECD standards as the main goal for entering into the AEIT. Anyway, the AEIT will enable better tools for Argentina’s federal tax authorities to make more precise tax assessments on transactions related to Cayman.

Therefore, the AEIT will probably help Argentina see Cayman beyond the ‘Grisham effect’ and notice that the Islands attempt to adapt to the continuous evolution of global legal standards while maintaining uninterrupted development of an efficient tax model and modern corporate regulation that provide investors with incentives for doing business in the Islands.

However, no modifications to the Argentine regulation for off-shore companies, as described above, are expected.

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