The first step is to determine whether the cloud service provider is an Argentinean resident according to the law. If so, the resident will be taxable for its worldwide income.
For non-residents, the taxation treatment may vary depending upon the type and characteristic of the provided service. Consequently each transaction needs to be carefully analyzed to determine whether a taxable presence is triggered, or whether the Argentine-source income is taxed through a withholding rate.
There are further complexities associated with this new technology as it has different stages in regards to the server´s control, location and accessibility.
Generally speaking, foreign corporations are only taxed on income that is Argentine-source, through withholding taxes that apply at different rates depending on the nature and origin of the income. An analysis of the characteristics of the service provided, and its compliance with the local law regulating transfers of technology, will determine whether the service is subject to tax. If taxable, the rates may vary from 21 percent to 31.5 percent.
The local framework states that each type of transaction is presumed to have an Argentine-source taxable income without right of rebuttal (notional income).
Argentine income tax law does not provide a definition of taxable presence or permanent establishment. However, based on different notions contained in administrative precedents, case law and authors’ opinions the existence of a permanent establishment (PE) is likely to be determined by several factors such as the existence of:
- a domicile through which income-generating activities are carried out
- the intention of permanence.
The above mentioned legislation does not consider the implications of tax treaties. Such treaties generally provide a definition of what constitutes a PE and the appropriate withholding rates applicable to royalty payments (which may vary from 10 percent to 18 percent, if legal requirements are accomplished). Two tax treaties have included specific regulations for software-related matters.
Related party transactions
In accordance with Organisation for Economic Co-operation and Development (OECD) guidelines, Argentine transfer pricing legislation states that companies must determine their income for rendered services to related companies on an arm’s length basis (i.e. under similar conditions to those that independent parties would have agreed).
The complex nature of the cloud makes this a highly sensitive issue. A business model to support the aforementioned services could have the servers located in one country, the supporting services in another and the accessibility and control of the information performed through other regions.
The cloud could be impacted by Value Added Tax (VAT) depending upon the specifics of the service provided. Should the service be provided from Argentina to an Argentinean resident, the tax is levied at 21 percent.
However, if one of the parties involved in the transaction is situated outside the Argentine territory, two scenarios could be considered:
- Export of services, with VAT levied at a zero rate.
- Import of services, taxable at a VAT rate of 21 percent. In this instance the local customer will be responsible for paying the tax liability.
Additional indirect taxes (such as custom duties and turnover tax) may apply, depending upon the characteristics of the transaction involved.
The Law for the Promotion of the Software Industry provides a preferential regime granting tax benefits to the software industry for eligible activities including creation, design, development, production and implementation and modification of existing software systems.
Some of the benefits of this law include fiscal stability, tax relief and exemption from import duties on hardware and IT components.