Tax Treatries in South America

Issues related to tax treaties in Argentina

The tax treatment of FX gains and losses under the OECD model tax convention is not completely clear. However, from the OECD commentaries it seems that FX gains are embedded in the capital gains tax.

In ruling 925/2005, the tax authority analysed the following case: an Argentine resident purchased a bond issued by the Austrian government at the beginning of the fiscal year and sold it in the same fiscal year.

For the sake of simplicity and to illustrate the reasoning of the tax authority, we assume that: (a) the Argentine resident purchased the bond at 100 euro (when the exchange rate was 1 euro = 1 peso); (b) the Argentine resident sold the bond at 105 euro (when the exchange rate was 1 euro = 3 pesos). The Argentine resident argued that the difference between the sale price (315 pesos) and the purchase price (100 pesos) was a capital gain exempt from Argentine taxation according to the tax treaty. The income of 215 pesos was exempt, according to the taxpayer.
The tax authority split the transaction and considered that 200 pesos was an FX gain arising from the devaluation of the peso and only 15 pesos was a capital gain arising from the sale of the bond (105 euro - 100 euro = 5 euro at the exchange rate of 1 peso = 3 euro).

The tax authority considered that capital gains arising from the alienation of bonds were exempt in Argentina pursuant to section 13(4) of the treaty, and FX gains were subject to tax in Argentina pursuant to section 7 of the treaty.

To reach this conclusion, the Argentine tax authority held that income arising from FX (even when the bonds are sold) was not covered by section 13(4) of the treaty because the FX gain did not originate in the sale of the bonds. It originated in the fluctuation of Argentine currency against foreign currency; thus the FX gain was generated only in Argentina and not in Austria; consequently, there was no possibility of double taxation.

The classification of business income may be challenged because section 7(7) of the treaty provides that where profits include income which is dealt with separately in other articles of the convention, then the provisions of those articles should not be affected by the provisions of this article. FX gains may be considered as capital gains.

The commentaries of the OECD model mentioned that capital gains due to depreciation of national currency were covered in section 13:

"The article does not distinguish as to the origin of the capital gain. Therefore all capital gains, those accruing over a long term, parallel to a steady improvement in economic conditions, as well as those accruing in a very short period are covered. Also capital gains which are due to depreciation of national currency are covered. It is, of course, left to each State to decide whether or not such gains should be taxed."


It may be objected that, since there is no gain which Austria is entitled to tax because the Argentine devaluation has no impact in that country, the treaty is not applicable. However, it is generally assumed that the country of residence will exempt this tax.28 Furthermore, the commentaries of the OECD model seem to indicate that the issue is not clear only when the foreign exchange gains are not connected with the alienation of assets so when they are connected with the alienation of assets, they should follow the capital gain treatment.