Even though Argentina and Chile are both members of the multilateral OECD Global Forum on Tax Co-operation (OECD Global Forum), tax treaty relations are still grounded in bilateral agreements and as a result issues of tax avoidance, fiscal evasion and other treaty abuses are managed at that level.
Today these two South American neighbours have made public their inability to resolve the problems with their long-standing tax treaty and so the Argentine government has announced that it will unilaterally terminate this 1976 agreement on December 31, this year.
In public international law circles the decision to termination a treaty is a drastic one usually indicative of a significant deterioration in diplomatic relations. Unfortunately, this is not the first time that Argentina has resorted to treaty termination as a means of managing the operation of its bilateral tax compacts. In fact it has recently cancelled tax treaties with Switzerland and Austria, also members of the OECD Global Forum.
The Argentina-Chile Tax Treaty uses the ‘exemption’ method to avoid the double taxation of their residents in respect of income taxes, and in the case of Argentines investing in Chile, housing taxes, as long as the Argentine resident is paying taxes in his home state.
Six Months to Try
According to the termination clause in the treaty the parties have six months to try to renegotiate a new agreement and even though they have been in the process of renegotiation for several months Argentine ambassador in Chile Ginés González remains confident that it can reach a new deal that will more accurately reflect modern fiscal realities.
If the parties fail to agree a new treaty then presumably there will be no legal basis for the exchange of taxpayer information in accordance with the international standard because the 2006 Administrative Agreement on Exchange of Tax Information on a Reciprocal Basis which complements the existing treaty will not be applicable either in the absence of the underlying tax treaty.
OECD Global Forum ‘Fallout’?
Argentina and Chile are major trading partners and given the real concerns about fiscal evasion and elusion it would seem that this scenario is the best example of the need for an instrument to provide for tax co-operation whether using a tax treaty or a tax information exchange agreement.
Indeed, the existence of other agreements that Argentina and Chile may have with other OECD Global Forum members providing for exchange of tax information where the level of trade with these partners is miniscule or the likelihood of a request being made remote is irrelevant in a determination about whether there is in fact effective tax information exchange in Chile and Argentina.
Chile has already passed its Phase I Assessment with its Phase II Assessment scheduled for early next year. The OECD Global Forum has agreed to allow Argentina to undergo a combined Phase I and II Assessment later this year. It will be interesting to see how the OECD Global Forum Peer Review methodology treats this termination in the event that no replacement agreement is confirmed before either assessment starts.