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ARTICLE OF THE WEEK

By PriceWaterhouseCoopers

Transition rules for certain 2007 transactions

The Flat Tax is calculated and paid on the basis of the calendar year, by means of an annual tax return that is required to be filed by no later than March 31st of the following year.

The following concepts can be credited against the Flat Tax:

1. The carryover of prior year Flat Tax credit attributed to excess Flat Tax deductions over Flat Tax income, as updated for inflation, multiplied by 17.5% (16.5% for 2008 and 17.0% for 2009).

2. The 17.5% rate (16.5% in 2008 and 17.0% in 2009) applied to the payments classified as taxable wages (on which withholdings have been remitted to the tax authorities) and is also applied to the employer contributions to the social security system.

The wages and social security contributions accrued prior to January 1, 2008 will not be eligible for the credit, even if the payment is made after that date.

3. An annual 5% rate is applied to the amount resulting from multiplying the net tax value of investments in fixed assets, and certain deferred charges and expenses as of December 31, 2007, for assets acquired from 1998 to 2007, by the factor of 0.175 (0.165 in 2008 and 0.17 in 2009), for a 10 year period. This credit does not apply to new assets acquired from September 1, 2007 through December 31, 2007, for which the taxpayer elects to depreciate the cost of these assets on a straight line basis over three years.

In the case of mergers, the surviving corporation after the merger will continue applying the pending tax credit generated by the disappearing entities.

In case of a spin-off or split-up, the original entity (escindente) and the newly created spun-off or splitoff entity (escindida) or entities will divide the pending credit, in the proportion in which to the investments (fixed assets and deferred charges) and the value of the inventories, are divided.

This tax credit will be updated by the inflation factor corresponding to the period from the month of December of 2007 to the sixth month of the fiscal year in which the credit is claimed.

4. The Income Tax of the taxable year, the Income Tax imposed on dividends in excess of the CUFIN, as well as the Income Tax paid abroad with certain limits. In 2008, taxpayers other than individuals, will be able to credit the Income Tax paid in 2006 and 2007 on dividends in excess of the CUFIN, whenever they have not been credited previously.

The credit for Income Tax is Income Tax that is paid "with respect to" the taxable year, and in the case of Income Tax on dividends the credit will be Income Tax paid "during" the taxable year. The creditable Income Tax is the tax that is indeed paid after reductions for credits and other reductions in terms of the tax provisions, with exception of the IDE credit or when the obligation has been satisfied by compensating the obligation with other favorable tax balances of the taxpayer.

5. The advance Flat Tax payment obligations paid in the taxable year. If it is not possible to obtain this credit, (e.g., advance tax payments of Flat Tax exceed annual Flat Tax obligations), these favorable balances can be applied against the annual Income Tax of the taxpayer, and the taxpayer can request a refund in the case of any remaining favorable balance.

In relation to the Flat Tax credit for the excess of Flat Tax deductions over Flat Tax income, the taxpayer may credit this amount against its Income Tax of the same taxable year in which the Flat Tax credit originated, although this can not give rise to a refund. Any remaining favorable balance can be credited against Flat Tax of the following 10 taxable years or until it is fully utilized, if earlier.

Taxpayers having concessions for the exploitation of goods belonging to the public domain or the benefit of a public service (such as mining concession), will be able to apply the credit for excess Flat Tax deductions over Flat Tax income on a carryforward basis for the number of years that its concession lasts, rather than the normal10-year period.

The amount of the credit determined in a taxable year will be updated for inflation multiplying the credit by the inflation index corresponding to the period from the last month of the first half of the taxable year in which the credit was determined, until the last month of that taxable year. The part of the credit of previous taxable years already updated pending its utilization, is updated by multiplying the credit amount by the inflation index corresponding to the period from the month in which it was last updated, and to the last month of first half of the year in which it is credited.

This credit can not be transferred to any other person, even in the case of a merger.

In case of spin-off or split-up, the credit will be able to be divided between the previously existing entity (escindente) and the newly created entities (escindidas), in proportion of the value of the inventories and accounts receivable, or if none, of the fixed assets.

Advance tax payments

Taxpayers are required to make monthly advance Flat Tax payments, on account of the Flat Tax due for the entire taxable year, on the 17th of the following the month for which the payment corresponds. The advance payments will be based on a determination of the total accumulated Flat Tax gross income from the beginning of the taxable year and until the month for which the payment is being determined, minus the authorized Flat Tax deductions for that same period. The cumulative month-to-date net amount for the taxable year is then multiplied by the 17.5% tax rate (16.5% for 2008 and 17.0% for 2009).

The following concepts can be credited against the Flat Tax advance tax payments:

1. The credit obtained by applying the 17.5% tax rate (16.5% for 2008 and 17.0% for 2009) to the excess of the Flat Tax deductions over Flat Tax income, up to the amount of the advance tax payment that corresponds to such period.

2. The credit determined when applying the tax rate of 17.5% (16.5% for 2008 and 17.0% for 2009) to the amount of the taxable wages and employer contributions to the social security system paid in the period for which the payment corresponds.

This credit will not be applicable to wages accruing prior January 1, 2008, even when the payment of these wages (or applicable payroll withholding tax) is made after 2007.

3. The credit on investments in fixed assets and certain deferred charges and expenses acquired from January 1, 1998 to December 31, 2007, previously mentioned, but the monthly advance taxes can only be credited based on the proportion that the number of months included in the advance tax payment period bears with respect to 12 months.

4. An amount equal to the advance tax payment of Income Tax that corresponds to the same period of the advance tax payment of the Flat Tax.

5. The advance tax payments of the Flat Tax paid for prior months of the same taxable year.

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