In November 22, 2015 Argentine voters elected a new president who will hold office for the next four years as of December 10. The elected president represents the opposition to the political cycle that ruled the country for the last twelve years. The incoming administration intends to review policies in different government areas: economy, healthcare, security, justice, foreign relations, etc., as well as analyse the implementation of new policies.
The current deteriorated macro-economic environment of the country will condition the new government and, consequently, new regulations are expected to be enacted aimed at promoting the local and foreign investment needed to strengthen employment and improve the country’s infrastructure and thus facilitate the production of goods and services.
There is also general agreement amongst politicians, scholars, and technical experts that, in order to attract investment and foster private employment, the current tax system needs an overhaul.
As of the date of this contribution important measures are still being expected by the market on the economic and tax fronts. Consequently, the purpose of this article is to mention certain general tax policies that the party now elected to govern the country mentioned during its campaign towards presidency. It is important to mention that the implementation of tax policies and rules, or pieces of legislation, depend on different circumstances such as (i) evaluation of the opportunity to implement the measures according to the national and international context and (ii) congressional approval of the initiatives presented by the executive branch.
Short Term and Long Term
The current economic scenario demands specific focus on urgent matters. Some of the short term initiatives include the following:
- Inflation: During the last few years, the average inflation rate in Argentina ranged from 20% to 35% (as estimated by private consultants). The lack of tax adjustment for inflation distorted federal taxation. Government efforts will be urgently required to reduce inflation as it is deemed the most harmful and regressive tax since it affects the purchasing power of all social sectors. The market disregards the implementation of the adjustment for inflation for tax purposes in the near future because such implementation may heavily impact the tax revenue of the new administration.
- Export duties on grain: These duties are currently levied on the export for consumption, i.e. the definitive exit of merchandise from Argentina. The rate of duties on grain exports ranges from 20% to 35%. Immediate elimination of export duties on wheat and corn is expected, as well as the segmented reduction of export duties on soybeans. Such elimination will be gradual due to the significant impact that it will have on tax revenues.
- First-job plan: According to a programme under analysis, the first 60 months in the work life of Argentine citizens would be tax-exempted, i.e. compensation paid to those persons shall not be subject to Income tax, social security contributions by employers (about 23%/27% over gross salary), or contributions by employees (about 17%).
- Income tax payable by salary earners: Over the last years this tax impacted significantly on salaries because government did not adjust deductible limits and income brackets for inflation. Consequently, salary increases were immediately and significantly captured by the tax. The new government intends to increase the minimum income subject to income tax for employees and taxable income brackets. It is also proposed to adjust such minimum income automatically taken into account the salary variations, so as to reduce tax pressure on workers.
- Tax promotion: Although generally mentioned during the campaign, it is expected that new tax promotion programmes would be encouraged for the development of certain economic activities, new investments in infrastructure works, and/or the production of capital goods.
Although not specifically tax related, foreign exchange controls are also evaluated by the new administration. The last administration imposed important restrictions on the inflow and outflow of funds which triggered scarcity of foreign and local investment. The new administration proposes to deregulate Central Bank restrictions so as to again generate trust amongst different economic players.
In the long term, the following strategy would need to be evaluated in order to enhance the development of local companies and individuals, and foster economic activity:
Even if inflation were finally brought under control by mid-term, the tax adjustment for inflation would still need to be enacted to allow taxpayers to adjust the basis of assets, tax losses, and balances in favour. Otherwise, capital gains taxes would heavily impact gains in the future.
Also, the current tax system is composed of different taxes that discourage investment or do not yield significant revenues to the government. There is a general consensus in the market place that Alternate Minimum Tax and Personal Assets Tax should be abrogated because these taxes yield little revenue whilst they do discourage investment and savings. Moreover, taxes such as the tax on bank account transactions should be converted into a payment on account of income tax in order not discourage the use of the banking system.
Finally, federal and local indirect taxation needs attention. In terms of federal VAT, the need to evaluate the triggering of the taxable events on a cash basis would allow companies to improve their working capital needs. On the other hand, provincial taxes such the Tax on Gross Revenues and miscellaneous stamp taxes should be replaced by less regressive taxes such as a local VAT that would allow provinces not to lose revenue and, simultaneously, reduce the cascading of local taxation in value chains.
Team work and social consensus – social agreement between the business community, trade unions, and the different political sectors – are the basic principles of the elected president’s focus. We understand that the tax measures previously mentioned, and any other future tax policies, must lead to a genuine distribution of income among citizens whilst fostering economic development and investment.
These measures must be evaluated and eventually enacted within a context of consensus, transparency, and legal certainty to encourage long term and productive investment in the country. This is a new opportunity for Argentina to focus on sustainable economic growth over the next years.
About the authors
Sergio Caveggia is a tax partner currently in charge of the Transaction Tax Area in Argentina. He joined EY Argentina in 1994 and has developed a strong expertise over 21 years in international taxation and mergers and acquisition matters. Mr Caveggia is highly experienced in acquisition structures for inbound and outbound investments, buy side, sell side, and restructuring services within the Transaction Tax Area.
Mr Caveggia has served numerous clients in a variety of industries and has also been involved in practically all buy side and sell side due diligence procedures performed by the firm over the last ten years. Mr Caveggia has given lectures at Argentine universities and is a frequent speaker at tax seminars. He has also written several articles dealing with Argentine tax issues.
Mr Caveggia is a certified public accountant with a degree from the University of Belgrano in Argentina. He obtained his Tax Specialist’s Degree at the University of Belgrano and has a postgraduate certificate in Business and Management from Universidad Católica Argentina (UCA). Mr Caveggia is a member of the Professional Council of Economic Sciences of Buenos Aires and the Argentine Fiscal Association.
Flavia Cimalando is a senior manager of the Transaction Tax Area in Argentina. She joined the tax division of EY Argentina in 2000. Ms Cimalando has developed strong expertise over fifteen years in tax advisory services, tax planning, and due diligence for local and international companies. She specialises in international and local business acquisitions and M&A consulting.
Ms Cimalando is a certified public accountant and has a Bachelor Degree in Business Administration from the University of Buenos Aires. As to her teaching experience, Ms Cimalando worked as an assistant professor of Tax Theory and Technique I at the School of Economics of the University of Buenos Aires during the last seven years. She has also written several articles dealing with Argentine tax issues.