The new Argentine government holding office as from December 10, 2015, represents a departure from the political cycle that ruled the country for the last twelve years. The new administration intends to strengthen local institutions and review policies in different areas: economy, healthcare, security, justice, foreign relations, etc., as well as analyse the implementation of new ones.
The deteriorated macro-economic environment has conditioned the country’s performance in the last years 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. During the last years the general business environment in Argentina was conditioned by important regulations and restrictions that imposed significant difficulties to cement straightforward transactions.
Although M&A transactions need to be viewed in a holistic way and deserve to be tackled from many angles and perspectives – regulatory matters, tax issues, macro-economic conditions, legal aspects, financial and accounting, etc. – the purpose of this contribution is to only focus on the foreign exchange restrictions experienced during the past years by investors and companies when trying to enter into a transaction locally.
During the past years, in fact, one of the most important restrictions to attract foreign investments were the strict Central Bank regulations that made it difficult for local and foreign investors to actually perform, amongst other, M&A transactions. Since 2002, highly restrictive currency exchange controls were in place alongside import restrictions aimed at controlling the volatility of the exchange rate and trying to defer the outflow of funds from Argentina.
After October 2011, restrictions were strengthened even further. The peso exchange rate – artificially sustained – led to the rise of multiple exchange rates such as bond swap rates, informal market rates, etc.
Below is a summary of the initial measures taken by the new administration to free up the exchange market. It is important to note that foreign exchange rules were not abrogated but rather simplified.
An important devaluation of the Argentine currency took place in December 2015. In fact, while the official exchange rate (selling type) published by the Argentine National Bank on December 16, 2015, was $1 = AR$ 9.835, the next day the peso had plummeted to AR$ 13.95 – a drop of almost 42%.
Payments for imports of goods and services can now be made without any limit or the Central Bank’s prior consent. This disposition is applicable to new payables. For accumulated goods and service debts prior to December 17, 2015 there is a particular schedule for repayment over time. The purchase of foreign currency by individuals and companies for treasury purposes including investments abroad was reinstated, with a cap of two million dollars per month.
The mandatory deposit (30%) on currency coming into Argentina – applicable to loans granted by foreign parties as well as other transactions – was eliminated. Financial loans are not required to be settled into Argentina. However, the requirement to provide evidence showing the inflow of funds remains in effect for the subsequent payment of principal and interest through the foreign exchange market. The minimum term for repayment was reduced from 365 to 120 days and advance payment was allowed as long as the 120-day term is respected.
“Blue chip swap transactions” were used by local companies and individuals during the years of restrictions to allow flow of hard currency in and out of the country through the purchase in one market and subsequent sale in the other market of public traded bonds or shares. It is no longer required that the asset transacted remain in the seller’s portfolio for at least 72 hours.
Export duties on agricultural products were abrogated, except for soy where the rate was reduced from 35% to 30%. Also, export duties for industrial and mining products were eliminated.
Informal restrictions on dividend and profit remittances have been eliminated as well. Accumulated profits from prior fiscal years would not face any restriction either. In terms of repatriation of foreign investment, it must be noted that in the recent past, foreign investors were required to prove the inflow of funds in order to be allowed to repatriate direct investment in the country, i.e. reduction of capital, liquidation, or participation sale. A first interpretation of current rules in force appears not to require such proof any longer.
The following preliminary conclusions for the local transactional environment may derive from the new set of rules or the amendment to the existing ones explained in previous paragraphs.
The devaluation of the Argentine peso implied a reduction in the value of the Argentine companies and assets in dollar terms whilst enhancing the competitive equation of export driven enterprises in areas such as agribusiness, oil and gas, mining, service industry, etc.
Also, new central bank rules are freeing up the flow of capital in and out of the country reducing prior restrictions to import goods, pay for services rendered abroad, repatriate profits, leverage investments, etc.
Certainly this relaxation of central bank measures was a “condition precedent” for any investor to evaluate a transaction in Argentina. However, still new regulations are necessary to complete this primary goal or objective of fostering foreign investment and enhancing local companies’ competitive landscape.
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 strong expertise over 21 years in international taxation and mergers and acquisitions. He is highly experienced in acquisition structures for inbound and outbound investments, buy side, sell side, and restructuring services.
Mr Caveggia has served numerous clients in a variety of industries and has also been involved in many buy side and sell side due diligence procedures. He has given lectures at national universities and is a frequent speaker at tax seminars. He has also written several articles dealing with Argentine tax issues.
Marina Kulik is a certified public accountant graduated from University of Buenos Aires. She is currently a senior manager of the Transaction Tax Area in Argentina. She joined the tax division of EY Argentina in 2000. Ms Kulik has developed a strong experience in tax advisory services, tax planning, tax free reorganisations, tax compliance, and tax audits.
Milagros Paz is a certified public accountant graduated from the University of Buenos Aires. She is currently a senior manager of the Global Trade division and has over 15 years’ experience in services related with customs issues and foreign exchange rules. She worked with clients from different industries, such as pharmaceutical, automotive, retail, and consumer products.