Argentine Tax Reform “The times they are a-changin'”
ARGENTINE TAX BILL: A STEP TOWARD STRUCTURAL REFORM
With a resounding victory in the mid-term elections behind it, the Macri Administration now enters the promised phase of meaningful Argentine tax reform. A first step is the administration’s release of a significant tax reform package, together with proposed reductions in employment taxes and social security contributions. The government has pitched the reforms as a means “to promote competitiveness and to attract investment for sustained growth”. While the Macri Administration does not have legislative control, we expect the reform package, with certain modest changes, to be enacted into law by the end of the year.
Let us take a quick look at the highlights of the tax reform, along with editorial commentary to contextualize the reforms.
Corporate Income Tax. The package would reduce over four years the rate applicable to undistributed profit from 35% to 25%. But, the government will restore a tax on dividends (10%). The change is a pretty transparent attempt to encourage reinvestment over dividends. Once implemented, the corporate income tax rates through 2021 will look like this:
Value Added Tax (VAT). The proposed reforms make two significant adjustments to VAT (currently levied at 21%). First, the proposed bill would allow companies making investments to recover VAT credits quickly. If VAT credit is not absorbed within six months of accrual, the taxpayer can use it as a general credit against any other federal tax or seek its reimbursement. That looks good for encouraging investment, especially given the Argentine Government’s history of slowing the return of VAT.
On the other hand, the reform package will levy VAT on “digital services” provided from sources abroad. As this would require taxing of a non-resident, collection will be made by the Argentine residents “consuming” the service and paying the service provider, in the form of a withholding. Yes, the service is “consumed” locally but levying VAT on a non-resident is not particularly trendy in today’s digital world. Look for the Argentine Netflix bill to increase 21%.
Tax on Banking Transactions. The reform package would eventually allow the tax (0.6% on debits and credits) to be fully creditable against income tax. Currently, only 34% of amounts withheld from credit transactions may be used by the taxpayer as a tax credit. While this offers some relief, sustaining this distortive tax does not do much to advance the goal of encouraging residents to transact in the banking system rather than use cash.
Provincial Taxes. The bill calls for a multilateral agreement between the federal government and the provinces to reduce GST (typically ranging between 2%-4%, depending on the activity) and to reduce or even eliminate stamp tax (often around 1%-2%). The agreement seeks to remove provincial and municipal taxes that work as “domestic tariffs,” which should reduce the burden of doing business in Argentina.
This tax reform package should be considered an initial step toward structural tax reform. Nonetheless, a successful policy outcome of this initial step depends largely on legislating other reforms to reduce payroll costs. The initiative remains far from a wholesale revamping of one of the world’s most oppressive taxing systems but does show a willingness to engage in a much-needed conversation between the federal and the provincial governments about fostering business activity and reducing evasion. As such, it is consistent with the Macri administration’s gradualist strategy, one that takes heed of a country’s history that has largely rejected abrupt market reform.
Source: Wiener Soto Caparros
For more information on the above or on tax matters in general, please contact Alfredo Bisero Paratz ([email protected]) and Irina Mizrahi ([email protected]). The foregoing article is based on publicly available information and given for informational purposes only. It is not intended as legal advice or as a comprehensive analysis of the matters referred to herein.