Argentina
Andres Edelstein and Ignacio Rodríguez
PricewaterhouseCoopers
Argentina
Andres Edelstein and Ignacio Rodríguez of PricewaterhouseCoopers explain how the government has used tax incentives and an amnesty to encourage compliance
In 2008, the Argentine economy achieved its sixth consecutive year of growth. However, it has not been immune to the negative impact of the international financial crisis on the real economy.
Even though all the components of aggregate demand experienced positive movements, they were lower than the average changes of previous years, a fact that encouraged the implementation of government policies in an effort to drive consumption and investment.
The depression in domestic demand and the decline in activity levels eased the pressure on the general price level, which remained below the index of the previous year. In this sense, the official consumer price index showed a growth rate of 7.2% in 2008, mainly driven by a price increase related to spending on education, health and recreation. This figure represented a decrease of 1.2% on the 2007 index, due to the slowdown in domestic demand. It is important to bear in mind that the methodology used by the National Institute of Statistics and Census (INDEC) is still being questioned, as it shows a discrepancy between the official inflation rate and private consultants' estimates
The pillars that supported the expansion during the period after the 2001 crisis weakened in 2008. Despite this, considerable growth was achieved, because of, for example, the increase in domestic demand as well as an increase in commodities' prices in the first part of the year. However, from August 2008, the negative impact of the international financial crisis led to a substantial decline in those prices and domestic demand began to show signs of deceleration that seem to persist in 2009.
Gross domestic product
In 2008, GDP increased by 7% at constant prices. In spite of this significant growth, the rate of expansion of the Argentine economy declined because of both external and internal factors. Even if the positive trend persists through private consumption, which represented 65.3% of the GDP, there was a 2.3 % fall in its growth rate compared to last year.
Trade balance and payment balance
The surplus in the balance of trade was $13.2 billion, 19% greater than the prior year. This increase is essentially explained by the extraordinary prices of Argentine exported commodities in the first half of the year. However, in spite of recording a positive balance, reserves only rose by 0.45%, accumulating a total of $46.5 billion by March 2009. The lower growth rate can be attributed to the significant increase in the demand for dollars by the private sector and a capital outflow of about $20 billion, augmented by both the international crisis and internal policies, such as the social security reform and the conflict between the government and the rural sector.
Public and external debt
Total external debt at the end of June 2008 was estimated at $128 billion, 8.4% more than in the same period of the previous year.
External and domestic public debt until September 2008 rose to $145 billion, an increase of $7 billion compared to the same month of the previous year. This increase was based on the adjustments of the CER (Reference Stabilisation Ratio) and the exchange rate, the placement of new bonds and interest capitalisation.
Industrial activity
As in 2007, the monthly index of industrial output grew at a rate below the average of previous years, at about 5%.
The sectors that experienced higher growth were those related to the basic metal industry (8.4%), tobacco products (7.7%), automotive (11.2%) and non-metallic minerals (7.1%).
Exchange rate
Although the average exchange rate for 2008 was AR$/$3.16, it rose sharply at the end of the year to AR$/$3.45. During 2009 the exchange rate has been rising steadily, reaching AR$/$3.85 in August 2009.
Fiscal account
In 2008 the primary fiscal surplus topped AR$32.5 billion, equivalent to 3.5% of GDP, achieving the sixth consecutive year of primary surplus. Incomes grew by 35%, while expenses did by 37%. The fiscal solidity of the national public sector still relies on resources derived from international trade. Nevertheless, the downward trend in commodities' prices and the difficulties in accessing international financial markets have led the national government to implement policies with the purpose of finding new sources of income to meet debt maturities and, in parallel, articulate a series of programmes intended to motivate spending and investment.
Within this context, the government approved regulations consisting of:
- Setting up the Argentine Integrated Social Security System, financed by a single distribution system. The resources that made up the individual capitalisation accounts of the members within the privately funded system were transferred to the National Administration of Social Security (ANSES).
- Tax amnesty for tax and social securities liabilities up to December 31 2007, including a repatriation regime for unreported funds placed abroad.
- The passage of Law 26,477, repealing article 23 bis of the Income Tax Law, which provided for a gradual phase-out of personal allowances and the fixed deductible amount for purposes of the personal income tax, contingent on income growth.
Tax incentives
Through the enactment of decree 2014/2008 and resolution 1312/2008, the Argentine government implemented new promotional measures for the oil and gas industry sector with the aim of encouraging the oil production and the increase of oil reserves as well as fuel and/or gasoline production.
The incentives are granted in two programmes called oil plus and oil refinery plus, that provide relief from several disincentives contained in the Argentine tax system directly affecting this industry. One example of these disincentives is the export duties of 45% for oil and 100% for gasoline.
The benefits consist of transferable tax credit certificates that can be used to pay export duties on crude oil and gas. The certificates are granted quarterly when a company's effective production exceeds its base production. Tax credit certificates are also granted for the expansion of oil reserves relating to the reserves of the previous year.
A special committee was specifically appointed to control, supervise and evaluate how the programmes are working and whether the applicants qualify for the benefits or not. In other words, the incentives are not automatic since government approval and several formal and substantive requirements must be met.
Another benefit granted is that the works performed during the exploration and/or exploitation of new oil areas, the expansion of production facilities and the incorporation of new technologies to exploit and/or develop existing oil areas that increase their capacity, may qualify as critical infrastructure work under the terms of the promotional regime enacted in early 2008 through law 26,360. This implies that the applicants can also qualify for an early recovery of VAT related to expenses and investments made or alternatively for an accelerated depreciation system for income tax purposes.
Tax amnesty
In mid-December 2008 the Argentine Congress approved law number 26,476 drafted by the executive branch through which a tax amnesty regime was granted to taxpayers who failed to comply with their federal tax and social security obligations, allowing them to regularise their situation at a much lower cost, even when the non-fulfillment has been already disputed by the tax authorities. A similar measure was last taken in Argentina more than seven years ago.
The obligations covered by this regime are those whose due date for filing and/or payment fell on or before December 31 2007. Interest accrued on unpaid tax obligations, which is determined at the annual rate of 24%, is capped at 30%, 40% or 50% of the principal amount. The sooner the taxpayer files an amended tax return, the higher the discount.
Penalties that usually range from 50% to 100% on the unpaid tax amount depending on the obligation failed are entirely waived for taxpayers that file amended tax returns and pay the tax due at the regular tax rates under the amnesty regime. Other significant penalties related to non-compliance with formal tax obligations are also waived.
To comply with this regime, a first payment of at least 6% of the total amount due has to be made and the remaining balance can be cancelled in as many as 120 monthly instalments, with a 0.75% monthly interest rate.
As part of the same tax package, tax incentives were also enacted, allegedly to encourage Argentine companies and/or individuals to repatriate their foreign earnings and hire local workers.
Instead of paying 35% income tax, among other taxes, plus interest and penalties, these incentives provide various flat tax rates for companies and/or individuals that repatriate foreign earnings and reinvest them locally, including a 1% rate for funds invested in productive assets or real estate; a 3% rate for funds invested in bonds and a 6% rate if the funds are placed in cash accounts. Should Argentine residents maintain their assets abroad but elect to declare them an 8% rate would be assessed. Although some formal requirements and restrictions apply, taxpayers who elect to pay the special tax do not have to report the source of their assets and will not be criminally charged by the government, except in connection with any money laundering, drug and weapons trafficking and other blacklisted activities. However, none of the provisions of this regime shall release financial institutions or other obligors, such as public notaries, accountants, managers, auditors, directors or other officers, from the obligations envisaged in the legislation on the prevention of money laundering, financing of terrorism or other crimes foreseen in non-tax laws, except for tax evasion or participation in tax evasion.
Moreover, companies that hire new staff will get a tax break. For the first 12 months after employment starts, employers will have to pay only 50% of the social security contributions. This will be increased to 75% for the second 12 months. This regime would not be applicable to employees who already work for the employer or for employees that are rehired.
Companies willing to get these benefits may not reduce headcount in the next two years after the benefit is granted.
The regimes collectively referred to as Tax Agreement (Acuerdo Fiscal) are in force until August 31 2009, although the executive branch is entitled to postpone that date for up to six months.
Finally, the generally applicable statute of limitations of five years has been extended since the new law established a one-year suspension for these purposes.
Local tax burden rises
When the Federal Fiscal Pact was enacted in the 1994, the aim was to reduce the overall tax burden for companies developing activities in Argentina. However, provincial taxes have become more significant and their rates have increased.
For instance, as from August 2008, the province of Buenos Aires has increased standard rates for trade (generally 3%) to 4.5% for taxpayers that have a certain level of annual income, more than $9 million. Furthermore, primary production (usually exempt when the activity is developed in a plant located within the province) is now subject to tax at the rate of 1% if the taxpayer's annual income is more than around $17.5 million.
On the other hand, the city of Buenos Aires government increased turnover tax rates for most of the activities (manufacturing, trade, services, construction activities and so on) from January 2009. Other provincial administrations such as those of Santa Fe and Córdoba have acted in a similar manner.
Additionally, the city of Buenos Aires reinstalled the stamp tax. This provincial tax applies principally to contracts and agreements, deeds, mortgages and other obligations, agreements and discharges of a civil, financial or commercial nature of which there is written evidence or, in certain instances, that are the subject of entries in books of account. While this tax had remained applicable only to real estate transactions, now it takes in most transactions at the general rate of 0.8% – though rates are higher for specific instruments.
Andres Edelstein (andres.m.edelstein@ar.pwc.com) and Ignacio Rodriguez (ignacio.e.rodriguez@ar.pwc.com) of PricewaterhouseCoopers