EY Argentina: New Tax Bill for Argentina’s Congress to ‘Incentivise FDI’

Milei’s new administration considers the realities of reforming a troubled economy.

When Right-wing economist Javier Milei took over Argentina’s presidency, he also took on the challenge of transforming a country in the grip of severe economic challenges.

The international business community has taken a keen interest. Milei’s presidency pledges to redefine the established norms of his country’s economic landscape, emphasising radical tax reform and macro-economic stabilisation.

Argentina had been in economic turmoil, with high inflation, rising public debt, stagnant wages, and a raging unemployment rate. This was the picture of a nation in distress, with an unfavourable business environment, erratic economic policies, and steep tax obligations. These challenges resulted in a 200 percent annual inflation rate in 2023 and a poverty index of over 45 percent.

Early Actions

Milei’s administration wasted no time introducing reforms aimed at corporations and individuals. The first, a tax reform bill, was rejected by Congress. Milei said that ruined an opportunity to stimulate economic recovery and attract foreign investment. He remains committed to his vision of tax reduction and simplification.

Taking on Inflation

Inflation is the most pressing issue to be addressed. From December 2023 to March 2024, it dropped from 25 percent a month to 11, and at the time of writing it is still falling. Market expects a single-digit inflation rate for the second quarter of 2024.

Investment Climate

Improving the investment environment is a key goal of Milei’s administration. The proposed transformations intend to make Argentina a lucrative investment hub for oil and gas, mining, agribusiness, technology, and infrastructure.

One significant measure is the Incentive Regime for Large Investments (Regimen de Incentivo para Grandes Inversiones, or RIGI, in Spanish). Although this was withdrawn by the executive branch in January 2024, in early April a new bill, including such a regime, was sent back to Congress for consideration.

The purpose is to give those who commit to investments of over $200m with predictability, stability, legal certainty and protection of acquired rights in tax, customs, and foreign-exchange matters.

The RIGI focuses on all sectors of the economy, across the country. It aims to encourage national and foreign investment, develop and strengthen the competitiveness of various sectors, increase exports, promote job creation, and generate welcoming conditions for investors.

The regime will be available for two or four years after it comes into force and will apply to sole-purpose vehicles (SPVs, or VPUs in Spanish) for large investment. The bill defines “large” investments as those involving the acquisition, production, construction and/or development of assets to be used for activities of the sectors included in the RIGI. The investment amount in computable assets is determined by regulations, and will, for the first and second years, be subject to a minimum.

Acquisition of companies may also be computed as “large investment” under certain conditions.

In order to obtain tax stability, investments must be long-term and have a ratio of no more than 30 percent between the current value of expected net cashflow — excluding investments — and the net present value of the investments during the first three years.

Tax and customs incentives:

• SPVs will be subject to a 25 percent income tax rate (as opposed to the general rate of 35 percent).
• An accelerated amortisation mechanism may be applied.
• Net operating losses (NOLs) that cannot be absorbed by taxable profits from the same period may be carried forward indefinitely, and deducted from taxable profits in subsequent years. After five years, any remaining losses may be transferred to third parties.
• NOLs can be adjusted for inflation.
• Dividends distributed more than three years from the closing of the fiscal year in which the profits were realised are subject to a zero percent withholding tax. This applies only for profits realised in fiscal years that close more than four years from the date of adhesion to the RIGI.
• When the SPVs receive invoices for the purchase, construction, manufacture, elaboration or definitive importation of fixed assets or for investments in infrastructure and/or services necessary for their development, they may pay the VAT with tax-credit certificates. The regulations establish the requirements, procedures and conditions for the issuance, delivery and/or transfer of the certificates.
• This particular mechanism would enhance working capital because no cash disbursement would be needed to fund VAT upon purchases of goods and services.
• SPVs may claim an income tax credit for the entire amount paid and/or collected for the tax on debits and credits in bank accounts.
• Imports of capital goods, spare parts and components made by the SPVs are exempt from import duties, statistics and destination verification, and from any regime of reverse withholding, prepayment or withholding of national or provincial taxes.
• Exports made by the SPVs will be exempted from export duties after three years from the date of adhesion to the RIGI.
• Thin cap rules included in the income tax law should not apply to SPVs in the first five years following the adhesion to the RIGI.
• Import and export restrictions cannot be imposed.
• SPVs may choose to keep their accounting records and financial statements in US dollars, following NIIF standards.
• Simpler procedure for reorganisations carried out for the purpose of establishing an SPV.

Foreign Exchange Incentives

The export collections made by the SPVs are exempt from being entered and settled in the local Official Foreign Exchange Market in the following percentages:

• 20 percent of the collections from the first year as from the date of adhesion to the RIGI
• 40 percent of the collections from the second year as from the date of adhesion to RIGI
• 100 percent of the collections from the third year as from the date of adhesion to RIGI.

These funds in the referred percentages are to be freely available.

SPVs will not be obliged to enter and/or settle the foreign currency of other concepts related to the project (capital contributions, loans, etc) in the official foreign exchange market.

Exchange regulations that establish, or may establish, restrictions or prior authorisations for access to the official foreign exchange market for (i) the payment of a loan principal and other financial indebtedness with foreign countries, or (ii) the payment of profits, dividends or interest to non-residents, among others, will not be applicable under certain conditions.

Stability

SPVs that adhered to the RIGI will benefit from a 30-year stability period in tax, customs and foreign exchange matters. The incentives may not be affected either by the revocation of the current regime or by the creation of tax, customs or foreign exchange regulations more burdensome or restrictive than those contemplated in the RIGI.

New taxes created on or after the adhesion date, and increases in existing taxes, will not be applicable to the SPVs.

The foreign exchange regime in force at the date of adhesion to the RIGI may not be affected by exchange regulations that may be issued establishing more burdensome conditions.

A special procedure is provided for contesting infringed stability.

Looking Forward
These proposed economic reforms bring a sense of cautious optimism to Argentina’s economic outlook.

The new Tax Bill recently sent to congress includes an incentive regime for foreign and local investments. A 30-year stability period would provide security for investors’ projects. If this bill is passed by Congress, it is expected that the country will receive FDI in many competitive sectors, with a particular boost for the economy.

About the Author

Author: Sergio Caveggia

Sergio Caveggia is a tax partner currently in charge of Transaction Tax area in Argentina. He joined EY Argentina in 1994 and has developed expertise over 26 years in international taxation and merger and acquisition matters. Sergio is also focus on servicing clients in the Private Client Services (PCS) area. He is highly experienced in inbound and outbound investments, buy side, sell side and restructuring services within the Transaction Tax area.

Sergio has served in a variety of industries and has also been involved in many due diligence procedures performed in the past over 20 years. He has given lectures in national universities and is a frequent speaker in tax seminars. He has also written several articles dealing with Argentina tax issues.

He is a Certified Public Accountant who graduated from 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 Catolica Argentina (UCA). He is also member of the Professional Council of Economic Sciences of Buenos Aires and the Argentina Fiscal Association.