EY: Argentina’s Need for Tax Reforms, and How They Could Be Achieved

The current Argentine macroeconomic situation is characterised by Covid-19 recession, inflation, record tax pressure, a reduction in tax revenues, poverty levels standing at 42 percent and rising, and government spending exceeding genuine financing possibilities.

Sovereign debt refinancing is still under negotiation with IMF and Paris Club as the government lacks genuine sources of funding to face the various due dates.

In the short term, this complex scenario does not allow a tax reform that could decrease revenues. There is no doubt that the medium- and long-term goals are reducing the tax pressure exerted on the private sector. But it must be addressed over several years while spaces for a parallel reduction in public expenditure are created.

The budget restriction may be increased if the government succeeds in articulating a tax policy that incorporates a part of the informal taxpayer universe into the system. Incentives should mostly be focused on generating employment by reducing payroll taxes and promoting exports. A systematic and sustained focus here may give rise to additional tax resources to allow a reduction of the general pressure on taxpayers.

Some 40 percent of the Argentine economy is estimated to be informal. Tax simplification implies not only a reduced administrative effort for taxpayers but also the possibility for authorities to focus their audit efforts.

This change in paradigm would allow the entry of a second segment of taxpayers that would ease the burden on the rest and give rise to better productivity for local products and services. There would be no unlawful competition within the private sector, as the change would level the playing field in the different economic sectors.

The Four Parameters

The four aspects below should be matched by BCRA (Central Bank of Argentina) regulations aimed at freeing the foreign exchange market. A successful outcome of the sovereign debt negotiations may reduce the government’s need for US dollars in coming years. This window of opportunity should be leveraged to create the basis for a tax system that would allow local companies to develop and grow — and to generate the foreign currency required to address future debt commitments.

Employment

The poverty levels shown by the Argentine economy require tax policies aimed at creating registered employment, especially one that strengthens the unified social security system. One of the largest bottlenecks in Argentine public expenditure arose from the integration of millions of people into the retirement and pension fund system over the first decade of this century. This change caused a rigidity in government spending to such extent that about 70 percent of this account is made up of civil servant salaries and retirement and pension funds. The rigidity diminishes with the entry of new workers who start making marginal contributions and achieving a larger number of active contributors for each passive contributor.

Employment incentives should constitute a fundamental pillar of tax reform. Reducing payroll taxes and increasing private activity allow for the following:

1. financing retirees
2. bringing genuine and additional resources to present revenues
3. incorporating employees into the banking system
4. promoting the formalization of economy and widening the base of taxpayers of other taxes (especially VAT)
5. reducing the dependency between public expenditure and retirement and pension funds
6. contributing to the genuine competition in the private sector
7. gradually transferring social plan beneficiaries to the private sector, freeing government resources.

The following main aspects should be covered from the employment perspective:

• Reduction of the employer contribution percentage increasing payroll, with no time limit. This measure does not entail a loss in present tax collection, but a marginal increase in tax resources and the entry into the system of personnel who used to perform informal work (10-year tax stability of the regulation).
• Enacting a law aimed at self-employed/payroll professionals which may allow developing a “gig economy” without giving rise to labour costs in the IT or other industries.
• Oil and gas, mining and industrial or service-related employment in distant geographic areas: zero employer contributions when there is an increase in payroll for 10 years and when companies are committed to making investments over such a period.

Productivity

The tax system should not be an obstacle to local product and service competitiveness. It is necessary for the system to articulate the various parts and variables to avoid any inefficiencies, tax overlapping, double taxation or just passing on taxes on to end consumers or exports.

After decades of successive changes that failed to prioritise the harmony between the taxes, Argentina no longer has a tax system, but a collection of taxes which, in aggregate, constitute one of the things hurting local companies’ productivity.

Here are the main thoughts on the fundamentals that should be covered from productivity standpoint:

• Replacing Turnover Tax by provincial Value Added Tax (VAT). This measure will mitigate the cumulative effect on the cost of products and services.
• Stamp tax abrogation.
• Tax on bank account transactions performed in connection with checking account transactions, 100 percent of which should be computable against any federal tax or employer contributions.
• VAT balance in favour computable against any federal tax or employer contributions after 90 days of being accumulated.
• Establish a tax adjustment for inflation on income, balances in favour, NOLs and personal allowances or deduction limits.
• 20-year tax stability of aforementioned points.
• According to financial science, the optimal use of proprietary and third-party capital is essential to address investment projects. The capital market incentive is crucial to promote the construction industry. There are corporate structures subject to the tax promotion system mainly aimed at large construction projects. The same exemptions which are currently available to small construction projects should be extended so that savers may have access to them with transparency guaranteed by a regulated market.

Exports

The Argentine economy needs foreign currency to avoid cyclical shortage periods, implying systematic devaluations and loss of confidence in the Argentine peso. The tax policy should promote tapping into external markets.

Another aspect that should be articulated with this variable is promoting investments from local residents in the actual economy. The proper use of tax policies in line with this goal may enable the repatriation of US dollars from local residents. Direct foreign investments should also be promoted.

• The main aspects that should be considered to enhance export transactions would be:
• Calculation of the withholdings made on services rendered abroad against Argentine-sourced income
• Abrogation of withholdings made to the export sector
• Free availability of foreign currency and foreign currency stability for a 20-year period.

Simplification

The idea of maintaining revenue levels does not contradict the tax simplification goal. System simplification may be achieved without reducing revenue levels.

• Focusing on auditing and collection tasks involving income tax, VAT and employer contributions within the economy’s informal sector.
• Abrogation of distortive taxes and taxes on equity. “PAIS” tax (tax payable on certain transactions in foreign currency), and personal assets tax, among others.
• Abrogation of withholding systems related to domestic transactions.
• Abrogation of Anti-Evasion Law.
• Incentives to the use of the banking system or the use of digital wallets by reimbursing 10 percent of VAT on transactions not involving the use of cash and effective 11 percent VAT rate. Revenue decrease should be offset by widening the base arising from the measure. The private sector itself would manage the incentives.

To achieve long-term sustainable growth, Argentina must focus on fostering investment and the private sector. The current tax system includes regressive type of taxes that prevent local competitiveness of products and services. By tackling the informal sector appropriately, the tax playing field may be levelled among private players while allowing tax cuts without generating an overall loss of government revenues.

In spite of the challenges and difficulties, Argentina has several sectors with high potential for growth and profits, such as energy, mining, agribusiness, food and knowledge-based business models.

About the Authors

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 24 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 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.

Jimena Garcia is a Manager currently working in the International Tax and Transaction Services (ITTS) and Private Client Services (PCS) areas in Argentina. She joined the firm in 2014.

She has extensive experience in social security & labor law buy-side and sell-side due diligence services in numerous companies in different industries. She also participated in the coordination of many cross-border engagements, dealing with foreign labor and social security legislation matters on each transaction. Jimena participates in numerous seminars related to payroll taxes and labor law matters.

Jimena is a Lawyer graduated in 2010 from UNLAM (Universidad de La Matanza). She is enrolled in the Bar Association of the City of Buenos Aires.