Argentina: A tax reform to promote competitiveness and integration By Dr. Hugo González Cano Evolution of revenue and the tax burden The tax burden of Argentina, including national, provincial taxes and social security contributions have been relatively stable between 1993 and 2001 around 21% or 22% of GDP. The important economic crisis of 2001 and 2002, resulted in a reduction of the tax burden to 19% of GDP. As a consequence, new taxes were created (tax on financial transactions and tax on exports) but the economic crisis resulted in an increase in tax evasion. The national taxes and contributions for social security represented 15.8% of GDP in 2002 and provincial taxes represented 3.2% of GDP. Even if the tax structure experienced some changes since 2001 because of the introduction of the new taxes on exports and financial transactions, consumption taxes maintain the first place as a revenue source, followed by income taxes, social security contributions and taxes on international trade. The following table presents the actual structure of total tax revenues 1. Income taxes 2. Wealth taxes 3. Consumption taxes 4. International trade 5. Other taxes 6. Social Security Contributions 7. National tax burden (gross) 8. Deductions ( and refund to exports) 9. Net national tax burden (7 8) 10. Provincial taxes TOTAL Type of tax 1997 13,99 0,90 44,44 4,75 0,04 18,18 82,30 1,06 81,24 17,70 100% 2000 18,43 2,04 42,57 3,38 0,64 15,84 82,90 (0,92) 81,98 18,10 100% 2002 14,7 1,8 34,2 10,4 8,8 13,1 83,1 16,9 100% Because of the great devaluation in 2002, taxes on exports have been reestablished, and since 2001 a new tax on financial transactions has been introduced. They generated respectively, around 10 percent of total central government revenues (20 percent of national tax revenues). Consumption taxes, especially showed an important decrease in revenue in 2002. The revenue decreased from 7 percent of GDP in 1998 to 5.7 percent in 2001, and to 4.8 percent in 2002. Income taxes that were increasing their revenue since 1993 to 2001 (4 percent of GDP) decreased to 3 percent in 2002. It is to be noted that although prices increased around 42 percent during 2002, and at a slower rate in 2003, no consideration was realized on the price increase to calculate the personal and the corporation income tax. No adjustment for inflation was permitted to calculate both income taxes; as a consequence, this tax shows a good performance revenue in 2002, and especially in 2003. Personal income taxes generated around 1/3 of the total tax, while corporation income tax generated 2/3 of the total tax. Provincial taxes generate around 3.1 percent of GDP, and consist of the: a) turnover tax (2 percent of GDP); b) real state tax (0.6 percent of GDP); c) automobile tax (0.3 percent of GDP); d) stamp and other taxes (0.2 percent of GDP) -1-
During the last 20 years, direct services (health, education, water supply, etc.) have been transferred from the national government to provinces. But taxes continue to be concentrated at the central government level. The difference is covered by a huge volume of transfers from the national government to provinces, especially through the system of revenue sharing (8.5% of GDP). The tax revenues of the Provinces is low (3.5% of GDP) and the huge transfers give little incentives for provinces to increase their own revenue. So, the actual system can be biased to an irresponsible fiscal behavior because provincial authorities can obtain the political benefit of fiscal expenditures without paying for the political cost of collecting taxes in their own jurisdiction.. This is the principal problem of fiscal federalism in Argentina Problems of principal taxes Income taxes Excises The new tax on financial transactions Provincial turnover tax Export taxes Tax on net wealth of phisical persons Minimum presumptive corporate income tax Provincial property taxes Tax incentives Since 1993 the base has been increasing and the general rate changed from 18% to 21% A reduce tax of 10,5% is applied to housing construction, unprocessed meat, fruit and vegetables, passenger transportation, health services provided through prepayment plans and grains A higher rate of 27% is levied on selected communications services, water, gas and electricity provided to small businesses and non registered Vat payers revenue Year % of GDP 1993-2000 6% - 7% 2001 5,7% 2002 4,8% EXEMPTIONS (are still very extensive) Private education Medical and funeral service rendered by unions Entertainments and shows (theater, cinema, etc.) Sport shows Taxi services and remise (taxi limousine) services Location of houses and apartments Interest on loans to governments at all levels Newspapers and magazines at the retail level Books Medicines for human use Bread Milk Water INCENTIVES AND PRIVILEGES Although reduced in recent years, still important Remaining industrial promotion system Competitiveness plans Two different regimes are applied to small businesses and professionals the Vat for non-registered tax payers the separate general regime for small businesses or simplified regime for small taxpayers that replace income tax, Vat and social security contributions REFORM PROPOSALS To promote a more adequate control by AFIP Eliminate exemptions, incentives and privileges To broaden the tax base The application of two systems to small businesses and profesionals reformed into only one system are inconsistent and must be -2-
Income taxes REVENUE The 1999 Reform increased the rates of PIT and reduced personal deductions, so the revenues increased to 3.8% of GDP in 2001. The total revenue is obtained in around 2/3 from corporations (corporation income tax) and only 1/3 from individuals or physical persons (personal income tax) Years 2001 2002 % of GDP 3,75% 2,8% The basic structure of the income tax is adequate, but it requires es to broaden the base in order to increase revenues and the progressivity of the taxes. Personal income tax Corporate income tax Income taxes Scale of rates from 9% to 35% Single tax rate of 35% Effects of the 1999 PIT Reform on the distribution of revenues by income brackets: 1997 2000 up to $50,000 18.2% 10.6% from $50,000 to $100,000 25.6% 28.3% from $100,000 to $500,000 41.5% 41.3% from $500,000 to $2,000,000 12.3% 13.5% over $2,000,000 2.4% 6.3% TOTAL tax assessed 100.0% 100.0% Income taxes problems EVASION Lack of adequate legal instruments available to the tax administration (AFIP ) A long culture and behavior of tax evasion because of the extended and frequent use of amnesties and whitewashing laws The weakness and erratic policy of tax control In 2001, only 469.000 taxpayers paid personal income tax In the case of income tax on corporations, the tax erosion has also been produced by industrial and other sector and regional promotion regimes, like the regime for Tierra del Fuego EXEMPTIONS Income taxes problems A large list of income from capital income and capital gains are exempted,, like: dividends interest from bank accounts all capital gains for individuals income from financial transactions for individuals investments covered by promotion regimes (regional or sector incentives) etc. Reform proposals It is evident the advisability to increase gradually the importance of the personal income tax while decreasing the weight of corporations, in order to improve equity horizontally and vertically. The tax base must be broadened, reducing exemptions and tax incentives, especially for income from capital and capital gains. An increase will be necessary in the auditing controls in order to reduce evasion. In connection with tax retentions, besides additional controls on the actual system, a system of auto-retentions could be established and applied to persons and enterprises, for example of 1 percent on the income of the previous month. Excises Excises suffered a big deterioration in their base and revenue, and the rates were also reduced The actual rates are the following: Tobacco Whisky and similar Beer Sodas Wine and champagne Rate 150% 20% 8% 8% 0% -3-
Tax on financial transactions This tax reestablished in 2001 is applied both on debits and credits to most accounts held in financial institutions. The new tax is imposed with a 0.6 percent standard rate, which considering both bank debit and credit operations imply a 1.2 percent rate Problems The rate of 1,2% is unusually high Negative impact on financial intermediation and efficiency Reform proposals Gradual reduction The consideration to apply it as a total credit against and income taxes. Provincial turnover tax The actual system is based on the origin principle. A general tax of around 3 percent was applied to all transactions. But now this tax is applied with different rates according the sector and stage of production: Sales of retailers and services Wholesales Industrial sales Primary sectors sales (agriculture, mining, etc.) 3 and 4 percent 2.5 percent 1.5 percent 1 percent or deemed exempted This cascade tax generated several distortions especially against exports Provincial turnover tax The tax must be replaced in the long run by some of the follow neutral alternatives a provincial connected with the national (dual or C ) a supplementary provincial a retail sales tax (similar to the tax applied by the American States) an increase in the national and sharing of revenue with the provinces Export taxes After devaluation in January 2002 all exports are taxed. Actually, export taxes range from 0 to 20 percent on a contrary sense to value added of each product. They have had a very good revenue behavior (Pesos 5,200 million in 2002), representing around 10 percent of total tax revenue of the central government. Export taxes are distorsive because affect incentives for production and competitiveness, and they must be gradually eliminated in the long run. Tax on net wealth of physical persons In 2001, this tax reports a very low revenue (0.3 percent of GDP). In 2002 it represented a revenue of Pesos 524 million only. Problems It presents some problems on design and control because of the great evasion. To that end, AFIP must apply auditing control methods already improved. Tax on net wealth of physical persons Reform proposals The base may be broadened and the actual scale of rates (0.5% and 0.75%) may be amplified to obtain more revenue and progressive increase. The proposed scale of new rates could be as follows: Total value subject to tax Up to $ 200.000 From $ 200.001 to $ 400.000 More than $ 400.001 Rate in percentage 0.50 percent 0.75 percent 1.0 percent -4-
Minimum presumptive corporate income tax This tax applied on assets of enterprises at the rate of 1 percent (revenue for $ 535 million or 0.21 percent of GDP in 2002), can be maintained in the short run because of the actual finance crisis, but in the long run must be eliminated because it has distorsive effects on competitiveness of the economy. At the same time that revenue of the tax on personal assets is increased, this tax on assets of enterprises must be gradually eliminated Provincial property taxes Property taxes (urban and rural) are in most cases applied by provinces but in same jurisdictions the urban property tax is applied by municipalities (provinces of La Pampa, Chaco, etc.). Problems Most provinces are experiencing serious problems of design and administration: Valuation to calculate the tax is lower than market value and there are problems about the cadastre, since the owners of properties are unknown in many cases Several provinces collect only around 30 percent or 40 percent of the tax calculated by the provincial tax administration (DGR). Provincial property taxes Recommendations on these taxes are: To improve the valuation process, bringing valuations more close to market values, and incorporate same properties and improvements on buildings which at the moment are not registered by the tax administration A better control in order to increase the percentage of collections in relation to the total value calculated by the DGR Tax incentives Tax incentives have been strongly reduced in the last 10 years. A estimation made by the Ministry of Finance (DNIAF), with a broader coverage, showed that total tax expenditures amounted to Pesos 8,991 million (3,07 percent of GDP) in 2002. Tax expenditure under the laws of the respective taxes Tax expenditure under the various systems of tax promotion Total Pesos 7,075 millions Pesos 1,916 millions Pesos 8,991 millions Tax incentives Recommendation: The recommendation is to continue the gradual reduction of this benefit in order to increase the tax base of and income taxes and to reduce the distorsive effects and tax evasion that these systems have generated due to lack of administrative controls. There still remain the provincial promotion systems (San Luis, Catamarca,, La Rioja,, San Juan, Tierra del Fuego and other provinces) which generated artificial locations of industrial enterprises which existence is only possible because of this tax benefit. It is to be noted that tax control on these promotion systems have increased since the AFIP recovered the tax control, but there are still problems of control on the systems administered by the provincial government. Summary of tax reform proposals Broadening of the and income tax base, eliminating exemptions and tax incentives. Gradually increased importance of personal income taxes, and reduction of corporate income taxes. As for corporate income taxes, granting -during a short period of 5 years- of the possibility for capital goods to depreciate completely in 1 year (accelerated depreciation) in order to incentive new investments. Gradual elimination of export taxes and of the minimum corporate income presumptive tax. Increased excises in general and, particularly, the reestablishment of those imposed on luxury items (automobiles, audio, video, etc.) -5-
Summary of tax reform proposals Maintenance of the tax on financial transactions but making it possible to credit it in full against and income taxes. Elimination of sector and regional tax incentives, including all the new competitiveness systems applied since 2001. Commencement of a very careful process of decentralization of some national taxes to be given to provincial governments (fuel taxes and provincial income taxes). In the long run, substitution of the provincial turnover tax with a provincial coordinated with the national (C). -6-