Congress Passes Overhaul of Argentina's Inefficient Tax System

(Bloomberg) -- Argentina's Congress approved a bill that seeks to reduce inefficient taxes that have dragged on growth in South America's second-largest economy for decades.

The Senate approved the overhaul of the tax system by 52 votes for, 15 against with 1 abstention. The lower house had already voted in favor of the bill. The Senate also voted 54-14 to approve the 2018 budget in its final session before Congress enters its summer recess.

The government is seeking to attract foreign investment that has shied away from an economy with one of the heaviest tax burdens in Latin America. The reform, coupled with an agreement with Argentina's provinces to reduce regional sales taxes, should reduce that burden by 4 percent of gross domestic product over the next five years, according to Cesar Litvin, chief executive officer of Lisicki, Litvin & Asociados, a tax advisory studio in Buenos Aires.

“This doesn't solve everything, but it's a substantial improvement,” Litvin said by phone. “It's the best tax reform of the past 30 years.”

The bill proposes to gradually reduce the corporate tax rate to 25 percent from 35 percent over five years. It also proposes to tax profits from financial investment for the first time, introducing a levy of 15 percent for foreign currency-denominated and inflation-linked instruments and 5 percent for peso-denominated debt. Non-residents are exempt from taxes except in the case of profits from central bank notes known as Lebacs.

President Mauricio Macri's government had to compromise with opposition lawmakers to reach a consensus. A plan to tax wine was scrapped as was a proposal to impose a charge on sugary drinks.

While the government said the reform shouldn't affect its efforts to close the budget deficit, Litvin said that was inevitable.

“Obviously this is going to reduce tax collection, but the way of compensating is with more investment, more economic activity and more employment,” Litvin said.

To contact the reporter on this story: Charlie Devereux in Buenos Aires at cdevereux3@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Bruce Douglas, Robert Jameson

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