Tax amnesty scheme bags billions — and crucial info
For the Herald
Last week, the government celebrated the success of its record-breaking tax amnesty programme, which has boosted its numbers and smoothed stuttering indicators. And now, with more information in the hands of the eagle-eyed authorities of AFIP, the government wants to make sure citizens continue to do things by numbers
By a very long way (whether measured from a financial or fiscal angle), the tax amnesty/whitewash programme which culminated last Friday was Mauricio Macri’s biggest economic achievement since he came to power in December, 2015 — even eclipsing the end of currency controls and the agreement with the holdouts. And way above anything occurring in a highly complex 2017, as far as the ruling Let’s Change (Cambiemos) coalition is concerned.
The results speak for themselves. US$116.8 billion — nearly a quarter of the country’s gross domestic product — has been declared before the authorities, the overwhelming bulk of it stationed abroad (mainly in the United States, Switzerland and the British Virgin Islands). Assets, income and investments — that invaluable “tax base” — now open to the inspectors have doubled. More than US$9.2 billion (148.6 billion pesos) has been brought in through taxes and fines — enough to match a month’s tax revenue.
“We believe that the size and volume of assets that have been declared is a vote of confidence not only in this government but in the country,” proclaimed a beaming Treasury Minister Nicolas Dujovne.
He should be beaming too — as it did back in December, the tax-amnesty programme has given a considerable boost to the government’s finances. With its impressive numbers, the Macri administration will likely meet its target for the fiscal deficit this year of 4.2 percent of GDP, painting a success story out of a domestic market that is still struggling to reboot.
The various positive results dovetail in the success of the whitewash, some of them psychological. Firstly, the government can boast that never in all the history of this country — or the world — has capital come clean on this scale. The results outstrip similar recent experiences in Italy, Spain, Brazil, Chile and parts of Asia, but importantly they were also light years ahead of the US$7.5 billion netted by the two appeals from the Kirchnerite governments. Both local and international factors combined to create such a result. The government worked on the former with patience and fiscal prudence, but it cannot take credit for the latter. However, it is always a merit when you help external positive factors to work in your favour.
The Macri administration has picked a propitious moment to offer people a chance to come clean with the dollars and pesos accumulating outside the legal system in recent years (ever since the mega-crisis of 2001). Argentina has, for years, suffered from an economy that’s been unable to emerge from what experts call a “structural” level of evasion (around 30 percent, and that in the good times) to decide to come clean.
Even for those who most prefer to remain fiscally clandestine, there always comes a time in which they need some form of amnesty to raise their heads. If only to be able to operate with a simple credit card, these people need life-belts too — never mind when they need investment funds or to transfer the fruits of evasion or capital flight to their heirs.
Nothing of course indicates that a programme of fiscal amnesty is ethically defensible. A tax amnesty or capital whitewash always means a tremendous injustice for those who have always complied with their fiscal obligations, without even mentioning those betting on the Argentine financial system, trusting in what the authorities promised them and leaving their money in the country in legal form. Such people number some 70 percent of the population and of tax-payers. But, of course, Argentina is not a country for redressing injustices.
What can be said is that the government managed to inspire a climate of confidence among this 30 percent of tax evaders that the terms of the whitewash would be respected, with no tricks or traps waiting further down the line. So much so that it even proposed to participants that they could keep their assets and money abroad without any need for repatriation. Undeniably, the government generated confidence too among those with undeclared assets and money within Argentina’s frontiers — including some 110,000 properties that have been declared throughout the country (with the majority coming from Buenos Aires province), worth an estimated US$10.5 billion. Experts believe that the nation’s people may hold as much as US$400 billion in tax havens across the world and by that logic, the Macri administration has brought back more than a quarter of that into the reach of the tax authorities. Helping its cause, of course, was the decision to offer citizens the “no questions asked” policy as to the source of the declared funds or assets.
Confidence is a key word in economics and the government can boast that they managed to lay the ground for a successful policy.
Regulations and exchanges
The government also managed to take advantage of a favourable international climate in at least two ways. On the one hand, and after many years, it is clear that Argentine yields in a world of depressed interest rates represent an appetising opportunity for once, especially for the Argentines themselves who for more than two decades (or even longer) have been taking their money out of the country to protect it from the vicissitudes of domestic financial crises, which were a regular occurence. (Two-digit dollar margins are not something you find every day on international money markets by any means.)
There were other international motives favouring the whitewash too, ones far less attractive in terms of financial yield but much more dangerous in the sphere of criminal justice. Between the first day of next year and the beginning of 2019, those famous agreements approvoing the exchange of financial and fiscal information, signed in the framework of the Organisation for Economic Co-operation and Development (OECD) by around 101 countries from all the continents, will spring into action — these will give any country access to information about its taxpayers in other financial systems. In other words, any given tax bureau will be able to verify if a suspicious taxpayer (whether a person or company) has undeclared property or financial assets (money, bonds, shares, etc), in other financial systems.
Argentina has already signed additional information exchange agreements matching the terms of the OECD with a host of countries as diverse as Switzerland, Spain, Germany, France, Brazil, Chile, Uruguay, Paraguay, Mexico and South Africa and is progressing towards global agreements with all the countries from the European Union (EU). Most importantly of course, it had already concluded an agreement with the lame duck administration of then-US president Barack Obama for the exchange of information with the United States in November, 2016 — a treaty which was surprisingly ratified last month by the Donald Trump administration.
The US did not adhere to the OECD mandate but it accepts bilateral negotiations with allied states. Which Mauricio Macri’s Argentina is (at least for Obama anyway).
If everything goes as the government wishes, by the beginning of 2018 the AFIP tax bureau will be exchanging data with Washington’s Internal Revenue Service (IRS) on Argentine holdings in the US in order to find out if there are compatriots, residents or companies of any kind registered in this country which have any physical or financial assets up north which are not declared here.
In other words, if a person or company resident in this country or liable to AFIP has US bank deposits, a house in any city, bonds or shares or any other property in the which are not declared and the tax authorities have their suspicions, they may consult any of the countries signing these agreements to verify that person’s financial situation. Such was also the information transmitted by many US, Swiss and Brazilian banks to their Argentine clients, often accompanied by the very real threat of “inviting” them to join the whitewash or else choose some other bank to deposit their savings. All this context, along with a lack of reliable tax havens where they could operate, made the whitewash such a success in terms of Argentine holdings abroad. This is where bilateral relations really pay off.
on local shores
The success will also trigger other rapid changes in the local economy.
As the first direct consequence, the revenue haul will rise as the new data becomes known in April, increasing the tax base by 20-25 percent as a consequence and bringing in more funds via income and personal asset taxation — even the IVA value-added tax might possibly pick up. But there will also be direct improvements to retirement benefits via the Historic Reparation Fund for pensioners, which is what brought this whitewash scheme into being in the first place. The ANSES social security agency estimates that by May there will be a further million pensioners (owed 47 billion pesos) who will have their litigation against the state settled and find their monthly earnings improved thanks to the US$10 billion entering the tax coffers via fines paid by those answering the appeal.
Furthermore, as a direct consequence of the tax amnesty scheme, some US$7-8 billion paid during its first and second stages prior to December 31 are now unblocked. That money, already whitewashed, can now be invested or put to some use beyond the Argentine financial system, though it will stay registered with AFIP. Most of these funds could presumably be steered into direct investments such as housing, infrastructure, vehicles or the local capital market. Much will depend on the skill and credibility of the financial agents as to whether this money is contained within the Argentine system.
There will also be direct consequences for the exchange markets, after the dollar bonanzas for the Central Bank and the local financial system — represented by the successive declaration of Argentine currency holdings outside the country and the five to ten percent levy shelled out to bring it home.
These dollars share part of the blame for the exchange rate lag in the first quarter of this year (the time of entry for the declared physical and financial assets on the simple basis of the laws of supply and demand, as explained by Paul Samuelson). The whitewash was one of the motors of the currency glut in the early months of this year, leading the dollar to drift below 16 pesos. The Central Bank’s reserves rose by over US$12.4 billion in the first two months of the year, reaching US$50.903 billion by the end of March, thanks in part to the whitewash windfalls, which contributed around US$3 billion to that total. That tap will now close but (as the government put it) “it has already done its bit.”
There was, however, one failure in the government’s plans: the take-up of the government’s bond options. Those declaring were given the option of investing in three-year government bonds paying zero interest or seven-year bonds paying a one-percent coupon, yet only two percent opted not to pay off their penalties in cash outright.
Another consequence of the closure of the scheme will be the new regime of “tax scoring” which will be submitted to all those paying-in taxes to AFIP, led by Alberto Abad. This has been christened the System of Risk Perception (SIPER), where all active tax-payers (whether individual or corporate) will be branded according to how they are seen, as greater or less tax risks by AFIP. The grades will be “A” (meaning very good), “B” (good), “C” (regular), “D” (bad) and “E” (very bad). The system was drawn up almost a decade ago by Abad himself, some time before he was replaced at the tax body in the Kirchnerite years. This year, he started to revive the plan as a scheme to control and analyse registered taxpayers.
The AFIP’s idea is that whatever their level of exposure, each person or company should be graded according to their proximity to potential tax evasion, taking into account all the data at the disposal of the agency — i.e. the level of income and invoicing declared, the scale of tax paid and its categories, the presentation of sworn statements, their seniority and their past and present tax record. Also any failure to provide presentations and failures to comply with tax rollover plans, the credit/debit ratio of each person or company, significant tax status adjustments now and in the past, any examples of bankruptcy and/or credit risks which figure in the Central Bank’s (BCRA) data. Also calculated will be financial operations, credit card spending, monthly payments registered by AFIP (rent, private schooling, prepaid healthcare schemes, etc.), tax rebate requests (including for “savings” and “tourist” dollar purchases in the years of currency controls), deductions and changes in the categories of self-employed. Participation in recent previous whitewashes and similar scheme will also be evaluated.
Obviously the worst marks possible will go to those with previous, serious and continuous tax evasion antecedents who are detected after the expiry of the whitewash scheme and the moratorium on new violations.
And then what happens to those taxpayers who always honoured their commitments and did not enter the tax-amnesty scheme, simply because they did not need to? They will be handed a consolation prize — a three-year respite from payment of the wealth tax in the 2016-18 period. Toward that end they need to meet three basic conditions — not having entered the 2013 whitewash pushed by former president Cristina Fernández de Kirchner, nor having applied for the rollovers for those companies facing economic difficulties or bankruptcy proceedings, nor having been in tax arrears with AFIP or otherwise facing fines or fraud charges. This year, the income-tax floor will pass from 305,000 to 800,000 pesos, a rise of 166 percent.
And of course, we can conclude that this whitewash will be, as promised by the Mauricio Macri government, the last. There will be no more chances. Until the next time.