Doing Business in Argentina
Contents
1.
Country Profile
Geographical Location and Language Form of Government Political System Population Structure Geographic and Demographic Data Climate and Natural Resources
2.
Economy
General Outlook Basic Economic Indicators Foreign Exchange, Credit, Financial and Monetary Policies Financial Markets Changes in Argentina’s Economy in 2012
3.
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place for professional advice. Ernst & Young accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. © January 2013 – Pistrelli, Henry Martin y Asociados. All rights reserved.
Business Presence
Types of Business Associations Stock corporation (sociedad anónima) Branches of Foreign Companies Joint Venture Corporate and Accounting Records Oversight Agencies Year-end, Financial Statements and Accounting and Audit Standards
3 3 4 4 4 5 5
7 7 11 13 17 22
24 24 24 26 31 32 33 34
4.
Foreign Investments
48
5.
Tax
52
General Description of the Tax System Direct Taxes Indirect Taxes Other taxes International Double Taxation Treaties
6.
Labor and Social Security Legislation
Labor Supply and Relations Other Employee Benefits Main Types of Employment Contracts Social security
52 53 62 70 72
73 73 75 76 78
1. Country Profile Argentina is one of the most important sources of natural and human resources in Latin America. A variety of climates, an enormous territorial expanse, very capable people and a high academic level and a solid industrial past are some of the different features of this country. Ernst & Young wishes to contribute towards a better understanding and knowledge of the surroundings characterizing Argentina from the geographical, economic, accounting, legal and regulatory point of view. For all of these reasons, we are presenting Doing Business in Argentina, targeting potential investors and entrepreneurs. Investment is an important step that should not be contemplated without appropriate professional assistance. This publication is a preview and a summary of the conditions that will be useful to take into account in an investment process, but which does not substitute complete and competent professional advice.
1.1. Geographical Location and Language Argentina is situated in the Southern Cone of South America, bordering Bolivia, Paraguay and Brazil on the north, Brazil, Uruguay and the Atlantic Ocean on the east, Chile and the Atlantic Ocean on the south and Chile on the west. The country covers most of the southern portion of the South American continent and has an approximate triangular shape, with the base up north and the tip at Cape VĂrgenes, the southernmost point of the South American continent. The official language is Spanish.
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Country Profile
1.2. Form of Government Since 1853, Argentina has adopted a representative, republican and federal form of government. This is reflected in the Argentine Constitution (section 1). In this regard, the Constitution refers to the vesting of power on representatives through the institutions and according to the type of office (although the people may also participate more actively through semidirect democracy mechanisms). The main pillar of the republican form of government is the sovereignty of the people. That is why, among other principles, the Argentine Constitution establishes terms of office, election methods and the publication of all acts of government for citizens to be able to exert control mechanisms and thus exercise their sovereignty. Federalism is characterized by the separation of powers: while there is a sovereign state (the federal government), the provinces retain the power to elect their authorities and regulate their local activities by drafting their own provincial constitutions, provided they do not contradict the federal constitution. The purpose is to decentralize power, i.e., prevent the concentration of power and allow control over power to be shared between the federal and provincial governments.
1.3. Political System The Executive Branch is run by the President of Argentina, who is elected for a four-year term and may be re-elected. The President and Vice President, who is also President of the Senate, are elected through a direct vote. The president is advised by a cabinet made up the ministers and the cabinet leader. There are also a series of departments. The Legislative Branch is made up of the Senate (formed by 72 senators elected for a six-year period) and the House of Representatives (formed by 257 representatives, elected for a four-year period), with seats renewed every two years. The Judicial Brach is made up of the Supreme Court, the federal courts of appeal and federal judges. In the provinces, the administration of justice is the responsibility of the courts of appeal, the magistrates and ordinary judges.
1.4. Population Structure The outcome of the National Census of Population and Housing, conducted on October 27, 2010, showed that Argentina has a total of 40,117,096 inhabitants. It found that of every one hundred women, there are 94.8 men, while the lowest tertiary sex ratio was registered in the Buenos Aires City district of La Recoleta, where there are 73.3 men to every 100 women. The most densely populated city, by square kilometer, is Buenos Aires City. A total of 13,881 inhabitants per square kilometer used to live there in 2001 and now this total has increased to 14,451 inhabitants per square kilometer. The province of Buenos Aires is the most densely populated of all provinces, accounting for 39% of Argentina’s population.
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Country Profile
Between 1991 and 2011, population growth was 10% (1% annually). Between 2001 and 2010, growth was 11%. The increase in population is explained by the low mortality rates and the increase in quality of life.
Total population Province Total liabilities City of Buenos Aires Buenos Aires 24 districts in Greater Buenos Aires Other districts in the province of Buenos Aires Catamarca Chaco Chubut Córdoba Corrientes Entre Ríos Formosa Jujuy La Pampa La Rioja Mendoza Misiones Neuquén Río Negro Salta San Juan San Luis Santa Cruz Santa Fe Santiago del Estero
Total population 2010 census
Total population 2001 census
Change in population (2001 – 2010) [%]
40,117,096 2,890,151 15,625,084 9,916,715
36,260,130 2,776,138 13,827,203 8,684,437
10.6 4.1 13.0 14.2
5,708,369
5,142,766
11.0
367,828 1,055,259 509,108 3,308,876 992,595 1,235,994 530,162 673,307 318,951 333,642 1,738,929 1,101,593 551,266 638,645 1,214,441 681,055 432,310 273,964 3,194,537 874,006
334,568 984,446 413,237 3,066,801 930,991 1,158,147 486,559 611,888 299,294 289,983 1,579,651 965,522 474,155 552,822 1,079,051 620,023 367,933 196,958 3,000,701 804,457
9.9 7.2 23.2 7.9 6.6 6.7 9.0 10.0 6.6 15.1 10.1 14.1 16.3 15.5 12.5 9.8 17.5 39.1 6.5 8.6
Source: INDEC (Argentine Statistics and Census Institute). National Census of Population and Housing (2010). Final results.
1.5. Geographic and Demographic Data Argentina is the second-largest country in Latin America in terms of territorial size, fourth-largest in the American continent and eighth-largest in the world. It covers a surface area of 2,891,810 square kilometers of the southern portion of the American continent, stretching around 3,800 kilometers from north to south and about 1,400 kilometers from east to west. The estimated number of inhabitants is 40 million. Population density is 14 inhabitants per square kilometer and the natural rate of increase of the population is around 1% per year. Around 25% of the population is concentrated in the area formed by the City of Buenos Aires and its surrounding districts, which is referred to as Greater Buenos Aires. The adult literacy rate 1 is estimated at 97.7% and life expectancy is 75.9 years according to the 2011 Human Development Report prepared by the UNDP.
1.6. Climate and Natural Resources The fundamental characteristic of the Argentine landscape is the contrast between the immense eastern plains and Andes mountain range to the west which has the highest peak in the western hemisphere: the Aconcagua, towering 6,959 meters.
1
Percentage of persons over the age of 15 years (2005-2010) 5
Country Profile
Following the mountain range from Jujuy down to Tierra del Fuego, there are very diverse landscapes: From the high plateaus in the north-west, which are desertlike with valleys, ravines and colorful mountains down t the region of lakes, forests and glaciers in Patagonia. To the north, Chaco is a forest area tied to the Bermejo, Salado and Pilcomayo rivers. Between the Paraná and Uruguay rivers, the Argentine Mesopotamia region (provinces of Entre Ríos, Corrientes and Misiones) is formed by low-lying hillocks, lagoons and marshes that show traces of the ancient courses of these great rivers. In the center of Argentina, the Pampean region is home to the most extensive and well-known plain. With intensive farming and livestock activities, it covers the province of Buenos Aires, the northeastern portion of the province of La Pampa and southern portion of Córdoba and Santa Fe. Its landscape is interrupted towards the south by the small mountains of Tandil and Sierra de la Ventana, and towards the west, by the small mountains of Córdoba. Towards the south, from the Andes to the sea, lie the stony Patagonian mesetas, battered by the winds during most of the year. The Atlantic coast, outlined by high cliffs, follows a sinuous course, such as the Valdés peninsula, with its marine fauna rookeries. Argentina has a very broad climatic range. It is template and humid on the Pampean plains, cold and humid in the far west of Patagonia, subtropical in the northern part of Mesopotamia and warm in the northwest. The area of Tierra del Fuego is cold, with strong winds, fog, rain and frequent snows.
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2. Economy 2.1. General Outlook For Latin America, the eighties were what was referred to as "the lost decade" due to its low economic growth and the impossibility of accessing international voluntary credit. Argentina was not the exception and was characterized as being a high-inflationary economy with an unstable macroeconomic performance. The debt crisis that was unleashed due to the Mexican default in 1982 led to the region’s financial isolation. The economy's main sectors related to industrial activities began losing competitiveness in relation to other countries. In 1983 Argentina welcomed back democracy, which established the cornerstones of a new institutional framework that is present to date. After 1989, the restrictions on transactions in foreign currency were eliminated and government securities were reprogrammed. Subsidies for industrial promotion were suspended and things were made ready for the privatization of government-owned companies under a framework of future structural reforms that would be consolidated in the nineties. In April 1991, Convertibility Law (currency board) was passed, pegging the Argentine peso to the US dollar at a rate of ARS1=USD1. This measure brought with it rigorous monetary and fiscal discipline as it eliminated government financing through issuance by the Central Bank: the monetary base was linked closely to international reserves. Monetization in Argentine pesos and US dollars increased significantly and in the first years the reappearance of credit benefitted production. Inflation slowed, quickly reaching international one-figure levels. In December 1992, Argentina regulated its situation with foreign commercial banks through the Brady Plan, improving the maturity profile of its public debt. The Argentine economy was also benefitted by an intense flow of capital in a context of high international liquidity. It is estimated that the inflow of capital as direct foreign investment in the 1990 – 1994 period totaled 15 billion US dollars. However, the Mexican crisis in 1994 triggered a reversal of those flows with a contracting effect on the economy. A large portion of the capital that flowed into Argentina was channeled through direct foreign investment. The government-owned companies that were purchased belonged mainly to the industries related to public utility services. Furthermore, sectors such as food and beverage, mining, automobiles, oil and gas benefited from the arrival of multinational companies that invested in Argentina and contributed to the increase in productivity in different sectors. 1
1 For further detail on current foreign investment in Argentina, please refer to Chapter 4. 7
Economy
Capital in flow - DFI 25,000
In millions of USD
20,000
15,000
10,000
5,000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: ECLAC
As from January 1, 1995, Argentina, along with Brazil, Paraguay (currently suspended due to breach of the democratic clause in the Protocol of Ushuaia) and Uruguay, organized a customs union known as MERCOSUR (Southern Common Market). In 2012, Venezuela became a full member. This union covers almost 13 million square kilometers, with a population of around 278 million inhabitants (about 70% of the population in South America) and an estimated GDP of 3.314 trillion US dollars. 1 The largest economy is Brazil’s, with a current GDP of 2.43 trillion US dollars and an estimated population of 196 million inhabitants. Argentina comes in second with a current GDP of around 475 billion US dollars. The countries forming part of the bloc include Chile, Bolivia, Colombia, Ecuador and Peru. In 1996, a free trade zone was set up with Chile, which allowed for a connection with the Pacific, and in January 1997 the same was done with Bolivia (in the process of becoming a MERCOSUR member country). In 2012, MERCOSUR consolidated its base and structure with the incorporation of Venezuela as a full member and now stands as the fifth largest economy in the world with 20% of all proven oil reserves. In addition to oil, the Mercosur has large proven reserves of natural gas totaling over 6.2 trillion cubic meters, 88.7% of which belong to Venezuela (5.5 trillion cubic meters). If Bolivia joins the Mercosur in late 2013, the bloc would add an additional 360 billion cubic meters in natural gas reserves. Moreover, two thirds of fresh water reserves in the planet are concentrated in this bloc, according to Brazilian statistics. These much-coveted resources stimulate this integration mechanism, the objectives and purpose of which seem to steer toward a new path that, without departing from trade, leads to the cooperation between members becoming an instrument of regional unity.
1
8
Source: FMI – World Economic Outlook – October 2012.
Economy
The purpose of the MERCOSUR is to consolidate the political, economic and social integration of its member states, through the free circulation of goods, services and productive factors, establish a common external tariff, adopt a common trade policy, coordinate macroeconomic and sectorial policies and harmonize legislation in the pertinent regions. Since January 1, 2005, the MERCOSUR is a free trade zone or an imperfect customs union and not a common market as its name indicates, with the freedom to exchange all goods circulating in the region. This is due to the following circumstances: ► Interzone trade in the MERCOSUR has not yet been fully opened up (for
example, the sugar and automobile sectors are exempted from the zero interzone rate). ► Although there is a common external rate for many goods, there are numerous exceptions to such rate, and the member States have the power to make a list of goods that are exempt from the rate, which can be changed every six months. ► In the Mercosur, there is no free circulation of capital, services or persons. Notwithstanding the above, on August 3, 2010, a huge step forward was taken in all plenary members approving a customs code. During 2012, Argentina’s trade volume was affected by the global economic downturn and the decreased harvest in the 2011/12 cycle. Both exports and imports decreased in year-on-year terms, although the drop in exports was smaller. In this context, during the first ten months of the year Argentina reached a trade surplus which exceeded the one achieved throughout 2011. Exports of goods decreased in all industries, except for fuel and energy. Industrial exports showed a decrease, a trend seen throughout the region as a result of the global economic cycle. Despite the decrease in exportable balances of soybean and corn due to the weather conditions that affected the last harvest, the rise in listed prices for the main agricultural products partially mitigated the impact. Imports decreased as compared to 2011 in all applications except fuels and lubricants, although the increase in this regard was marginal, allowing certain improvement in the industry's trade balance. The trade balance this year would exceed those reached the previous two years, and an external surplus of over USD 10 billion would be achieved for the eleventh year in a row. This surplus would continue offsetting the balance of services and income, resulting in a balanced amount in the current account A new trade surplus is expected for 2013: both imports and exports would recover momentum. Exports would improve based on the acceleration of the growth of Argentina’s main trade partners and the increased agricultural exportable balances. Meanwhile, imports would grow along with the larger increase in economic activity. Thus, the trade balance would help sustain a balanced amount in the current account. The capital and financial account yielded a negative balance in the first half of the year due to the net outflow of the non-financial public sector and the BCRA. During 2012, there was a significant decrease in the outflow of capital abroad, measured by the formation of external assets by the non-financial private sector. Due to the restrictions on the purchase of foreign currency by residents for accumulation purposes, a cumulative amount of about USD 6.53 billion had left the country by the third quarter of 2012. The measures aimed at containing such 9
Economy
outflow, implemented as from the fourth quarter of 2011 due to the emergence of some stress in the foreign exchange market, include the implementation of a specific procedure for purchasing US dollars to travel abroad, the ban on the purchase of US dollars for accumulation purposes, a 15% tax on offshore and online purchases with debit and credit cards and the ban on the purchase of US dollars with funds obtained through mortgage loans in Argentine pesos to purchase real property. Despite the increase in the current account of the balance of payments and the large decrease in capital outflows, international reserves stood at USD 45.24 billion in late November, USD 1.14 billion less than at the end of 2011, mainly due to payments net of principal and interest repayments in foreign currency by the public sector charged to the BCRA’s international reserves.
Argentina’s main trade partners. January through November 2012 Exports by destination Mercosur ASEAN, Korea, China, Japan, India European Union NAFTA Rest of ALADI Chile
%
Imports by origin
27
Mercosur ASEAN, Korea, China, Japan, India European Union NAFTA Rest of ALADI Chile
17 15 9 7 6
% 28 22 18 16 3 1
Source: INDEC
Main exported products. January through November 2012
Total Flour and pellets from the extraction of soybean oil Corn, excluded for sowing, in grain Soybean oil, gross including degummed Automobile vehicles to transport goods Soybean, excluded for sowing Durum wheat, excluded for sowing Crude oil Gold for non-monetary use
Millions of USD
Contribution (%)
75,212 9,469 4,543 4,076 3,696 3,256 2,862 2,450 2,056
100 13 6 5 5 4 4 3 3
Source: INDEC
In December 2001, Argentina went into default on its foreign debt with private creditors and abandoned the currency board system. In 2005, the international financial situation was normalized through the foreign debt restructuring. Towards the end of that year, Argentina settled matured installments that amounted to the total debt owed to the IMF. During 2009, the Government decided to reopen negotiations to pay the debt owed to the Paris Club, and reopen the debt swap for bondholders who still have 20 billion US dollars in default. In late 2009, the Government announced the creation of the Bicentennial Fund for debt reduction and stability through a Decree of Necessity and Urgency. The Bicentennial Fund would be made up of 6.579 million US dollars, which represents 50% of 2010 maturities. It was annulled by the Argentine Congress in March 2010 and replaced in the same year by the Debt Reduction Fund. 10
Economy
In December 2010, the Government launched another swap of the unpaid foreign debt totaling USD 6.1 billion, in default since 2001; bonds were issued for a total of USD 156 million, more than what had been expected. Argentina’s external debt totaled USD 141.99 billion as of late June 2012, with a USD 3.92 billion year-on-year increase. Out of the total debt amount, USD 71.77 billion was related to the public sector and USD 70.23 billion, to the private sector. The rise was mainly due to the increase in net indebtedness with nonresidents by the private sector, a situation which was partially offset by the net decrease in the debt assumed by the non-financial public sector. In turn, the external debt of the financial sector without the BCRA remained virtually constant. Despite the nominal year-on-year increase, the debt decreased in relation to the GDP as compared to the second quarter of 2011 (from 33.5% to 30.7% in June 2012). Thus, the public foreign debt represented 15.5% of GDP and the private foreign debt represented 15.2% of GDP. Thus, the external debt-to-GDP ratio reached its lowest level in the last 15 years and was substantially lower than those reached by developed countries and emerging economies. In December 2012, Argentina paid USD 3.52 billion out of its foreign debt related to the GDP-linked coupon, which was part of the debt restructuring process and was given to the investors around the world who accepted the swaps in 2005 and 2010. In late November, there was a risk that Argentina’s payment would not be made when a New York judge ordered the country to pay the entire amount claimed by investments funds and threatened to impound the money. Afterwards, the Second District Court of Appeals issued a decision favorable to Argentina and allowed funds to be paid out to foreign investors with no risk of them being impounded. Should the economy fail to grow over 3.26% in 2012 and 2013, no payments will be realized on the GDP-indexed coupons in 2013 and 2014, respectively. If this were the case, Argentina would look at a comfortable foreign date due date schedule that would not exceed 4.5 billion dollars in 2013.
2.2. Basic Economic Indicators Argentine economy slowed down in 2012, largely as a result of the contraction in global economy, especially in Brazil -which affected manufactured goods exportsand the effect of the drought on agricultural production. As of September, the GDP showed a cumulative annual growth of 2.1%. The GDP growth rate is estimated to have reached about 2.2% in 2012, as domestic demand boosted economic activity. Demand-side, gross domestic fixed investment (GDFI) showed signs of recovery in the second half of the year after exhibiting negative behavior during the first half. There was an improvement in purchases of durable production equipment, while construction investments were reduced. Private consumption remained the component with the largest contribution to the economy. Family spending was favored by an increase in income from the labor market and government transfers such as the universal child allowance (AUH) and pensions, and the availability of financing alternatives. Meanwhile, export volumes had an unfavorable performance.
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Economy
Supply-side, partial indicators show a year-on-year decline in construction and industrial activity, although the margin has improved. The agricultural industry had a weak performance, with a reduction in agricultural production and a moderate increase in the stockbreeding industry. There was a slowdown in the expansion of the service industry due to the impact of the decreased production of goods. Once more, communications and financial intermediation grew the most and had a more significant contribution to the progress in economic activity, while trade and transport were less dynamic. Finally, import volumes decreased during the second half-year for all types of goods. An increase in the economic expansion rate is expected for 2013, based on a solid domestic market, high harvest levels in historic terms and the prospects of a larger growth for Argentina’s main trade partners. Argentina’s macroeconomic performance is shown below: Item Nominal GDP (USD bn)
2007
2008
2009
2010
2011
2012e
2013e
260.1
324.4
305.8
367.6
444.6
474.8
495.1
Real GDP (annual var., in %)
8.7
6.9
0.3
8.2
9.0
2.2
3.9
CPI (annual var. In % Dec - Dec)
8.5
8.0
7.1
10.9
9.5
10.2
11.8
150.7
171.7
187.0
253.9
320.5
392.4
486.2 89.9
Total deposits (ARS bn) Exports (USD bn)
55.9
73.5
55.9
68.4
80.4
85.3
Imports (USD bn)
(44.7)
(62.2)
(39.9)
(55.6)
(71.5)
(74.8)
79.7
Trade balance (USD bn)
11.2
11.3
16.0
12.8
8.9
10.5
10.2
International reserves (USD bn)
46.2
44.6
46.0
53.2
49.2
46.0
47.9
Exchange rate (ARS/USD)
3.1
3.3
3.8
4.0
4.3
4.8
5.6
Unemployment rate (in %)
8.3
7.8
9.0
7.7
7.2
7.3
7.1
Source: Developed internally based on BCRA, IMF, ECLAC and Argentine Ministry of Economy data.
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Economy
GDP by Economic Sector Millions of current pesos. Second quarter 2012. Producers of Goods Agriculture, livestock, hunting and forestry Fishing Mining and quarrying Manufactured goods industry Electricity, gas and water Construction Producers of Services Wholesale and retail trade and repairs Hotels and restaurants Transport, storage and communications Financial intermediation Real estate, business and leasing activities Public administration and defense Teaching, social and health services Other service activities and household services
871,030 315,564 2,408 62,098 352,734 19,961 118,265 1,223,744 280,137 37,404 158,647 125,070 183,645 147,647 208,182 82,985
Source: INDEC
2.3. Foreign exchange, credit, financial and monetary policies Schedule for 2013: New Charter and multiple mandates The amendment of the BCRA’s Charter represents a landmark in the institutional organization of Argentina’s economic policy. Article 3 of the BCRA’s new Charter establishes that “the purpose of the bank is to promote monetary stability, financial stability, employment and socially equitable economic development, within its powers and under the framework of the policies established by the federal government." Thus, BCRA understands that in order to fulfill its mandate, and pursuant to article 42 which sets forth that “the Bank shall publish before the beginning of each fiscal year its objectives and plans regarding the development of monetary, financial, credit and foreign exchange policies”, policies along the following lines are required to be maintained and strengthened given the specific characteristics of the Argentine economy: ► As regards policies on foreign exchange and international reserves, the
BCRA’s objective is to keep the managed float regime restricting foreign exchange volatility. It also intends to consolidate the accumulation of reserves, which will allow Argentina to continue its debt reduction policy with private creditors, and especially as regards debt in foreign currency. ► The credit policy is aimed at strengthening the credit channel, increasing the credit-to-GDP ratio alongside the involvement in long-term production financing, especially for SMEs. ► As regards the financial policy, the BCRA’s objective is to increase the inclusion and democratization of access to financial services and ensure that the system remains stable, enhancing prudent regulation and incorporating the international standards agreed upon by the G20 which are compatible with the objectives laid down by the policies established by the BCRA.
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Economy
► The BCRA’s role financing the Argentine Treasury, as established by its
Charter and National Budget Law, is also considered to be strategic. Such financing gives room to implement a fiscal policy consistent with the economic cycle. ► Finally, a monetary policy is determined according to the new system of multiple mandates and is consistent with the abovementioned policy objectives.
Foreign Exchange Policy The managed float regime has been one of the core aspects of the economic policy adopted since 2003. This system seeks to provide a context of foreseeability that may stimulate savings and investments. To such end, the Central Bank will continue to participate in the foreign exchange market and for the purpose of moderating the volatility of the foreign exchange rate in its double role as a variable relevant to both growth and financial stability. As from October 2011, measures were introduced to regulate access to the foreign exchange market for accumulation purposes to give preference to the use of foreign currency in transactions involving production activities and private and public debt repayments. These regulations are integrated into the existing macroprudential policy framework, which mitigates the impact of capital flight (from residents and non-residents) on the exchange rate and on the trade balance. Thus, the positive trade balance can be assigned according to criteria prioritizing the wider economic and social impact of foreign currency. These regulations will remain in effect during 2013. For 2013, foreign currency supply from trade is expected to be more favorable than that of 2012, which was affected by the decrease in exports caused by the lower harvest and the economic slowdown in Brazil. Net foreign currency purchases by monetary authorities are expected to reach about USD 12.5 billion in 2013. This inflow of foreign currency will help achieve the goal of restoring the international reserves level, even after debt repayments in foreign currency by the public sector. Between 2003 and 2012, international reserves increased over USD 32 billion, despite the USD 33 billion in sovereign debt repayments made through FONDEA, FONDOI (Fund for Deleveraging with International Organizations) and the repayment to the IMF (International Monetary Fund).
Credit Policy In early July 2012, the “Production investment credit line” was established, whereby the top 20 financial institutions in the system and those which act as financial agents for the State at all government levels should earmark a sum equivalent to at least 5% of their deposits in Argentine pesos for the private sector to fund the acquisition of capital goods or the construction of production facilities. The line provides for a maximum interest rate of 15.01% and a term not shorter than 36 months, while it establishes that half the total amount should be granted to micro-, small- and medium-sized enterprises (MSMEs). From the launch of the instrument through the first two weeks of December, financial institutions have disbursed about 91% (ARS 13.65 billion) of loans to be placed. The total amount granted was distributed in similar portions between large companies and MSMEs. Projections for disbursements to be made during the last two weeks of December and H1 2013 (the latter, from transactions where more than one disbursement was agreed upon) indicate that the degree of compliance with the credit line will exceed 100%.
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Economy
As part of its credit promotion line for 2013, the BCRA will once again promote the “Production investment credit line�, this time considering 5% of private deposits in pesos in November 2012 (ARS 17 billion). Thus, total loans granted through this line as of June 213 will account for about 9% of total loans in pesos to the private sector. Moreover, the PFPB (Bicentenary Productive Financing Program) continued during 2012. To facilitate the transactions, new assets were incorporated that may be accepted as security for the prepayments granted by the BCRA to the banking system. This line finances projects aimed at increasing competitiveness and production capacity to favor the substitution of imports, the insertion of local companies in the international market and the creation of employment. Since the program began, total awarded funds amount to ARS 5.78 billion, with disbursements totaling about ARS 3.9 billion. The economic sector which is the main recipient of resources is the manufacturing industry (71%), followed by the primary sector and the transport and telecommunications industries, with 9% and 8%, respectively The BCRA expects to continue with the PFPB bidding process. For 2013, it is estimated that, should disbursement continue at the same pace as the one seen in recent months, the lent amount could increase by ARS 1.8 billion. Under the new Charter, a third line of action to stimulate financing for the productive sector and MSMEs in particular was the reduction in the minimum cash requirements based on the percentage of loans to such companies over the total loans granted to the private sector by each institution. As this proportion increases, financial institutions can apply an increasing reduction on the minimum cash requirement, up to a maximum equivalent to 3% of deposits if loans to MSMEs exceed 30% of their loan portfolio for the private sector. This decrease in the minimum cash requirement became effective in December. In 2013, the BCRA will maintain its objective of stimulating credit for the private sector, focusing its actions on long-term productive financing, paying special attention to MSMEs and regional economies. Given that loans in pesos to the private sector are estimated to increase by 33%, rates will remain high and exceed those expected for nominal GDP. Thus, along with productive investment required to sustain growth, the process of consolidating the credit channel will continue, causing an increase in the proportion of the total loans (in pesos and foreign currency) as regards GDP by 1.1%, reaching 17.3% of GDP in 2013. Given the ongoing credit orientation policies, production financing will continue to grow in proportion to consumption spending financing. Loans for housing construction will also grow in importance, mainly as a result of the Pro.Cre.Ar program.
Financial Policy Financial stability is achieved when the banking system develops its intermediation roles in an efficient, secure and long-term manner, actively contributing to the economic development process. To this end, it is essential for the financial system to act within an oversight and regulation framework encouraging it to channel national savings into comprehensive business financing, thus avoiding the accumulation of systemic risks that may generate and/or spread stress situations. In recent years, Argentina has developed a set of macroprudential regulations that helped mitigate the local impact of volatility in global financial markets and avoid the creation of speculative economic bubbles. In this regard, the managed float regime and the accumulation of international reserves as well as the controls over foreign exchange and capital movements by residents and non-residents
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Economy
have been the pillars of the macroprudential policy. It worked adequately, which helped mitigate the external shocks caused by the global financial crisis, thus ensuring financial stability conditions in a time of increased turbulence by avoiding sudden reversals in short-term capital flows and a disruption of financing in the Argentine economy. In 2012, the Argentine financial system continued expanding the intermediation levels —with an increase in loans and deposits in the private sector— while it maintained a limited exposure to the main risks related to its activity. Specifically, when facing moderate levels of indebtedness in the private sector, the financial system had a low exposure to credit risk, combining reduced delinquency and high coverage with allowances. In addition, the foreign currency risk when considering the institutions collectively stood at moderate levels, well below the levels reached in the late 1990s and early 2000s, based on the dollarization levels of assets and liabilities. As regards the liquidity risks, the financial system maintained high coverage ratios. Finally, solvency levels improved during 2012 as a result of accrued accounting income and, to a lesser extent, the conversions into equity made effective during the period. One of the most significant measures implemented in 2012 was the expansion of the capital conservation buffer to 75%, which entities have to meet if they wish to distribute dividends, as well as the new capital requirement to hedge operational risk. In both cases, the purpose is to improve solvency for the entities operating in the Argentine territory. In this regard, in November 2012, the BCRA introduced significant changes in the minimum capital requirement systems, effective as from January 2013. Specifically, the method for measuring credit risk was changed. In this regard, the most salient aspects are the redefinition of risk-weighting factors for calculating the regulatory capital requirement –mainly related to loans to natural persons and MSMEs, mortgage financing on a borrower’s only residence and financing in Argentine pesos for the private sector—, and the increase in the capital requirement for receivables transferred to trust funds. In 2013, efforts will be made to consolidate the upward trend in the financial system intermediation levels along with the expansion in economic activity, based on the credit stimulation policies and the regulations aimed at consolidating banking. In this regard, one of the most significant measures adopted in 2012 is the approval of new guidelines for branch openings and the adjustment of the minimum cash requirement for financial institutions based on the location of their head office. Moreover, the BCRA limited the costs of bank transfers —including the elimination of charges for electronic transfers of less than ARS 10,000— and ordered institutions to implement the possibility of bank transfers to be credited immediately. Finally, Argentina continues amending its regulations for convergence with international banking standards (known as Basel II and III). During 2013, the country will go on implementing the commitments assumed within the G20, the FSB (Financial Stabilization Forum) and the Basel Committee on Banking Supervision (BCBS), assessing in each case the adjustments required to see to the priorities of Argentine economic policy.
Monetary Policy The monetization process that had began in the Argentine economy in early 2010 continued during 2012. Both the wider monetary aggregate (M3*, which includes money supply held by the public and total deposits in pesos and foreign currency) and private-sector M3* (which includes money supply held by the public and total private-sector deposits in pesos and foreign currency) increased in proportion over GDP by about 2.5%, after the falls resulting from the impact of the global crisis in 2008 and 2009. 16
Economy
The main source of monetary creation in the segment in Argentine pesos was the increase in loans in pesos to the private sector. The percentage of these loans over GDP largely exceeded the one related to foreign exchange purchases by the BCRA in the foreign exchange market and the one created by public-sector transactions, which enabled the implementation of an anticyclic fiscal policy during the year which helped to sustain employment and economic activity levels. Certificates of deposit in pesos held by the private sector were the component of monetary aggregates that grew the most in 2012; they concentrated about 30% of the increase in M3 and 50% of the increase in private-sector deposits in pesos. Indeed, private-sector time deposits showed a cumulative annual growth of over ARS 54 billion and their year-on-year expansion rate increased by 19% as compared to December 2011, reaching the highest level in recent years. Thus, total private-sector deposits in pesos had increased by 41% in year-on-year terms by late 2012, with time placements which increased by 51% and sight deposits which grew 35%. Should the abovementioned macroeconomic assumptions and plans materialize, monetary aggregates are expected to decrease their expansion rate in 2013, although the remonetization process began in 2010 will continue. Indeed, M3* and private-sector M3* are expected to account for 2% of GDP for the year. In 2012, the Central Bank introduced reforms in minimum cash requirement regulations. As from October 2012, the minimum cash coefficients in pesos began to be differentiated based on the location of the bank branch where the deposit was made. Thus, branches in location I (large cities and towns with a higher degree of development and banking services) have a larger minimum cash requirement, while other locations have a lower minimum cash requirement. This change is aimed at promoting geographic coverage in the banking system and banking services for areas with lower economic potential and population density. Moreover, as mentioned above, under these new regulations, specific deductions were admitted as from December considering the proportion of loans to MSMEs over the total loans granted to the private sector. The results from this policy are expected to consolidate gradually over the coming year, as the new regulatory framework is implemented in full. During the first half of 2012, lending and deposit interest rates experienced a downward trend, in a context of a strong increase in deposits in pesos, which was reflected in an increase in liquidity. Meanwhile, as from June, this trend was reversed and rates began to increase gradually, in line with a marked increase in loans. However, despite the increases during the second half of the year, the average for interest rates in November was below the average for late 2011. For 2013, the various interest rates are expected to remain steady.
2.4. Financial Markets Macro-financial System An integral part of the Argentine financial and economic system as regards capital flows is a macro-financial system composed of the exchange market and the following markets: â–ş â–ş
the capital market the financial market
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Economy
2.4.1. The Capital Market a)
General Characteristics
This market gathers together several different operators for them to interact in the public listing of securities. Through this market, both companies and the Government obtain financing from investments through a series of transactions related to the negotiation of shares and private and government debt securities. The operators making up the capital market are grouped in the following manner: 1.
Stock Market
►
►
Stock Exchanges Securities Markets Stockbrokers Stockbrokerage firms Listed companies Caja de Valores S.A. (main securities depository) Banco de Valores (primary settlement bank for the Merval) Mutual funds Asset management companies Depository companies
2.
Over-the-Counter Market
►
Over-the-counter market brokers MAE (electronic over-the-counter market)
► ► ► ► ► ► ► ►
►
All of these operators are supervised by the CNV (Argentine securities commission), a self-regulating entity that authorizes and controls the parties involved and the markets on which securities are listed.
Capital Markets Regulations In late October 2012, the Argentine Executive introduced a bill to reform the public offering system for corporate bonds and the way the capital market is organized and operates when considered in a comprehensive manner. The bill was passed into law by Congress in November. The main objective in the new Law is to reinforce the CNV’s tools and resources while promoting and/or consolidating other market-related aspects: access, transparency, integration, simplification, efficiency, minor investor protection, etc. The new law updates the system established by Law No. 17,811, as supplemented, considering the transformations found in the financial markets both at the global and local levels over the last few decades (including the shift towards tighter regulatory frameworks with wider perimeters and financial consumer protection based on the global financial crisis that had its peak in 20082009) and international best practices effective in capital markets (such as the principles set forth by the International Organization of Securities Commissions and the regulations issued by the Financial Action Task Force). Moreover, a series of relevant regulations related to market and public offering regulations was organized in a single regulatory body with the force of Law.
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Economy
Supplementing the banking regulatory reform process initiated by the amendment to the Central Bank’s Charter, the new Law focuses on strengthening the role of the public sector in capital market regulation and oversight. Additionally, it seeks to perform actions on other aspects, including: ► ► ► ► ► ►
Promoting the development of the capital market to drive savings towards investments that may boost productive development. Facilitating and extending market access and participation by various types of players (including smaller investors and SMEs). Ensuring transparency and reliability. Encouraging simplification of transactions. Encouraging the existence of a less fragmented, more federal market. Defending the rights of minority investors which are less significant in dimension and sophistication.
As regards the specific developments included in this new Law, one of the main points refers to the consolidation of the CNV’s role as regulatory and oversight agency for the capital market as a whole. Thus, the CNV becomes the sole agency which oversees the public offering of securities in which authorization, registration, regulation, supervision and control roles and disciplinary power over all players involved in the capital market are concentrated. This implies a relevant shift from the market self-regulation paradigm that had been effective under Law No. 17,811, as amended. In this regard, the corporate fraud cases in the early 2000s (Enron, WorldCom, etc.) generated a trend of regulatory changes around the world, with harsher penalties and increased powers for regulatory agencies. This trend intensified during the global financial crisis of 2008.
The Argentine financial regulatory framework remained virtually alien to this global trend until early 2012, when the amendment to the Central Bank’s Charter was approved. In the specific case of the capital market, the new law is aimed at extending both the disciplinary power and the resources available for the regulatory entity. On the one hand, although the previous regulatory framework gave the CNV the power to impose penalties as regards public offering, it could only report a market agent to the relevant market if noncompliance was verified, and such market was the competent sphere where disciplinary measures were taken. Thus, for instance, the CNV’s inability to exercise direct disciplinary power over stock market agents was a peculiar characteristic of the Argentine capital market that is absent from markets in other countries. On the other hand, under the new Law the CNV has control power and exclusive disciplinary competence over all agents performing activities in the capital market. Such extension of the CNV’s action capacity comes hand in hand with a greater availability of resources. In addition to those allocated by annual Federal Budget laws, additional resources will be available, such as revenues from fines, oversight and control rates and authorization charges. Together with the shift from the self-regulation paradigm, this change proposes progress in the demutualization process, in line with global trends. Markets should be made up of sociedades anónimas (Argentine business type akin to a stock corporation) included in the public offering system, and participation in the market as an intermediary will no longer require being a shareholder. In more general terms, the CNV will now authorize and register the different types of agents that perform the various activities inherent to the market based on requirements to be established. Initially, this would extend the universe of agents, with potential implications on competition and the costs to be borne by users, for instance. In addition, in the specific case of credit rating, the CNV will determine 19
Economy
which types of organizations may perform this activity, and may include state universities authorized by this agency. Two measures stand out as regards market integration and the federal nature thereof. On the one hand, the CNV may require the different existing markets to establish an interconnection system with a shared book of orders to avoid fragmentation and facilitate access to better liquidity conditions for retail investors. On the other hand, the CNV may establish regional delegations. Two main changes are introduced into the public offering system. The CNV will be empowered to establish differentiated systems according to the characteristics of the different issuers and/or subscribers. Additionally, the takeover system is determined to be universal; it becomes applicable to all listed companies, even those companies that would have chosen to be excluded from its application under the current system. Finally, the new Law seeks a more efficient use of the information collected by the CNV while performing its regular duties, facilitating the coordinated actions by different agencies related to financial market oversight considered under a comprehensive approach that recognizes both the presence of financial conglomerates as well as the high degree of interconnection between the different products and players operating in the financial market. Regardless of the required secrecy and confidentiality, the goal is for information to be exchanged between the CNV, the BCRA, the SSN (Argentine insurance regulatory agency) and the UIF (Financial Information Unit), in addition to the fulfillment of potential request for information from similar foreign authorities with which cooperation treaties have been signed. In conclusion, consistently with a consideration of financial markets from a wide perspective and the explicit objective of guiding them to economic growth, and supplementing the work already begun in the banking system, the new Law seeks to bring the regulatory framework in the capital market up to date and make it work with enhanced efficiency. In this regard, the regulation of specific issues by the CNV and the dynamics of the implementation thereof gain relevance.
2.4.2. Financial Market Introduction In Argentina, the banking activity is governed by Law No. 21,526 of 1977, whereby the BCRA is the enforcement agency and, as such, it issues regulations and controls the entities included in the law (authorization and operation conditions in the banking industry; definition of transactions allowed, forbidden and restrained; monetary controls; compliance with certain statutory operating ratios; reporting; booking and control system; dissolution and liquidation; etc.). Characteristics of the Argentine financial system Classification ►
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Commercial banks Government-owned banks: federal, provincial and municipal banks. Domestic private banks with national capital: cooperatives and noncooperatives. Foreign banks: foreign banks and foreign bank branches.
Economy
►
► ► ► ► ► ► ►
Investment banks Provincial government-owned banks. Local banks with foreign capital. Mortgage banks Development banks Savings accounts Finance companies Savings and loan institutions for home building and development of other real estate Credit organizations Representation offices
Financing systems. Main transactions Financial transactions are mainly performed in Argentine pesos (legal tender), US dollars and government securities. The segments that constitute the Argentine financial system are: ► ► ►
Segment in Argentine pesos Segment in foreign currency Segment with own resources
The main transactions include: ► ► ► ► ► ► ► ► ► ► ► ► ► ► ► ►
Overdrafts in checking accounts Signature loans Commercial paper discount Mortgage loans Collateral loans Personal loans Credit cards Demand deposits Time deposits Deposits in common checking accounts Deposits in government securities Interbank transactions Repo transactions Bank acceptances Foreign exchange transactions in cash Term foreign exchange transactions
Main regulations ►
Statutory operating ratios ► ► ► ► ► ► ► ► ►
Keeping minimum equity (minimum capital requirement). Meeting investment cap requirements in other companies’ equity. Meeting lending cap requirements; these limits are measured in terms of minimum equity required. Monetary regulations. There are minimum cash requirements. Optional deposit guarantee. Forbidden and restrained transactions. Banks cannot perform commercial or any other type of activity on its own account. Banks cannot encumber their assets without BCRA’s previous authorization.
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Economy
► ►
►
Banks cannot accept their own actions as debt guarantees. Banks cannot operate with related companies and/or natural persons under more favorable conditions than those offered to their other clients. Banks, except for commercial banks, cannot issue bank bills or make transfers among different financial markets.
2.5. Changes in Argentina’s Economy in 2012 Argentine economy slowed down in 2012, largely as a result of the contraction in global economy, especially in Brazil -which affected manufactured goods exportsand the effect of the drought on agricultural production. Aggregate demand includes decreases in exports and a low return on investment, while consumption, both public and private, was the main driver in the economy. As of September, the GDP showed a cumulative annual growth of 2.1%. The GDP growth rate is estimated to have reached about 2.2% in 2012. Growth is expected to recover in 2013 and stand at about 3.8% in year-on-year terms, thanks to the improvement in agricultural production —particularly soybean and corn harvest—, the recovery in Brazil and a sustained expansive fiscal policy. As regards economic policy, structural measures were taken in 2012 with an impact that exceeds the short term on the fiscal and monetary fronts and at the level of foreign trade. Some of the most salient measures are the renationalization of a majority stake (51%) in oil company Repsol YPF, the introduction of a series of measures aimed at reducing the accumulation of foreign currency by residents and limiting the use of foreign currency in local business transactions (real estate sector), and the reform of the Central Bank’s Charter, which, by extending the scope of objectives set by monetary authorities, enabled the implementation of credit orientation and regulation policies and increased the statutory margin to finance the Federal Treasury. At the fiscal level, the government maintained during 2012 an expansive policy based on a 29% year-on-year growth of primary spending accumulated as of September, higher that the rise in income, which increased 26.2% in the same period. Tax revenues in the federal public sector experienced a cumulative yearon-year increase of 24%, while revenues from social security contributions grew by 30.1%, driven by salary increases and the rise in registered employment. During the same period, current spending grew by 31.6% in year-on-year terms, which mainly originated from the increase in social security benefits and compensation, standing at 40.8% and 28.7% in year-on-year terms, respectively. In turn, transfers to the private sector, an account which had increased significantly in recent years, were less dynamic during the first nine months of the year, with an 18% increase as a result of the reduction in subsidies, particularly for public transport and residential gas and electricity consumption. According to the 2013 budget message, government transfers to privately-owned companies are expected to decrease by 11.4% in nominal terms. The dynamics of revenues and spending shown by the federal public sector caused a downward trend in the financial balance, from a deficit standing at 0.4% of cumulative GDP as of September 2011 to a negative balance of about 1.0% of GDP during the same period in 2012. However, data from the 2013 budget message yield a deficit totaling 1.6% of GDP by the end of the year, similarly to the previous year, which would imply an even larger increase in deficit during the fourth quarter of the year. The government chose once more to use the resources of the public sector itself to face the financing needs of the Argentine Treasury, as it had done in 2011, mainly from the BCRA and the Sustainability Guarantee Fund of the public social security system. In the case of the BCRA, in addition to the 22
Economy
usual remittance of profits, the most significant measures were the transfer of international reserves to face external commitments assumed by the Treasury and the extension of margin for the BCRA to grant temporary prepayments to the Treasury, which increased from 3.4% in October 2011 to 5.3% in October 2012. Disaggregated information by sector, available of the first half of 2012, shows a 5% increase in service producing sectors and a 2% decrease in goods producing sectors. Among goods producing sectors, the manufacturing and construction industries experienced moderate growth (1.2% and 0.5%, respectively), while the agricultural industry experienced a 16% year-on-year downturn, which the decrease in this sector. In the case of agriculture, there were year-on-year decreases in the production of soybean (18%), corn (12%), wheat (13%) and sunflower (9%). As regards service producing sectors, financial intermediation is the most significant, with a 21% growth during the first half-year, driven by private-sector time deposits in pesos and borrowings. During the first quarter of the year, the manufacturing industry decreased by 1.3%. Among the subsectors which experienced a year-on-year increase, the most significant are tobacco products and chemical products and substances, both with a 3.8% increase; in the case of the latter, the increase was determined by pharmaceutical products (7.5%). The basic metals and motor vehicle industries decreased by 7.6% and 11.7%, respectively. The decrease in the motor vehicle sector is caused by the 28% reduction in exports and the 6% fall in the domestic market accumulated as of September. The inflation rate remained at a level similar to that experienced the prior year, over the regional average. In this context, there was a mean salary increase of about 25% which has reaffirmed the upward trend in real salary. Compensation in the private sector experienced an increase above the average between September 2011 and September 2012, while salaries of public-sector employees had an increase below this average. In turn, during the third quarter of 2012, the employment rate stood at a level similar to that experienced in the same period of 2011, while unemployment rate increased by 0.4% during the same period, totaling 7.6% of the population.
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3. Business Presence 3.1.
Types of Business Associations
The types of business associations covered by Argentine Business Associations Law (No. 19,550) are those indicated below: ►
Stock corporation (sociedad anónima) – –
► ► ►
Limited liability company (sociedad de responsabilidad limitada) Company in which the Government is the majority shareholder Limited partnership (sociedad en comandita) – –
► ► ►
Publicly-held Closely-held
Stock limited Non-stock limited
General partnership (sociedad colectiva) Partnership in which one of the partners provides the capital and the other the services Branch office of a foreign corporation
The most common forms of business associations used by foreign investors in Argentina are the stock corporations and, to a lesser extent, local branches of foreign companies. The main characteristics of both are described below.
3.1.1. Stock corporation (Sociedad Anónima, or “S.A.”) ►
Capital is represented by shares of stock.
►
Shares must be registered and nonendorsable. They may be represented by certificates or registered in accounts opened in the shareholders’ names in a share certificate registry by the issuing company or by commercial or investment banks or by authorized share depositary entities. Furthermore, according to the rights they grant, shares may be classified into common or preferred shares. The latter usually have priority upon payment of dividends, do not carry voting rights and, in general, are entitled to fixed accumulative dividends.
►
There must be at least two shareholders.
The IGJ (Argentine regulatory agency of business associations) in Buenos Aires City will not register companies where the plurality of owners is merely formal or in name only (for example, when one of the shareholders owns 99.99% of shares). The scope of the IGJ's oversight powers include verifying the actual existence of a plurality of shareholders, for which it assesses the initial contribution made by each founding shareholder. In deciding whether to register the company, the IGJ evaluates if the contributions amount to a minimum economically substantial sum to effectively constitute a plurality of shareholders.
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Business Presence
►
The shareholders’ liability is limited to the capital contributed by them.
►
The main characteristics of stock corporations (corporate purpose, duration, management, etc.) are provided in the articles of incorporation or bylaws that require approval by the appropriate governmental oversight agency of associations (in Buenos Aires City, the IGJ), published in the Official Bulletin, registered with the Public Registry of Commerce and notarized.
►
If the shareholders of a corporation organized in Argentina are foreign business associations, they have to file their articles of incorporation or bylaws with the Public Registry of Commerce.
►
The shareholders must hold at least one regular meeting every year with the main purpose of approving the financial statements, distributing profits and designating directors and statutory auditors, as the case may be.
►
The Shareholders’ Meeting designates a Board of Directs on a yearly basis, made up of one or more persons, who are responsible for company administration.
►
Stock corporations that fall under permanent regulatory supervision by respective authorities, given their particular characteristics, are required to have at least three directors.
►
As established by IGJ General Resolution 7/05, bylaws are required to establish the directors' guarantees, which should meet the abide by the following rules: ►
It should consist in bonds, government securities or amounts in local or foreign currency deposited with financial institutions or securities clearing houses, to the company’s order, or in sureties, bank guarantees, surety bonds or business liability insurance, the cost of which should be borne by each director. Under no circumstances can the guarantee be funded using the direct inflow of company cash;
►
When the guarantee consists in deposits of bonds, government securities or amounts of money in local or foreign currency, the conditions to create this guarantee should ensure that it remain unavailable while the statute of limitations concerning legal liability actions is still running(at least three years as from the end of the term of office); and
►
The amount of the guarantee will be the same for all directors and cannot be lower than ARS 10,000 per director (for limited liability companies with capital amounting to less than ARS 12,000, the guarantee amount shall be ARS 2,000 for every manager).
Alternate directors are not required to provide a guarantee until they hold office to replace one of the regular directors.
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Business Presence
Very strict controls are imposed to ensure compliance with the setup of such guarantees, which include verifications performed by the IGJ before consenting to the incorporation, business transformation and registration of the appointed directors, in addition to the duty of reporting such compliance by the statutory auditor. The new system on guarantees is applicable to appointments or renewals as from February 7, 2005. ►
Stock corporations are subject to a series of special controls, such as:
Stock corporations with special characteristics (see point 3.4) are under constant supervision, while for other business associations supervision is limited to the articles of incorporation or the bylaws, their amendments and changes in capital stock. Stock corporations subject to permanent supervision should have their own supervisory position within the company that, depending on the circumstances, may be filled by an individual statutory auditor (síndico) or by a statutory audit committee (comisión fiscalizadora), which must have an uneven amount of members (generally three) appointed by the Shareholders' Meeting. The other stock corporations may dispense with such duties. In that case, it is the shareholders who are empowered to individually exercise this control. All stock corporations can have a surveillance committee that will work alongside the statutory audit committee or even replace it. Its duties are considerably broader.
3.1.2. Branches of Foreign Companies ►
To be able to legally do business as a branch, these organizations must prove the existence of their head offices abroad, register the articles of association or bylaws with the Registry of Public Commerce, and appoint and register representatives.
►
Branches are subject to constant control by the governmental corporate control agency (in Buenos Aires City, the IGJ) and are required to fulfill the same requirements as those required of stock corporations subject to that control.
►
Branches are required to keep books separately from those of their head offices, and to present financial statements to the corporate oversight agency. Corporations presenting financial statements to the IGJ in Buenos Aires City must do so within a period of 60 business days after their fiscal year-end.
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Business Presence
►
Under IGJ General Resolution No .11/06, foreign branches (section 118, Law No. 19,550) are required to maintain a positive owners' equity. the IGJ will verify that owners' equity remains positive and, as applicable, that the capital stock assigned that was registered with the Public Registry of Commerce also remains positive, as per the last financial statements required to be presented. If the abovementioned financial statements show negative owners’ equity or, as the case may be, equity lower than the assigned capital, the branch will have a term of 90 days as from the notice received and, if no notice was received, a term of 180 days as from the end date of the financial statements to: 1)
Provide evidence of the restoration of the owners’ equity or the assigned capital, as the case may be, through an independent accountant’s certification; or
2)
Request the branch's deregistration or, as the case may be, the registration of the decision to reverse the allocation of capital or to decrease its amount to a total equaling or not exceeding owners' equity.
In the event of noncompliance, once the term granted has expired, the IGJ will request that the capital assigned to the branch be deregistered or that the branch be wound up and deregistered, depending on the circumstances of the noncompliance. ►
IGJ General Resolution No. 7/03 established important additional requirements concerning companies organized abroad, for those requesting registration to business in Argentina and for those already existing, providing evidence that they are already doing business abroad, summarized in the paragraphs below. Subsequently, IGJ General Resolution No. 2/05 set forth stricter measures in certain cases, establishing that it would not register foreign companies lacking the capacity and legitimacy to do business in the territory in which they were organized or with the scope described in sections 118, third paragraph, and 123, Law No. 19,550, unless the companies in question have a special purpose or are referred to as “vehicle” companies in lay terms, for which requirements under General Resolution No. 7/03 are met through the direct or indirect parent company. To do business in Argentina, these companies must previously have fully complied with Argentine law, complying with the provisions established in IGJ General Resolution No. 12/03. The abovementioned IGJ regulations were replaced by General Resolution 7/05, a new revised version of the IGJ regulations that came into force on February 27, 2006, introducing certain changes that are discussed in the paragraphs below. a)
Companies requiring registration: They are required to report legal prohibitions or restrictions in their country of origin to engage in all or their core activities, , identify their owners (when they hold equity interests not subject to listings and public offerings) and evidence that they actually do business abroad, with at least one of the following conditions:
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Business Presence
►
that they have one or more permanent agencies, branches or representation offices abroad;
►
that they have noncurrent fixed assets or rights to commercially use assets belonging to third parties of that nature;
►
that they hold equity interests in other companies not subject to public offering; or
►
that they carry out investment transactions on a regular basis in stock exchanges or securities markets as set forth in their corporate purpose.
As regards the items mentioned above in points (ii) and (iii), companies are required to indicate the values shown on the last financial statements approved by the company provided they date back to one year at the most. As regards the transactions indicated in point (iv), it is necessary to file a certificate referring to the transactions performed during the year preceding the year of registration, stating the types of securities and transactions, volume negotiated and lump-sum amounts in accordance with listed prices, the stock exchanges and securities markets they were carried out on, and listed prices of the securities held as of the certificate’s date of issuance. As regards operating property belonging to other parties, as mentioned in point (ii), registrants are required to file a certification stating the assets used and gross revenues obtained shown on the abovementioned financial statements. The IGJ also allows for the presentation of lump-sum certifications reliably and reasonably showing the company’s position, when they refer to the audited and approved financial statements with favorable opinions and when issuance of such certifications is justified by the amount and variety of the company’s assets and transactions. Furthermore, the IGJ will assess the sufficiency of the documentation on a case-by-case basis, being able to grant exemptions from certain requirements when it is publicly and generally known that the company engages in financially significant business abroad and that its center of operations is also abroad. This assessment shall not be limited to quantitative methods. If the company forms part of an international group of companies through a control relationship, meeting the abovementioned requirement of being a publicly and generally known fact, this will be enough to identify the subject or subjects under whose unified management it is and file an independent accountant’s certification on the company’s owners’ equity resulting from the group of companies’ last consolidated financial statements. b)
Registered Companies: Branches, agencies or representations (Section 118, paragraph 3, Law No. 19,550) are required to file with the IGJ on an annual basis jointly with their financial statements, a certification signed by a corporate officer, whose powers to such end must be certified by
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Business Presence
a public notary or government official, or other appropriate documentation that: i) states the changes experienced in the accounts mentioned in point (a) above, as regards breakdown and values as of the company’s financial statements closing date, [the IGJ may grant an exemption from having to meet those requirements or allow the accounting certification of owners' equity as taken from the group of companies' consolidated financial statements as mentioned in the last paragraph of point (a)], and (ii) provide proof of the capital stock structure and ownership as of the date indicated in the paragraph above, individually identifying the partners. Additionally, companies organized abroad that only hold permanent equity interests in an Argentine company (section 123, Law No. 19,550) are required to file the same information mentioned above required of branches and must evidence compliance with AFIP (Federal public revenue agency) General Resolution 1375 (information on financial transactions between Argentine residents and the foreign company) for the prior calendar year or the shorter period in question. c)
Foreign companies acting as a "vehicle" or with a special purpose: Under General Resolution 7/05, foreign companies applying for their registration or those already organized having to make the abovementioned presentations, belonging to groups of companies, the leading company and direct or indirect parent companies of which were organized and are domiciled abroad and subject to foreign regulations, shall be exempt from having to meet the requirements of General Resolution 7/05, provided they meet the following requirements: File an express representation from management that the company is exclusively an investment “vehicle” or instrument used for only this purpose by another company from the group that directly or indirectly controls it based on the equity interests held. Evidence, by the same means provided in General Resolution No. 7/05, that the requirements of this resolution are met by the indirect or indirect parent company. File a sworn statement through the representative including: (a) an organization chart of the group of companies, indicating the equity interest percentages held that show director indirect control, either by one or more companies and (b) the identification of the Partners owning the equity interests mentioned in the point above.
d)
Foreign companies from low- or nil-taxation jurisdictions or jurisdictions that are “non-cooperative” in combating money laundering and crossborder crimes: Under General Resolution No. 7/05, with these types of companies the IGJ will assess whether the requirements set forth in such resolution have been met, applying a strict evaluation method, although the laws in place in that company's organization jurisdiction do not prohibit or restrict such companies in their own territory.
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Business Presence
Foreign branches particularly (section 118, third paragraph, Law No. 19,550), should evidence that they effectively do financially significant business in the place of their organization, registration or incorporation, by presenting the last financial statements and a detailed description of the main transactions carried out there during the period covered by the abovementioned financial statements or during the prior year if the period covered therein is shorter, providing dates, parties, purpose and financial volumes involved. The main requirements set forth in General Resolution No. 7/05 shall not apply to foreign companies acting as “vehicles� that have already been registered or that are registered under such resolution. However, after having been registered, the IGJ will send its background information to the AFIP, to determine if there are any matters within its competence that may require attention. e)
Offshore companies (*): The IGJ shall not register offshore companies from jurisdictions of that nature. To engage in activities in furtherance of their corporate purpose or to hold an equity interest in other companies, they must first comply fully with Argentine legislation. Those companies organized abroad that, under laws of the jurisdiction in which they were organized, incorporated or registered, are forbidden or restricted from performing all of their activities, or their main business activity or activities.
f)
Consequences of failing to comply with IGJ General Resolution No. 7/05 If a foreign company intending to organize in Argentina fails to meet the requirements established in General Resolution No. 7/05, the IGJ will deny registration. Additionally, should a foreign company that has already been created fail to comply with such resolution, the IGJ may require that its bylaws meet Law No. 19,550, as set forth in IGJ General Resolution No. 7/05, having to adopt one of the business association types set forth in such law, that is, it will be required to turn into a local company whenever it lacks assets abroad, whenever its noncurrent assets abroad are not significant of if its principal place of business in Argentina is the company's actual management center. The IGJ may request that courts order the deregistration of the company, as applicable and, as the case may be, that it be would up (for foreign companies organized under section 118, paragraph 3, Law No. 19,550), when they fail to comply with legislation mentioned above. Deregistration is also a possibility when companies fail to file the annual certification in point (b) or in the event of the recurring failure to present the annual financial statements.
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For Argentine companies the shareholders of which are companies organized abroad, the IGJ will not register the documentation associated with the shareholders’’ or partners’ meetings when foreign companies not registered under section 123, Argentine Business Associations Law took part in the voting, regardless of the size of their equity interests and provided their votes were sufficient to make a difference in the decisions. Also, for companies required to present financial statements, the approval thereof and other company decisions made in the respective meeting and under the abovementioned conditions, will be deemed to contain irregularities and be ineffective for administrative purposes. Notwithstanding whether the situations mentioned in the preceding paragraph are actually verified, having foreign companies that are not registered under section 123, Law No. 19,550, participate in stock corporation shareholders' meetings will lead to the directors of such stock corporations becoming liable to fines.
3.2.
Joint Venture
Cooperation agreements between companies ► ►
Cooperating groups (agrupaciones de colaboración) Temporary business association undertakings (uniones transitorias de empresas)
In both cases, the law expressly provides that no new legal entity or artificial person is created. This is a mere association with a specific purpose and the relationship is governed by the agreement executed by the respective parties. The agreements of this kind require registration with the Public Registry of Commerce. ►
Cooperating groups (agrupaciones de colaboración)
The purpose of these groupings is for the members to provide each other with reciprocal assistance in developing certain phases of their businesses, enhancing or increasing their income They may not engage in profit-seeking ventures and any financial advantage they may obtain will form part of the members’ assets. The group’s assets form part of their “common operating fund”, which is considered to be an indivisible estate. Creditors of the group’s members cannot enforce their claims against the common fund. ►
Temporary business association undertakings (uniones transitorias de empresas)
The purpose of these associations consists in providing a given service or supplying a given product in or outside Argentine territory. The bankruptcy or liquidation of any of its members shall not result in termination of the temporary association agreement, and the temporary association may continue to operate with the remaining members.
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3.3.
Corporate and Accounting Records
All business associations domiciled in Argentina are required to carry accounting records of their transactions. Accounting books required by statute include the Inventory and Financial Statements Book, as well as the subsidiary books supplementing them. Stock corporations are required to keep books of the directors’ meeting minutes and shareholders’ meeting minutes, as well as the record of attendance at shareholders’ meetings and the shares register. These books require binding and pages must be foliated and individualized by the Public Registry of Commerce. However, business associations, cooperatives, nonprofit organizations and foundations using mechanized or electronic data processing can request that the appropriate oversight authorities exempt them from these formal requirements, except as regards Shareholders’ and Directors’ Meeting Minutes Book and the Inventory and Financial Statements Book in the case of entities controlled by the CNV and the various IGJ (see point 3.4), except the IGJ in the City of Buenos Aires. Accounting records other than the Inventory and Financial Statements Book in the case of entities controlled by the CNV and the various IGJ (see point 3.4), except the IGJ in the City of Buenos Aires, may be carried using computerized booking systems with paper printouts (listings on removable sheets of paper), compact discs, other optical discs and microfilms, as long as authorization has first been obtained from the IGJ. To obtain this authorization, the company must meet a series of requirements, some of which include a technical demonstration showing that the records cannot be altered, which will be supported by administrative and accounting internal controls as well as by other operating or programmed internal controls, applied to the data input, processing and output. Under the scope of the IGJ of Buenos Aires City, entities will be allowed to keep the breakdown of inventories in an analytical supplementary record issued by a computerized accounting registration system, in which case they need to request the related authorization from the IGJ, according to the requirements established by such agency as regards accounting records using computers, mechanic media or other, mentioned in the preceding paragraph. The summary of the related account in the Inventory and Financial Statements book should include a reference to the breakdown included in the supplementary inventory record. Companies carrying accounting records using computerized booking systems such as those mentioned above should file an independent accountant's certification with the IGJ within the 120-day period after year-end, containing the following: (a) an exact description of the system used during the year and (b) a properlyfounded opinion on the agreement between the booking system used during the year and the authorized booking system. If there are no objections from the IGJ, it will issue a certification that should be added to the Inventories and Financial Statements Book, which will be required to consider the books to be carried in conformity with the law. Furthermore, every two years a technical upgrade report is to be filed with the IGJ regarding the obsolescence of the system being used. The Argentine Commercial Code provides that all businessmen shall be required to prepare, within the first three months after each fiscal year-end, a balance sheet and a statement of income that should be transcribed in the Inventory and Financial Statements Book.
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Business Associations Law contains provisions related to the information that must be included in the financial statements. Additionally, oversight agencies have specific regulations in this regard that supplement Business Associations Law. The financial statements of stock corporations and foreign branches should include an independent certified public accountant’s report on whether those financial statements taken as a whole fairly present the company's financial position and its results of operations (and changes in cash flows, as the case may be), in accordance with the professional accounting standards.
3.4.
Oversight Agencies
The most significant aspects involving oversight by authorities are described below: IGJ (Argentine regulatory agency of business associations) This is the agency through which the Argentine Government controls certain business associations domiciled in Argentina (stock corporations, branches of foreign companies, savings and loan organizations, non-profit associations and foundations). Every jurisdiction has an IGJ office. In Buenos Aires City, the IGJ manages the Public Registry of Commerce. The agency is empowered to examine books and accounting records, request information and any documents it deems necessary, attend shareholder meetings and lodge complaints with administrative authorities and courts of law. Stock corporations with the characteristics listed below are permanently controlled: a) b) c)
d) e)
f)
*
Stock corporations publicly offering their equity or debt securities (*). Stock corporations with capital stock equal to or exceeding 10 million Argentine pesos. Stock corporations engaging in savings or investment transactions or obtaining money or other securities from the general public promising future consideration or benefit. Stock corporations managing concessions of public utilities. Corporations that are mixed companies (where capital stock is held by both the government and private shareholders) or in which the government is the majority shareholder. Stock corporations which are parent companies or subsidiaries of another company subject to control under one of the points listed above. In Buenos Aires City, corporate control is carried out by the CNV (Argentine securities exchange). See point 2.5.1. (The Capital Market).
CNV (Argentine Securities Commission) This is the oversight agency authorizing and controlling companies wishing to publicly offer their shares and other securities. See Point 2.5.1 (The Capital Market).
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Other There are other specific oversight agencies that exercise authority by virtue of their role in society, such as the Central Bank of Argentina, which regulates financial and banking transactions, the SSN (Argentine insurance companies regulatory agency), which regulates the insurance industry, and the SRT (Argentine workers compensation insurance regulatory agency), which controls the companies that manage workers compensation insurance.
3.5.
Year-end, Financial Statements and Accounting and Audit Standards
3.5.1. Financial Reporting Stock and limited liability companies with a capital exceeding 10 million Argentine pesos are required to prepare annual financial statements (balance sheet, statements of income, changes in equity and cash flows, or changes in working capital, if the company is organized in conformity with section 299, Law No. 19,550). Furthermore, parent companies are required to present consolidated financial statements as supplementary information to their stand-alone financial statements. The basic accounting and reporting standards are specifically defined and regulated by statutory provisions. The organization, operation and winding-up of business associations is regulated mainly by Law No. 19.550 (Argentine Business Associations Law) and the regulations issued by the different oversight agencies. The two main requirements are as follows: ►
The requirement of presenting audited annual financial statements (external audit).
►
Corporations and partnerships limited by shares without a surveillance committee, included in Section 299 (described in Chapter VI, Business Associations Law) are required to have an individual statutory auditor or, in some cases, a statutory audit committee, a role that is held by accountants and/or lawyers (Section 284, Argentine Business Associations Law). Companies publicly listing their securities, banks and their related companies (parents and subsidiaries) should have a surveillance committee.
The oversight agencies mentioned further ahead require that financial statements be presented together with the external auditor’s report issued by an independent public accountant, as per effective audit regulations, and as the case may be, the statutory auditor’s report.
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Oversight Authority
Main types of companies subject to control
CNV (Argentine securities commission)
Companies with listed securities.
BCRA (Central Bank of Argentina)
Financial institutions
SSN (Argentine insurance regulatory agency)
Insurance companies
SART (Argentine regulatory agency of workers compensation insurance companies)
Workers compensation insurance companies
IGJ (Argentine regulatory agency of business associations) and similar provincial authorities
Stock corporations, foreign branches, non-profit organizations and foundations
The terms within which to present annual financial statements vary depending on the oversight agency in question. Such terms, counted as from year-end, are as follows:
Company
Term within which to present annual financial statements
Companies with listed securities.
70 days
Financial institutions
Day 20 of the second month subsequent to year-end
Insurance companies
45 days
Workers compensation insurance companies
45 days
Foreign branches
60 business days
Stock corporations subject to the IGJ’s control: Falling under section 299, Law No. 19,550
15 business days prior to the Shareholders' Meeting (1)
Other companies
15 business days subsequent to the Shareholders' Meeting (1) (2)
Non-profit organizations and foundations
15 business days prior to the Members’ Meeting
(1) The meeting must be convened within the four months following year end. (2) The financial statements closing after May 2006 are required to be presented to the IGJ on a diskette or compact disk, generated by the application program provided by the IGJ, along with a sworn statement by the Company and the certification of an independent public accountant.
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According to section 66, Argentine Business Associations Law No. 19,550, managers of stock corporations and limited liability companies are required to draft a Letter to the shareholders or owners as of the date of issuance of the financial statements referring to the company’s position regarding its different activities and their opinion as to the projections for operations and other aspects considered necessary to illustrate regarding the company’s current and future situation. Under IGJ (Argentine business associations regulatory agency) General Resolution No. 4/09 all stock corporations and limited liability companies with equity equal to or exceeding ARS 10,000,000 as from the fiscal years ending on or after December 31, 2009, must include information in the Letter to the shareholders or owners in addition to the information set forth in Business Associations Law which covers the following items: a) b) c) d) e) f) g) h)
brief description of the business; company’s structure and organization and the group of companies it belongs to; summarized table of the balance sheet, statements of income and cash flows in comparison to those of the prior year; Indicators. analysis of the most important changes in the balance sheet and statements of income and cash flows; description of significant special agreements and projects; brief description of transactions with related parties; brief comment on the objectives and prospects for the coming fiscal year.
Under certain conditions, the boards of directors of companies not falling under section 299, Law No. 19,550 may prepare the Letter to the shareholders or owners in accordance with the requirements of section 66, Business Associations Law No. 19,550 without having to include the additional information established in IGJ GR 4/09. All companies publicly listing their securities should present quarterly financial statements and an informative overview from the Board of Directors, which are published in the newsletter of the stock exchange on which the securities are listed (in general, the Buenos Aires Stock Exchange). This information should be filed within 42 days after period-end (for entities required to prepare their financial statements under IFRS, the term was extended to 50 days in the interim periods related to the fiscal year when they first apply IFRS). A company's subsidiaries and affiliates must also present their quarterly financial statements within the same term. Financial institutions, insurance companies, pension fund administrators and workers compensation insurance companies are required to present quarterly financial statements to their respective oversight agencies. Such terms, counted as from period-end, are as follows: Company Financial institutions
Term within which to present quarterly financial statements Day 20 of the second month subsequent to year-end
Insurance companies
45 days
Workers compensation insurance companies
45 days
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Under Argentine Business Associations Law, financial statements should be prepared in constant currency, which entails that they must recognize the effects of the changes in purchasing power of the currency in a comprehensive manner, by applying the restatement into constant currency method set forth by FACPCE (Argentine Federation of Professional Councils of Economic Sciences) Technical Resolution No. 6; this requires the domestic wholesale price index (IPIM) published by the INDEC to be used. Between September 1, 1995, and December 31, 2001, companies ceased to apply this method due to the low rates of inflation, which for the whole period resulted in negative inflation of around 6%, measured by the domestic wholesale price index. Due to the new inflationary context, the application of the method was resumed, effective as from January 1, 2002, considering the accounting measurements prior to that date to be expressed in currency of December 31, 2001. Under Presidential Decree No. 554/03, the Argentine Executive and IGJ General Resolutions 4/03 and 441, and the CNV, respectively, discontinued application of the method and, therefore, the effects of changes in purchasing power of currency caused after March 2003, are not recognized in accounting records. Dividends may be distributed only based on liquid and realized income, resulting from a related balance sheet as of the end of the year, prepared in conformity with the law and the company’s bylaws. Companies included in section 299 of Business Associations Law may distribute dividends in advance or temporarily, based on special-purpose financial statements, under the unlimited joint and several liability of directors and statutory auditors. IGJ (Argentine regulatory agency of business associations) General Resolution No. 25/04, effective as from December 22, 2004, (currently IGJ General Resolution No. 7/05), that has to be applied by stock corporations and limited liability companies (with certain specific issues depending on the capital stock amount), established the following requirements: (a) the capitalization of capital adjustments prior to effective capital increase and (b) the distribution of unappropriated retained earnings. Additionally, requirements were established to book irrevocable capital contributions an account for future share subscriptions in addition to those established in professional accounting standards, mainly that they should be paid in cash and that their capitalization is mandatory within a maximum term of 180 days as from the date on which the agreement was executed by the company and the contributing party. As regards the abovementioned treatment of unappropriated retained earnings, the Shareholders’ Meetings held after the effective date of IGJ General Resolution No. 25/04 (currently IGJ General Resolution No. 7/05) and which have to consider the annual financial statements, will have to decide on the use of the unappropriated retained earnings that, after having set the legal reserve and/or statutory reserves, if any, may involve setting a voluntary reserve, distributing cash or share dividends or a combination of these options. Under no circumstances shall the Shareholders’ Meeting decide to keep any amount of the unappropriated retained earnings. As to the distribution of unappropriated retained earnings, the CNV issued General Resolution No. 593, which sets forth similar requirements to those established in IGJ General Resolution No. 7/05, as mentioned in previous paragraphs.
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If unappropriated retained earnings are distributed by setting up a reserve, it should be noted that section 70, Law No. 19,550 establishes that the constitution of voluntary reserves should be decided by a majority vote as required under last paragraph of section 244, Law No. 19,550, (special cases) when the amount involved exceeds the amount of the capital stock plus the legal reserves. That is to say, this case would require the favorable vote of the majority of shares entitled to vote and a plurality of votes would be deemed insufficient (this means that the majority should be of all possible votes and not only of those present).
3.5.2. Professional accounting and auditing standards General Aspects Argentina is a federation made up of 23 provinces and Buenos Aires City, the country's capital. In each of these jurisdictions there is a professional council in economic sciences in charge of issuing professional accounting (generally accepted accounting principles) and audit standards. The standards issued by each council are mandatory only for the professionals registered with the respective jurisdiction. All professional councils in Argentina are members of an organization termed FACPCE (Argentine Federation of Professional Councils in Economic Sciences) and this organization is in charge of coordinating efforts to issue professional accounting and audit standards. To prepare its proposed standards, the FACPCE has set up the CENCyA (Accounting and Auditing Standards Setting Board). The procedure to issue standards is: a)
The CENCYA prepares proposed accounting and auditing standards, which, once approved by the FACPCE’s governing board, are published with a deadline (inquiry period) to receive opinions from professional councils, government control entities, business associations, graduates in economic sciences, among others interested in the matter.
b)
After the inquiry period has elapsed and the changes approved have been included, the projects become technical resolutions that require approval by the respective professional councils to come into force in each jurisdiction.
In 1998, the FACPCE’s governing board decided to implement a plan to adapt Argentine professional accounting standards to the IAS (International Accounting Standards) proposed by the IASC (International Accounting Standards Committee). This plan included: a)
defining a general framework for Argentine professional accounting standards;
adopting benchmarks or acceptable alternatives contained in certain IAS selected for the first stage of the harmonization plan, provided they are not significantly inconsistent with the general framework. That is, the purpose of the original plan and the final result was not a direct merging of the two, but rather an approach to be a little more similar to the international accounting standards. On December 8, 2000, the FACPCE’s governing board approved Technical Resolutions Nos. 16 through 19, completing the first stage of the harmonization plan, which then continued issuing new technical resolutions.
b)
On March 20, 2009, the governing board of the FACPCE (Argentine Federation of Professional Councils in Economic Sciences) approved Technical Resolution No. 38
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26 “Adoption of the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB)”. This approval was the result of a common project between the FACPCE and the CNV (Argentine Securities Commission) to adopt the IFRS as the only way of preparing the financial statements of entities included in the public offering system, whether through to their capital stock or corporate bonds, although certain entities under CNV control were exempted from this mandatory obligation, as explained ahead. The CNV issued the regulations required to make the application of IFRS effective for the entities under its control for which IFRS adoption is mandatory. Additionally, TR 26 established that IFRS may be applied by all entities not covered by, or excepted from, their mandatory application, with the same scope indicated for entities that will apply the IFRS in a mandatory way. Subsequently, on December 3, 2010, the FACPCE approved Technical Resolution 29, whereby it incorporated the possibility of applying the IRFS for small and medium enterprises (SMEs), issued by the IASB in July 2009, with the same scope provided by such international organization, as detailed further ahead. All entities not covered by, or exempted from, the mandatory application of IFRS and which do not apply IFRS or IFRS for SMEs by choice must apply the professional accounting standards other than Technical Resolutions Nos. 26 and 29, or those that the FACPCE issues in the future for these types of entities. Application of IFRS by TR 26 and its amendment to TR 29 As a result of the issue of TR 26 and 29, the application of IFRS in Argentina has the following scope and characteristics: (a) Scope of mandatory application Application of the IFRS will be mandatory for preparing the financial statements of entities included in the public offering system, whether due to their capital stock or corporate bonds, or entities which have requested authorization to be included in this system, with temporary exemptions set forth for given entities, which include entities authorized by the CNV to maintain the accounting methods of a different regulating body, such as the companies included in Financial Institutions Law, insurance companies, cooperatives and civil associations. The application of IFRS should be carried out fully without any changes, in conformity with the official text in Spanish issued by the IASB. TR 26 includes an Exhibit with the list of standards and interpretations issued by the IASB as of the date of the TR’s approval and adopted by the FACPCE's governing board. The adoption of new IFRS or amendments to IFRS already adopted shall be made through IFRS adoption circulars to be issued by the FACPCE. As of December 31, 2012, the FACPCE has issued three circulars whereby all IFRSs approved by the IASB through that date have been adopted.
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(b) Optional application of IFRS Entities not covered by, or exempted from, the mandatory application of IFRS, have the option of applying IFRS or IFRS for SMEs, with the same scope set forth for entities that will apply IFRS mandatorily. However, the IFRS for SMEs cannot be used by entities that are expressly excluded from their application by the IASB, that is, by the entities whose debt or equity instruments are negotiated on a public market or which are in the process of issuing these instruments for trading on a public market, or when one of its main activities is to hold assets as a trusty for a vast group of third parties. Moreover, the possibility of optionally applying IFRS or IFRS for SMEs is subject to the respective corporate oversight body accepting such application. (c) Financial statements covered by comprehensive application of IFRS The full implementation of IFRS reach these financial statements: (i) Consolidated financial statements (ii) The financial statements of entities that are not required to present consolidated financial statements. Separate (individual) financial statements of entities that should present consolidated financial statements either totally or proportionately will be prepared by applying IFRS with the sole exception of the measurement of (1) the investments of subsidiaries, jointly-held companies and affiliates; and (2) special-purpose entities which have qualified to be included in the consolidated financial statements, for which the equity method will be applied instead of the fair value method or the cost method which are required by the IFRS when financial statements are prepared separately from a parent company. The purpose of this difference with the IFRS is to ensure that the equity and income of the controlling equity interests (majority interest) in the consolidated financial statements presented together with the stand-alone financial statements be the same in both sets of financial statements. (d) Effective date. For all entities falling under mandatory application of IFRS, the effective date for such application is for financial statements for the fiscal years beginning on or after January 1, 2012, and interim periods, allowing the early application of IFRS for fiscal years beginning on or after January 1, 2011 and, where applicable, its interim periods. The entities not covered by mandatory application of TR 26 can choose to apply IFRS or IFRS for SMEs (with the abovementioned limitation) to the financial statements for the fiscal years beginning on or after January 1, 2011, provided the relevant corporate oversight agencies allow this.
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Application of the FACPCE’s accounting standards not related to TR 26 and TR 29 The Technical Resolutions issued through December 31, 2012, other than Technical Resolution Nos. 26 and 29, include the following: T.R. No.
Issue
6
Financial statements in constant currency.
8 9
General regulations for accounting disclosure. Specific standards for accounting disclosure by companies engaging in trade, industrial activities and services. Specific standards for accounting disclosures for non-profit organizations. Accounting information regarding involvement in joint ventures.
11 14 16 17 18 19 20 21 22 23 24 25 27 28 30
31 36
General framework for professional accounting standards. Professional accounting standards: Dealing with generally applicable issues. Professional accounting standards: Dealing with specific issues. Amendments to technical resolutions 4, 5, 6, 8, 9, 11 and 14. Derivative instruments and hedge transactions. Equity valuation by the equity method. Consolidating financial statements. Information to be disclosed on related parties. Farming activities. Employee benefits due after termination of the payroll employee relationship and other long-term benefits. Specific aspects regarding accounting disclosure and audit procedures for cooperatives. Amendment to Technical Resolution No. 11. Partial amendments to other technical resolutions. Impracticability. Financial Reporting – comparative information. Changes to section 9 of Technical Resolution No. 17 regarding the treatment of measurement issues not provided for in local professional accounting standards. Introduction to revaluation model for PP&E, except for biological assets. Balanced scorecard.
Through December 31, 2012, the FACPCE issued and has enforced the following interpretations. T.R. No. 1 2 3 4
Issue Transactions between related parties. Statement of cash flows. Booking income tax Applying professional standards to small entities.
The accounting model of the Argentine professional accounting standards in effect (other than TR 26) is based on the following pillars:
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a)
Unit of Measurement The financial statements are to be stated in constant currency of the purchasing power of their closing date whenever there are generalized inflationary or deflationary conditions. The FACPCE is in charge of permanently evaluating the existence or inexistence of an inflationary (or deflationary) context and, to such end, Technical Resolution No. 17 establishes that it should consider the occurrence of a series of events, such as: the existence of generalized price and/or salary adjustments, the immediate investment of local currency to maintain purchasing power, the relevance of the gap between investments in Argentine currency and in foreign currency, and a preference by the general population to keep its wealth in nonmonetary assets or in a relatively stable foreign currency. These qualitative factors were taken from IAS 29 “Financial Reporting in Hyperinflationary Economies” as part of an alignment process with international standards carried out in 2000. Although the FACPCE did not incorporate the quantitative guidelines of IAS 29 into Technical Resolution No. 17, according to which a cumulative inflation rate over three years that approaches or exceeds 100% denotes a hyperinflationary context that requires the effects of inflation to be incorporated, the subsequent comprehensive adoption of IFRS in 2010 as mandatory for certain entities and optional for others leads to the conclusion that the abovementioned quantitative guideline is considered by the FACPCE regardless of the body of accounting standards it may apply to each entity. As opposed to IAS 29, Argentine professional accounting standards establish that, when the restatement process is interrupted and then resumed, the effects of the inflation or deflation of the interruption period are ignored.
b)
Measuring Methods The accounting measurements may be based on the following features: For assets: ► ►
►
Historical cost Current values: ► Replacement cost ► Net realization value ► Net realization value based on degree of progress. ► Fair value ► Discounted amount (present value) of the cash flows to be collected Percentage of equity interest on the accounting measurements of assets or equity
For liabilities: Original amount Settlement cost ► Discounted amount (present value) of the cash flows to be disbursed ► Percentage of equity interest on the accounting measurements of liabilities ► ►
The accounting measurement methods must be based on the features that are most appropriate in each case, considering the most likely use for certain assets and the intention and likelihood of immediate settlement for liabilities.
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As regards non-monetary assets, Technical Resolution No. 31 issued in 2011 changed the criterion which required the application of cost model as the only measurement criterion for assets intended for use. Effective regulations on the measurement of the main non-monetary assets indicate the following: (a)
Inventories, biological assets, property acquired for sale in the normal course of business or in the process of construction or development for such sale. Measured at current value by the method applicable for the type of asset.
(b)
P&E, except biological assets. Are alternatively measured: ► at original cost, net of accumulated depreciation and accumulated impairment losses; or ► at its revalued amount, based on (i) spot prices in an active market, or (ii), if no such market exists, present value estimates as from the use of valuation methods, or at its replacement cost net of any depreciation through that time. Revaluation surpluses are recognized directly in an equity account and any decrease in the revaluated price is deducted from such account up to the residual revaluation cap contained in the book value of the related asset.
(c)
Investment properties (whether leased or held unoccupied for an increase in value), non-current assets held for sale (provided they be available for such purpose in their current condition, the sale is highly likely and expected to occur within a year after the classification date) and assets retired from service. Are alternatively measured: ► at original cost, net of accumulated depreciation and accumulated impairment losses, if any; or ► at net realization value, with any change in value recognized in income (loss). Recognition of income though measurement at net realization value is only admitted if there is an effective negotiation market for similar goods with transactions near the closing date or whenever the sale price is ensured through an agreement. If these conditions are not met, measurement should be at original cost or at the latest current value.
(d)
Long-term investments in other companies. When control, joint control or significant influence is exercised, the equity method is used. In other cases, the accounting measurement shall be made at cost.
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(e)
Intangible assets and goodwill (from a business combination or the measurement of long-term investments in other companies). Intangible assets and positive goodwill are measured at original cost, net of accumulated depreciation and accumulated impairment losses, if any. If useful life is indefinite, no depreciation will be deducted and goodwill will be compared with its recoverable value as of each yearend. In the case of negative goodwill, the portion thereof that could be related to expectations of future expenses or losses at the initial measurement is recognized in income (loss) in the same periods when such expenses or losses are incurred, and the remaining goodwill is recognized in income (loss) systematically throughout the useful life of the assets of the issuing company subject to depreciation.
The FACPCE has established that measurement issues for which Argentine professional accounting standards provides no accounting treatment should be resolved through the application of (i) the provisions established by those standards for similar or related issues, or (ii) general standards on accounting measurement, or (iii) the concepts included in the general framework of such standards. Whenever the issue cannot be resolved or the resolution is not apparent based on the primary sources mentioned previously, the entity’s Management may use the following supplementary sources in this descending order of priority to form its judgment, provided they do not contradict the primary sources and until the FACPCE issues a specific standard on the matter: (a) the IFRSs approved and issued by the IASB; and (b) in no established order: (i) the most recent pronouncements from other issuers using a similar general framework for the issuance of accounting standards; accepted practices in the various industries or sectors, and accounting jurisprudence. The term IFRS is used to refer to the set of regulations made up of: a) b)
c)
the IFRS issued by the IASB as from 2003; the International Accounting Standards (IAS) issued by the dissolved International Accounting Standard Committee (IASC) through 2001 and adopted by the IASB; and IFRS interpretations.
3.5.3. Statutory Accounting Standards Legal standards regarding accounting issues may only be issued by the Argentine Government and the provincial governments that can set them by law, decree or resolutions of government agencies to whom such special legislative powers have been delegated on the issues in question. The Argentine Government agencies mentioned below are empowered to issue legal regulations regarding accounting matters: â–ş CNV (Argentine securities commission), an agency authorizing and controlling: a) Companies with listed securities.
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b) Certain entities related to the public offering of securities: Stock exchanges, securities markets, over-the-counter market brokers, mutual funds and depository entities. ► BCRA (Central Bank of Argentina), which has the duty of controlling the following entities: Banks, finance companies, savings and loans institutions for home building and developing other real estate, and mutual credit associations. ► SSN (Argentine insurance regulatory agency), the jurisdiction of which includes the institutions related to insurance transactions and others that can be likened to such activities. ► SART (Argentine regulatory agency of workers compensation insurance companies) which controls companies managing workers compensation insurance. ► Argentine Cooperative and Mutual Action Institute (Instituto Nacional de Acción Cooperativa y Mutual), controlling cooperatives and mutual aid associations. ► INSS (Argentine Social Services Institute), which controls statutory healthcare organizations and similar entities. ► IGJ (Argentine regulatory agency of business associations), which oversees: a) Stock corporations (except those controlled by the CNV), foreign branches, non-profit organizations and foundations domiciled in Buenos Aires City. b) Stock corporations engaging in capitalization and savings transactions, regardless of where they are domiciled. Generally, names and duties of provincial oversight authorities are similar to those of the IGJ. Some jurisdictions also have specific authorities controlling cooperatives and/or mutual associations. Some of these government entities automatically incorporate as statutory accounting standards the professional accounting standards approved by the FACPCE. Other government entities issue specific resolutions whereby they adopt the professional accounting standards partially or in full. Finally, there are government entities which issue their own statutory accounting standards, which may contain significant differences with professional accounting standards, such as the BCRA and the SSN. The existence of accounting and statutory professional accounting standards that may be different from one another warrants special attention as regards IFRS application. Under professional accounting standards, non-listed companies may choose to apply IFRS. However, the actual use of this option does not depend solely on the companies’ decision, but on the authorization that may need to be granted by the respective corporate oversight agencies. While the BCRA and the SSN can take an undetermined amount of time to establish the obligation or the option of applying IFRS, for other regulatory agencies the process can be faster.
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Business Presence
In this regard, in December 2012, the IGJ, which controls stock corporations located in Buenos Aires City, issued General Resolution No. 11/2012, whereby it established that affiliates of listed companies may file their financial statements with IGJ under IFRS as from the 2012 fiscal year-end. This measure had an initially practical goal, given that affiliates of listed companies are required to prepare their financial statements under IFRS for their filings with the CNV, for which reason this Resolution allows them to avoid the task of converting their financial statements from one set of accounting standards to the other. However, this resolution by the IGJ creates the expectation that the agency may extend the option of applying IFRS to the rest of the companies under its control. In the case of companies regulated by provincial authorities similar to the IGJ, largely no authorization is required from such agencies to apply IFRS; therefore, these companies would be allowed to file their financial statements under IFRS. Certain legal regulations can set forth requirements that must be taken into account when preparing the audit reports. These requirements may be divided into two groups: a)
Those requiring that the auditor's opinion on the financial statements as a whole refer not only to the application of generally accepted accounting principles, but to the application of certain legal requirements that must also cover accounting matters.
b)
Those requiring that the auditor’s opinion include information not consisting in technical opinions on the application of specific accounting standards.
As regards the standards related to the performance of the auditor’s work, oversight agencies dealing with this include the BCRA, the SSN and the SART, which have established the minimum scope of the work of external auditors, as well as a list of the minimum audit procedures applicable to the examination of the annual and quarterly financial statements.
3.5.4. Audit Standards The standards in effect for performing audits and limited reviews of financial statements of entities not required to apply IFRS are included in FACPCE Technical Resolution No. 7. Such standards have no substantial differences, in their basic aspects, with the International Accounting Standards (IAS) and the International Standard on Review Engagements (ISRE) for interim financial statements issued by the International Federation of Accountants (IFAC), and there currently is a project to amend Technical Resolution No. 7 to eliminate the differences with the international standards mentioned above, especially as regards the form and content of auditor’s reports.
46
Business Presence
In November 2012, the FACPCE issued the following resolutions for audits and limited reviews of financial statements which are required to be prepared under IFRS: (a) Technical Resolution No. 32, which adopts and requires the mandatory application of the IAS issued by the IFAC for audits of financial statements which are required to be prepared under IFRS, effective as from fiscal years beginning on or after July 1, 2013, and allowing early application. (b) Technical Resolution No. 33, which adopts and requires the mandatory application of International Standard on Review Engagements (ISRE) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” for audits of interim financial statements which are required to be prepared under IFRS, effective as from interim periods related to fiscal years beginning on or after July 1, 2013, and allowing early application. (c) Technical Resolution No. 34, which adopts and requires mandatory the application of the International Standards on Quality Control and the Standards on Independence issued by the IFAC for all auditors who report having provided professional services in which the regulations contained in Technical Resolutions Nos. 32 and 33 were applied. In addition, Technical Resolutions Nos. 32 and 33 may be applied voluntarily in cases other than those indicated in (a) and (b) above and, in such cases, application of Technical Resolution No. 34 is mandatory. Whenever the auditor does not opt for the voluntary application of Technical Resolutions Nos. 32, 33 and 34, the rules to be applied in audits and limited reviews of financial statements are contained in FACPCE Technical Resolution No. 7. Such Technical Resolution has no substantial difference, in its basic aspects, with IAS and ISRE 2410. Moreover, there currently is a project to amend Technical Resolution No. 7 which was in the inquiry period until November 2012. If this project is approved, the differences with IAS and ISRE 2410 would decrease, especially as regards the form and content of auditor’s reports.
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4. Foreign Investments 4.1. Legal framework for foreign investments in Argentina In Argentina, both foreign investments and investors enjoy ample legal protection, ensured by a wide array of local and international regulations which position Argentina as a safe destination for foreign investments and investors. The Argentine Constitution provides an equal treatment to foreigners in its Foreword, and recognizes the same rights for foreigners as for Argentine nationals in Article 20.
A) Foreign Investment Law Foreign Investment Law No. 21,382 sets forth the legal framework governing foreign investment in Argentina It is aimed at foreign investors investing capital in Argentina, in any of the forms established therein, and used in activities of an economic-industrial, mining, agricultural, commercial, financial, services or any other nature related to the production and exchange of goods and services, or the expansion or improvement of existing activities, without requiring any prior approval. It states that such investments will have the same rights and obligations that the Constitution and laws set forth for Argentine investments. This law sets out definitions aimed at classifying foreign investment, including the following: ►
►
►
►
Foreign capital investment: Any capital contribution belonging to foreign investors and used in economic activities performed in Argentina and/or the acquisition of equity interests in an existing local company by foreign investors. Foreign investor: Any natural or artificial person domiciled outside the Argentine territory who owns an foreign capital investment, and local foreign-capital companies investing in other local companies. Local foreign-capital company: Any company domiciled within the Argentine territory in which natural or artificial person domiciled outside the Argentine territory directly or indirectly own over 49% of capital stock or have the number of votes required to prevail in shareholders' or partners' meetings. Local Argentine-capital company: Any company domiciled within the Argentine territory in which natural or artificial person also domiciled in the Argentine territory directly or indirectly own no less than 51 % of capital stock or directly or indirectly have the number of votes required to prevail in shareholders' or partners' meetings.
According to such law, foreign investors enjoy the following rights: ► ► ►
48
The right to transfer abroad liquid and realized income from investments made, as well as the right to repatriate investments. The right to organize their businesses in any business association form provided by Argentine law. The right to use local credit with the same rights and under the same conditions as locally-owned companies.
Foreign Investments
The law also establishes the ways in which the foreign investment can materialize: ► ► ►
► ► ►
Readily convertible foreign currency. Capital goods, their spare parts and accessories. Income or capital in Argentine pesos belonging to foreign investors, provided that such income or capital is legally eligible for transfer abroad. Conversion into equity of receivables from abroad in readily convertible foreign currency. Intangible assets, in accordance with specific legislation. Other forms of contribution provided for in special or promotional regulatory systems.
In addition, it establishes the treatment to be afforded to transitory contributions and the relationship between parents and subsidiaries. Transitory foreign capital contributions made as a result of the performance of contracts for lease of things, works or services or others are not included in the law and will be governed by the terms and conditions of the respective contracts pursuant to the applicable legal provisions, despite which the owners of such contributions may choose to realize their investment as provided by the law. As regards the relationship between parent companies and subsidiaries, it is established that the legal acts executed between a local foreign-capital company and the company which directly or indirectly controls it or another affiliate of the latter will be considered, for all effects, as executed at arms' length provided the agreed-upon provisions and conditions are consistent with normal practices in the market between independent parties.
B) Inflow of foreign currency and remittance of profits Foreign direct investments (FDI) in Argentina are exempt from the nominative, non-transferable and non-interest-bearing one-year deposit for 30% of the amount involved in the related transaction established in Presidential Decree 616/2005, commonly known "holdback". In line with the definition provided by the IMF, the Central Bank considers FDIs to be any investment by a non-resident evidencing the intention of obtaining a long-term interest in a resident company, which for practical purposes occurs whenever such interest in a local company exceeds 10% of capital stock or voting rights. After this minimum percentage is reached, any subsequent contribution made by the non-resident investor/partner will be equally considered to be a FDI, regardless of the amount or percentage involved. The inflow of funds originated from new contributions and purchases of interest in local companies or real property should be registered in the local exchange market (BCRA Communiqué “A” 5237). Such registration is required to access the foreign exchange market for the purpose of remitting the investment under its various forms without the need for prior authorization.
49
Foreign Investments
The only inflows of funds from a foreign direct investor which are subject to the 30% holdback are those originating from debts assumed abroad, except for debts for the purchase of non-financial assets for a term longer than two years (see point d) in Requirements to access the exemption to the holdback). Under Presidential Decree Decreto 616/2005, the existing foreign exchange control system is aimed at sustaining economic stability by discouraging speculative movements of funds, but without affecting the inflow of foreign currency to be used for productive investments. Other inflows of foreign currency are also exempt from the 30% holdback. Particularly, the following transactions related to direct investments are also exempt from the holdback ► ► ► ►
Investments by non-residents for the purchase of real property. Payments related to sale agreements and installments for the purchase of real property in construction in Argentina. Repatriation of external assets owned by residents. Inflow of foreign currency for trust funds aimed at the development of energy infrastructure works.
In addition, there are no restrictions to the payment abroad of interest, dividends, profits, royalties and any other business payment duly evidenced by the related documentation.
4.2. Foreign Direct investment (FDI) in Argentina In 2006, the investment promotion system in Argentina was strengthened by the increase in the budget and in the operating structure of the Investment Development Agency, followed by the official creation of the new National Investment Development Agency, with more features, instruments and budgetary independence In 2007, ProsperAr opened its doors. This is a national entity that fosters investment in Argentina and some of the activities it engages in include missions abroad and an information and advisory services center for potential investors. In August 2010, the National Investment Development Agency (ProsperAr) was dissolved. The Agency, present-day Under-department of Investment Development, was absorbed by the Department of International Trade and Economic Relations, Ministry of Foreign Affairs. FDI flows in Argentine increased slightly in 2011 to USD 7.24 billion; 55% of FDI was related to new capital contributions, 31% was related to profit reinvestment and the remaining 14%, to loans between companies. The most significant acquisition by a company was the purchase of the Argentine affiliate of the US company Occidental Petroleum by Chinese company Sinopec. With this acquisition, in addition to the arrival of state-owned company CNOOC the previous year, Chinese companies become consolidated as major players in the Argentine oil & gas industry. The most significant development in this sector is the exit of Spanish company Repsol due to the expropriation of most of its assets in April 2012. Other major transactions conducted in 2011 include the acquisition of Interbaires (duty-free shops operator) by Swiss company Dufry by USD 285 million and the acquisition of Allus Global BPO Center, provider of remote business services, by Brazilian company Contax by USD 206 million.
50
Foreign Investments
4.3. Foreign direct investments in Latin America and the Caribbean In 2011, FDI flows to Latin America and the Caribbean maintained the same upward trend than in the previous year, reaching USD 153.99 billion, i.e., 28% more than in 2010 and 12% over the 2008 historic high. Thus, the effects of the global financial crisis of 2008-2009, which caused FDI to fall by 40%. Brasil, which accounts for 43% of regional GDP and FDI flows, was the main responsible for the 54% increase in FDI in Latin America and the Caribbean. In addition to the increase in flows to Brazil, there were also more moderate increases in investment towards almost all economies in South America, which caused a 35% increase in inflows into the subregion. Moreover, Mexico and Central American countries recieved 4% more funds than the previous year. Finally, after two consecutive of decreases, FDI in the Caribbean increased by 20% during 2011. After a 40% decrease in FDI in 2009 as a result of the global financial crisis, flows into the region have increased for the second consecutive year. The factors which caused this increase have remained stable during this period: an international context where a certain level of trust was recovered and the performance of economies in the region. Despite the uncertainty in developed economies, which was reflected in an increase in financial instability as from August 2011, overall international companies have resumed their expansion plans. This relative recovery would be reflected in a slight increase in trasborder mergers and acquisitions in the region during 2011. Extraction investments in oil & gas, mineral and other natural resources have increased, which contributed to the high level of international prices for these products as a result of the sustained demand from China and other emerging economies in expansion. Moreover, the economic crisis in developed countries would be boosting business reorganization processes, the transfer of activities to other countries and increased outsourcing of manufacturing and remote business services activities. The continuing growth of emerging economies, including several in Latin America and the Caribbean, would also have favored South-South investments through an increase in the number and size of international companies from emerging countries. As seen last year with the emergence of FDIs from China (the third direct investor in the region), international expansion strategies implemented by major companies in emerging economies offer new opportunities for Latin America and the Caribbean. If we analyze FDI as a percentage of GDP, it can be seen that, within the region, these flows are much more significant for smaller economies. In 2011, Saint Kitts and Nevis as well as Saint Vincent and the Grenadines received FDI equivalent to 19% of their GDP. Many other countries in the Caribbean and Central America also received FDI amounts which exceeded 5% of GDP. The most significant case among medium and large economies is Chile, where FDI reached 7% of GDP, followed by Uruguay, with 5%. For the largest economies in the region, the impact of FDI was much more reduced: Mexico and Argentina received flows for less than 2% of their GDP, while Brazil, despite the remarkable increase experienced in 2011, only received the equivalent to 3% of its GDP. For the region, FDI as a percentage of GDP yielded an average of 5.8% in 2011, a percentage slightly higher than the one for the previous year, but still below the 8% average reached in 2007.
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5. Tax 5.1.
General Description of the Tax System
Introduction In the Argentine tax system, taxes may be divided into three categories: taxes, rates and assessments. Rates and assessments tend to compensate the State for a specific activity by way of a particular service rendered to the taxpayer. Taxes, on the other hand, are payments required from taxpayers regardless of what the Government does or does not do for them. As this guide intends to provide only a brief overview, we shall limit our comments mainly to taxes.
Argentine Tax Structure Argentina's political organization involves federal, provincial and municipal levels of government.
Federal Level At the federal level, the DGI (Argentine tax bureau) is subordinate to the AFIP (Federal Public Revenue Agency), a self-governing agency within the sphere of the Ministry of Economy and Public Finance. The DGI is responsible for applying, collecting and controlling taxes (except customs duties). The main federal taxes are listed below: ► ► ► ► ► ► ►
Income tax Value-added tax Minimum presumed income tax Tax on bank account transactions and other similar transactions Excise taxes Tax on real property transfers Personal assets tax
Tax disputes may be handled through the following proceedings: a)
Administrative: ► ►
b)
Legal: ► ► ►
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DGI Federal Administrative Tax Court
Federal courts Appellate courts Argentine Supreme Court of Justice
Tax
Provincial Level Provincial taxes are the responsibility of the DGR (provincial tax authorities) of each province. These agencies are subordinate to the respective provincial Ministries of Economy. Buenos Aires City has been recognized as a self-governing city with its own government institutions and, therefore, certain taxes usually collected at the provincial level are applicable here. The main provincial taxes are listed below: a) b) c)
Turnover tax Stamp tax Real property tax
A new development, starting 2011, is a tax on the free transfer of goods including inheritance, legacies and donations, etc, effective in the Province of Buenos Aires.
Municipal Level Municipalities' revenues are derived from the collection of rates and assessments. Although in general this involves lesser resources, lately the financial needs of municipalities has led to claims against taxpayers involving the payment of rates, even when it is questionable whether they were provided with the services as they do not have premises or establishments in the jurisdiction.
5.2.
Direct Taxes
5.2.1. Income tax Worldwide Income - Source Persons residing in Argentina pay income tax on all of their income obtained in Argentina or abroad, and may compute the amounts actually paid for similar taxes on the activities performed abroad as a payment on account, up to the cap of the increase in the tax obligation caused by adding income earned abroad. Persons residing abroad pay income tax only on Argentine-source income. In general, regardless of certain exceptions, Argentine-source income is income generated by: a) b) c)
Assets located, placed or put to economic use in Argentina. Any acts or activities capable of yielding profits. Any events that have taken place within Argentine territory.
Requirements for Income Tax Returns Residents assess their own income tax on an annual basis by means of an income tax return on which taxable income is assessed in accordance with the regulations established in relevant legislation.
53
Tax
Additionally, companies are required to file a report certified by an independent certified public accountant for tax purposes, and in some cases the company's financial statements must also be submitted.
How this tax is paid Income tax is paid over to tax authorities as follows: ►
Business associations: ► ►
►
Ten monthly prepayments Remaining amount: In the fifth month subsequent to year-end.
Individuals: ► ►
Five prepayments Remaining amount: In April or May
For business associations, the tax year coincides with their fiscal year; for individuals, the tax year coincides with the calendar year. Income tax is also paid through withholding systems. The withholding agents tend to be the taxpayers when they pay for certain items, such as purchase of goods, services, leases, commissions, among others. Such withholdings are computed as payments on account of income tax on the annual income tax return.
Types of Taxpayers ►
Stock corporations, limited liability companies, limited liability partnerships and limited liability partnerships by shares, among others considered nonpass-through companies for tax purposes, are subject to 35% tax on taxable income. These companies file their own income tax returns.
►
The branches of foreign companies are considered Argentine residents and are subject to a 35% tax on taxable income and file their own tax returns.
►
All other business associations assess their income tax, but the partners or owners include the taxable income in their own tax returns proportionately to their respective shares as per the scale referred to in the following paragraph.
►
Individuals file their income tax returns and pay income tax, including the taxable income obtained from business associations mentioned above, according to a progressive scale that ranges between 9% and 35%. However, those who only obtain income from work performed personally in a payroll employee relationship are not required to file a tax return, provided the related tax has been withheld when the income was paid and their gross annual income does not exceed ARS 144,000.
►
Natural persons and business associations organized abroad that are not residents of Argentina for tax purposes (foreign beneficiaries) and have Argentine-source income, pay over income tax through withholdings, which constitute single and final payments, according to the rates indicated in the related section.
54
Tax
In all cases, taxable income is assessed in historical currency, as tax regulations do not recognize adjustments for inflation that have taken place after April 1992.
Exemptions There is a significant exemption that includes income obtained from the sale of shares of Argentine companies by foreign beneficiaries. There are some exemptions applicable only for individuals in regard to interest on deposits with financial institutions, transactions involving Argentine government securities, purchase of shares, etc. Certain non-profit associations engaged in activities provided by law are also exempt from income tax.
Deductions The general principle established by law is that expenses incurred to obtain, maintain, and keep taxable income shall be deductible, subject to the express restrictions contained therein. â–ş
Stock corporations and other companies a)
Allowances and provisions The tax-purposes financial statements may only include the deduction of reserves expressly allowed by statute (for example, the tax-purposes allowance for doubtful accounts, with certain restrictions). Consequently, other allowances or provisions are not generally deductible.
b)
Tax All taxes levied on income-generating assets, other than income tax itself, are income tax deductible:
c)
Startup expenses Startup expenses related to setting up a business may be deducted in the year when they are incurred or else amortized over a maximum fiveyear term.
d)
Donations Donations may be deducted when made directly to the (federal, provincial or municipal) government, to the FPP (permanent fund for political parties), religious or charity institutions and exempt private organizations with specific purposes. Deductible amounts are limited to 5% of net income for the year.
e)
Foreign exchange differences
f)
Foreign exchange gains or losses are included in taxable income on an accrual basis. Receivables and payables in foreign currency should be restated according to the exchange rate set by Banco de la NaciĂłn Argentina as of the respective year-end. Interest
55
Tax
Interest and other financial expenses are deductible considering the limitations provided by “thin capitalization rules”.
►
g)
Extraordinary losses caused by acts of God or force majeure to the extent not covered by insurance or compensation.
h)
In addition to the specific items mentioned above, other deductions are permitted for expenses necessary to obtain, maintain or keep taxable income. For example, salaries, wages, commissions, directors’ fees, technical services, contributions to pension funds, and traveling expenses may be deducted, but there are certain restrictions on some times.
Individuals In addition to deducting expenses necessary to obtain, maintain, or keep taxable income, individual taxpayers may deduct the following items from their income: a)
Contributions or discounts for retirement, pension or family allowance funds, provided that such funds are managed or approved by federal, provincial or municipal governments.
b)
Mandatory discounts on contributions made to statutory health care organizations, membership fees paid for health care plans and fees for healthcare, medical and paramedical assistance services (up to a given amount).
c)
Life insurance premiums (up to a given amount).
d)
Donations (similar characteristics to those made by business associations).
e)
Other expenses specifically provided for (up to certain caps established by law), such as interest on mortgage loans, funeral expenses, amounts paid to domestic staff.
In addition to the above, taxpayers may deduct a personal allowance, provided they have been residing in Argentina for at least six months during the tax year. There is also a special deduction applicable to certain forms of taxpayer income from personal work. Certain deductions are also allowed for family dependents, provided that their personal income does not exceed a given amount during the year and that they reside in Argentina for more than six months out of the tax year. Examples of such deductions include deductions for spouses and children who are dependent on the taxpayer.
Inventory Valuation Regulations establish inventory valuation methods according to the type of asset involved. However, if market value is lower, such value may be used for tax purposes, subject to certain requirements.
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Tax
Depreciation Property, plant and equipment are depreciated on an annual basis according to their useful life. There are no guidelines regarding depreciation rates, except in the case of buildings, which should be depreciated at a rate of 2% p.a.- The AFIP (Federal Public Revenue Agency) can accept higher rates if the taxpayer proves that the building has a useful life less than 50 years. Depreciations and losses from disuse of automobiles are deductible provided they do not exceed the caps set by law. Depreciation and losses from disuse of automobiles are fully deductible if their use involves the main purpose of the taxable activity.
Payments of Dividends Dividends and uses that stock corporations and other non-pass-through companies distribute to their members, as well as the shares distributed for revaluations or book adjustments, will not be taken into consideration by beneficiaries when calculating their net income. Additionally, when an Argentine company pays dividends or distributes earnings exceeding income assessed by applying general Income Tax Law provisions, accumulated as of the year-end prior to the date of such payment or distribution, it is required to retain 35% of such excess as a single and final payment. To such end, income to be considered in each year shall be the income assessed by applying the general Income Tax Law provisions, less the tax paid for the tax period or periods in which the distributed income was generated, plus the dividends or earnings not computed upon assessing such income.
NOLs The NOL or tax loss carried in a given year may be deducted from taxable income that generated in the following five years. Tax losses may not be carried back against taxable income for prior tax years. The NOLs arising from the transfer of shares or equity interests may only be charged against income of the same origin. This also applies to NOLs resulting from activities not to be considered Argentine-source income and from transactions under derivative agreements, except for hedging transactions.
Tax Rates â–ş
Tax rates applicable to taxpayers residing in Argentina are as follows: Stock corporations, limited liability companies, limited liability partnerships, limited liability partnerships by shares, and other non-passthrough companies
35%
Branches
35%
Other business associations
Owners or partners report income in proportion to their interests.
Individuals
From 9 to 35%
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Tax
►
Individuals and business associations residing abroad pay tax on their Argentine-source income at the rates indicated below, which result from applying a 35% rate to presumed income, as set forth in Income Tax Law: Description
1.
Technical assistance or consulting services that
Presumed
Actual Tax
Income
Rate
60%
21%
80%
28%
cannot be obtained in Argentina, resulting from agreements that comply with Technology Transfer Law. 2.
Assignment of rights or patent licenses and any other technology transfer in compliance with Technology Transfer Law not contemplated in point 1.
3.
Copyrights, under certain conditions.
35%
12.25%
4.
Interest paid to financial institutions resident in
43%
15.05%
43%
15.05%
jurisdictions considered to be of low or nil taxation,fn, or when the borrower is a financial institution. 5.
Interest on financing transactions involving the import of personal property subject to depreciation, except automobiles, granted by the suppliers.
6.
Other interest on debts.
7.
Interest on deposits with financial institutions
100%
35%
43%
15.05%
70%
24.5%
40%
14%
10. Lease of real property.
60%
21%
11. Sale of assets located in Argentina.
50%
17.50%
12. Other income not covered in prior points.
90%
31.50%
governed by Law No. 21,526, namely, savings account deposits, special savings account deposits, certificates of deposit, third-party deposits, and any other ways of procuring the public’s funds, as determined by the BCRA (Central Bank of Argentina) (as long as they are not exempt). 8.
Salaries, professional fees, and other amounts earned by persons working in Argentina on a temporary basis (less than six months): artists, sportsmen, technicians.
9.
Lease of personal property.
The paying agent in Argentina is required to withhold the tax. Dividends are not subject to withholding unless they exceed the income assessed by applying the general provisions of Income Tax Law, in which case the withholding system explained under “Payments of Dividends” is applicable.
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Tax
Affiliates 1.
Affiliates residing in Argentina Each company is considered an independent person subject to income tax. No combined income tax returns may be filed.
2.
Affiliates residing abroad Transactions between related enterprises (the term “related” has a broad definition), as well as those with companies located in low or nil taxation countries should be entered into on arms'-length terms. To do so, these companies must comply with the transfer pricing standards established in local legislation, which mostly follow the guidelines established by the OECD. Taxpayers required to file sworn statements in relation to the transactions subject to transfer pricing standards are those who: ►
►
► ►
engage in transactions with foreign companies, persons or groups of persons that, directly or indirectly, have an equity interest in them or which control or manage them; engage in transactions with foreign companies or establishments, in which a direct or indirect equity interest, is held by foreign companies, individuals or groups of individuals that, directly or indirectly, have an equity interest in or control or manage the former; engage in transactions with foreigners related under other relation criteria; engage in transactions with natural or artificial persons resident in or organized, domiciled or based in low or nil taxation jurisdictions.
In this regard, regulations provide that there shall be an economic relation in the following cases, among others: ►
►
►
►
when a person provides another with the technological property or technical knowledge that form the basis of its activities and based on which the latter conducts business; when a person performs a significant activity only in relation to another person, or its existence is only justified in relation to another person, giving rise to single-vendor or single-customer relations, among others; when a person substantially provides the funds required for the performance of the business activities of another person by granting loans or, in the case of third-party financing, providing guarantees of any kind; when a person bears the losses or expenses of another person.
In the case of exports to related parties involving grains, oilseeds, other products of the land, oil & gas and their derivatives and, in general, goods with widely-known listed prices on transparent markets, in which an international intermediary, other than the effective merchandise recipient, is involved, a special method should be applied to assess Argentine-source income, with the specifications established in such rules.
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Tax
The taxpayers in question are required to file a semi-annual sworn statement, and an annual informative return and an annual supplementary sworn statement; the latter shall be filed along with a transfer pricing report signed by a certified public accountant and with the Company’s financial statements. In addition, the parties exporting and importing goods to and from independent parties shall also be required to prove that the prices set in those transactions are consistent with normal market conditions, to the extent that they performed export and import transactions for an annual amount exceeding ARS 1 million. In the case of imports or exports of goods for which an international —publicly and generally known— price could be set through transparent markets, stock exchanges or similar entities, those prices shall constitute benchmarks to prove that transactions are consistent with market practices.
Corporate reorganizations The enterprises that have undergone a merger, combination, spinoff or split, or have otherwise been involved in a sale or transfer of assets within the same group of companies may benefit from a tax-free reorganization and may transfer certain tax attributes to the surviving enterprise. The gains from such reorganizations are not subject to income tax. To such end, all reorganizations are required to be reported to the AFIP, whose approval should be obtained prior to transferring a part of a company's business. For tax attributes to be transferred, the surviving companies shall be required to continue performing the predecessor company's activity for a term of at least two years. In addition, the predecessor companies' shareholders shall be required to maintain in the surviving companies an equity interest of at least 80% of the equity interest that they held in the predecessor companies before the reorganization. For the reorganization to continue qualifying as tax free, such equity interest should be maintained for two years. There are other requirements specific to each type of reorganization established in the Administrative Order to Income Tax Law. The following are the tax benefits that may be transferred to the surviving company: a)
Accumulated tax losses. For this benefit to apply, the equity interest is required to have been maintained for two years prior to the reorganization date.
b)
Unused amounts arising from tax benefits or special deductions.
c)
Deferred charges not yet deducted.
d)
Unutilized tax benefits granted by certain government agencies as long as the surviving company meets the basic conditions subject to which such exemption was given. For this benefit to apply, the equity interest is required to have been maintained for two years prior to the reorganization date.
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Tax
e)
The option of carrying on with the methods used by the predecessor company to value inventories, depreciate PP&E, allocate income and expenses, and set up tax-deductible reserves, or choosing a new method. It should be noted that, in certain cases, the AFIP's authorization is required prior to changing the method.
Thin capitalization rules In the case of interest on loans granted by foreign persons that control the local company, according to the applicable Transfer Pricing rules, the local company may not deduct any interest on the related payable as of year-end that is in excess of the amount represented by multiplying the Company's shareholders’ equity as of such date by two, except for cases where Argentine-source presumed income, according to rules on withholdings from foreign beneficiaries, equals 100%. In this respect, the administrative order clarifies that the interest considered as fully Argentine-source income for the foreign beneficiary and subject to a 35% withholding upon payment falls under the abovementioned exception. The portion of interest that is not deductible shall be treated as dividends.
5.2.2. Minimum presumed income tax Minimum presumed income tax is applicable in all the territory of Argentina, and it is determined on the basis of assets. Assets subject to tax in Argentina whose aggregate value is equal to or lower than ARS 200,000, are exempt from minimum presumed income tax (MPIT). When the value of assets exceeds such amount, all taxable assets held by the taxpayer shall be subject to minimum presumed income tax. The following items should not be considered upon calculating the tax: â–ş â–ş
The value of brand-new depreciable personal property, other than motor vehicles, in the year of acquisition or investment, and in the next one. The value of investments in new buildings or improvements in the year in which total or partial investments, as the case may be, are made and in the next one.
Persons subject to tax a)
Companies domiciled in Argentina.
b)
Non-for-profit organizations and foundations domiciled in Argentina (provided that they are not exempt).
c)
Sole proprietorships located in Argentina.
d)
Individuals, undivided estates, owners of rural real estate,
e)
Permanent establishments domiciled or otherwise located in Argentina for or by virtue of the performance of business, industrial, agricultural, forest, and mining activities.
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Rate Minimum presumed income tax to be paid in results from applying the 1% rate to the tax base.
How this tax is paid Income tax assessed for the tax year in which minimum presumed income tax is calculated may be computed as a payment on account of the latter. If computable income tax were insufficient and thus minimum presumed income had to be paid, minimum presumed income tax actually paid could be considered a payment on account of any excess of income tax over minimum presumed income tax that arises in any of the subsequent 10 (ten) tax years. This tax is paid in as follows: â–ş â–ş
Eleven monthly prepayments. Remainder: In the fifth month subsequent to year-end.
5.3.
Indirect taxes
5.3.1. Value-added tax (VAT) General Remarks: Value-added tax is levied on: a)
Sales of personal property located or placed in Argentina.
b)
Works, contracts for services, and service provisions in Argentina.
c)
Definitive importations of personal property.
d)
Services provided abroad but actually used or exploited in Argentina when service recipients are subject to VAT by virtue of other taxable events and are registered VAT payers.
Who pays VAT: In general, VAT payers are the sellers of goods or services. However, the VAT amount is added to the price of goods or services and may be computed as tax credit in the following stage if the related person is registered as VAT payer. Therefore, it is actually the end-consumer (or exempt party) who bears the VAT cost. Certain taxpayers (in general, natural persons) whose annual sales do not exceed a cap of ARS 200,000 (or ARS 300,000 in the specific case of a sale of personal property and to the extent that certain payroll requirements are met), and provided they comply with other requirements, may choose to enroll for the simplified system (single tax system for small taxpayers), which replaces the VAT and income tax payments for the payment of a monthly fixed amount.
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Credit and debit system: VAT charged by companies on its sales of goods or services is known as “VAT debit”. The VAT paid by companies with goods or services purchases is called “VAT credit”. In general, companies deduct their VAT credit from the VAT debit every month, file a VAT return, and pay in the difference, if any. If in a given month the VAT credit exceeds the VAT debit, the difference may be added to the VAT credit for the next month. There is an important restriction on the VAT recoverability principle: VAT paid for the acquisition of goods or the use of services that, in turn, are used for VATexempt transactions may not be deducted as VAT credit. Thus, such VAT is not recoverable and is a cost. The VAT credit from the acquisition of automobiles costing more than ARS 20,000, restaurant and hotel services, etc., is generally not computable either, with a few exceptions. It is expressly provided that VAT billed by the sellers of taxed products manufactured in Argentina that are purchased by foreign tourists and taken abroad shall be reimbursed. VAT billed for the services provided to foreign tourists by hotels, inns, and similar establishments at sites of tourist interest located in provinces with international borders shall also be reimbursed.
Rates: The general VAT rate is 21%. This rate is increased to 27% when the services below are provided to properties not used exclusively as dwelling and the service recipient is a registered VATpayer or enrolled in the simplified system for small taxpayers. ►
Telecommunications
►
Gas and electric power supply
►
Water supply and sewerage services
The general rate is reduced to 10.5% for the following taxable events, among others: ►
Sale and import of live animals, meat and edible offal of cattle, sheep, goats and other animals; fruits, pulse and vegetables; bee honey in bulk; certain grains and dry pulse (beans, peas and lentils); bread and certain bakery products; and cattle hides.
►
Services related to obtaining some of the products mentioned in the prior paragraph.
►
Sales, manufacturing, fabrication or construction and definitive imports of goods that qualify as "capital assets" according to the list included in VAT law.
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►
Works on real property belonging to other parties and earmarked for housing, excluding those performed on pre-existing constructions that cannot be considered work projects in progress, and works performed directly or through third-parties on real property owned by the taxpayer, when earmarked for housing.
►
Interest, commissions and fees on loans granted by financial institutions, subject to certain conditions; certain health-care services and passenger transportation (distances longer than 100 km.)
►
Sales and definitive importation of certain dailies or other newspapers, magazines, journals and periodical publications; works of art; chemical fertilizer for use in farming; propane, butane and liquid petroleum gas.
Comments in connection VAT applicability to certain specific transactions: ►
Imports Definitive imports, whether recurring or nor, are subject to VAT. The importer must pay the VAT before the imported goods are withdrawn from Customs. The tax paid as importer is a tax credit to the extent that such importer is a registered VAT-payer. There is an additional withholding system applicable upon importing goods definitively. The rate is usually 10% (5% in the case of goods subject to the reduced VAT rate). The importation of items to be added to fixed assets in the nature of tools of trade is not subject to VAT additional withholdings. The additional withholding rate will be duplicated if the company does not obtain an Importer’s Data Validation Certificate.
►
Service imports Local companies are required to pay VAT on services rendered by others from abroad and given economic use in Argentina. The VAT paid can be computed as a tax credit in the following month (reverse charge method).
►
Leases and rentals The lease of real property and the rental of personal property are subject to VAT. Real property leases are VAT-exempt when the assets are to be used for housing exclusively and the lease charged does not exceed ARS 1,500 per month per unit or tenant or are rural properties used in farming activities.
►
Sale of real property Sales of real property are only subject to VAT (excluding the value of the land when they are made by: ►
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Construction companies building on their own plots of land to generate a profit from such activity or from the subsequent sale of the building.
Tax
►
►
VAT-payers transferring or retiring from a taxable activity buildings or other works that over the last 10 years generated tax credit. In such cases, the tax amount to be paid in will be that VAT credit computed at the time.
Exports Exports, whether of goods or services, are VAT-exempt, but exporters are allowed to offset any VAT billed to them for goods or services against VAT they have payable for other transactions subject to this tax. If a VAT credit results from this offsetting, the taxpayer may request that the respective amount be credited against other taxes collected by the AFIP, that it be reimbursed, or that it be transferred to other taxpayers.
Exemptions Among others, the following services are VAT-exempt: ► ► ► ► ► ► ► ►
Books, leaflets and similar printed material and sale to the public of newspapers, magazines and periodical publications. Tuition (under certain requirements). Healthcare organization services under certain requirements. Personal services provided as a payroll employee. Certain staple foodstuffs (water, milk) for certain consumer categories. Lease of real properties, with the exceptions mentioned under "leases". Motor vehicle transportation (less than 100 km). The business of organizing congresses, fairs and exhibitions and the rental of space therein, when the services are engaged by foreign parties.
5.3.2. Turnover tax Overview Turnover tax is a provincial tax charged by tax authorities in each of the 24 jurisdictions (including provinces and the city of Buenos Aires).
Tax base This tax is applied on revenues from the usual activities carried out for profit in business, industry, the professions, contracts for work or services, etc, regardless of the result of such activities, the nature of the service-provider or the place where the activities are performed.
Exemptions Among others, we may mention the following exemptions (they may vary according to the jurisdiction involve: ►
Transactions with securities, certificates, and other documents issued by the federal, provincial, or municipal governments.
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►
Transactions involving shares and dividends.
►
Publication of books, periodicals, dailies, and magazines.
►
Interest and / or indexation on savings-account, fixed-term, and checkingaccount deposits.
►
Sale of real property (with certain exemptions).
►
Exports
Some provinces have exempted certain activities from turnover tax, such as primary production, production of goods, real estate construction, among others, pursuant to the commitment undertaken upon adhering to the Federal Pact for Employment, Production, and Growth.
Rates Turnover tax rates vary according to the jurisdiction and the activity involved. The general rate (applicable to commerce and services) ranges from 2.5% to 3.5%. The rate on production activities is generally 1.5%. Certain jurisdictions establish higher rates for the taxpayers that exceed certain annual billing benchmarks. Higher differential rates are applied to other activities (loans, commissions, etc.).
Payment terms and manner In general, turnover tax is calculated and paid in on a monthly basis and taxpayers are required to file an annual turnover tax return.
Multilateral compact The persons subject to turnover tax who perform activities in more than one province have to allocate the tax base among the respective jurisdictions pursuant to a compact they have executed for this purpose.
5.3.3. Excise taxes Overview Excise taxes are levied on certain products sold to consumers. There are a variety of applicable rates and requirements for filing returns and payments. Manufacturers or importers are generally subject to this tax upon selling the goods.
5.3.4. Customs duties International and regional agreements Argentina is a member of the World Trade Organization, the ALADI (Latin American Integration Association) and the MERCOSUR (Southern Common Market).
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World Trade Organization Argentina, as member of the World Trade Organization, has adopted, among other basic principles, the GATT (General Agreement on Tariffs and Trade) value code, which establishes the value guidelines for imports of goods.
ALADI (Latin American Integration Association) The ALADI is an intergovernmental agency that promotes the expansion of regional integration, to ensure its economic and social development and its ultimate goal is to establish a common market. Its twelve member countries are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. Compacts signed among different member countries have established tariff preferences for products originating in member countries with respect to tariffs effective for third-party countries.
MERCOSUR (Southern Common Market) The MERCOSUR was created in 1991, when Argentina, Brazil, Uruguay and Paraguay signed the Treaty of Asunci贸n. The basic purpose of the Treaty of Asunci贸n is to integrate the four member countries through the free circulation of goods, services and productive factors and establish a common external tariff. In such regard, the import of goods originating in any of the member countries will be exempted from import duties and the statistical rate. In addition, Chile, Bolivia, Peru, Ecuador and Colombia are associated to MERCOSUR as associate countries and Venezuela has not yet been approved to be included as a full member. There are also the Economic Supplementation Agreements that have been signed with Mexico, Cuba and India.
Importation taxes Import duties In Argentina importation duties are calculated on the CIF (cost, insurance and freight) value of goods, valued under GATT value standards. This duty rate ranges from approximately 0% to 35%, according to the characteristics of the goods imported, whose identification, in order to verify the applicable tax rate, should be made by using Common MERCOSUR nomenclature tariffs. There may be minimum specific import duties, resulting from applying a fixed amount in US dollars by measurement unit (meters, pairs, kilograms, etc.) as minimum import duty.
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Specific import duties only apply to textile, apparel and shoe industry products. Statistical rate The importation of goods shall be subject to the payment of a statistical rate, which is 0.5% of the CIF value of goods, with a USD 500 cap. Value-added tax See comment on imports in point 5.3.1. Income tax The definitive importation of goods is subject to a 3% or 11% additional income tax withholding, depending on the allocation of the imported goods. The assets that qualify as P&E for the importer are not subject to additional withholdings. The amount of additional income tax withholdings made shall constitute an advance tax payment for registered taxpayers and shall be computed by the latter in the tax return for the respective annual tax period. If the importer does not file the Data-Validation Certificate, the applicable rate shall be 6% (instead of 3%). Turnover tax The definitive importation of certain goods is subject to a Turnover Tax collection at source of 1.5%. Imports of assets that qualify as P&E for the importer are not subject to additional withholdings. The amount thus paid is considered as a prepayment made by the importer from the withholding is made. If the importer does not have a data-validation certificate, the applicable rate shall be 3% (instead of 1.5%).
Export taxes Export duties The export duty is levied on the export for consumption, i.e., the definitive extraction of merchandise from Argentina. Such duty is calculated based on the FOB (free-on-board value of goods, valued under the Argentine Customs Code standards. Any other taxes and charges levied on exports and the CIF value of materials imported on a temporary basis are excluded from the taxable value, whenever they have been included in the value of goods. The export duty rates for most goods range from approximately 0% to 10%, according to the characteristics of the exported goods, whose identification, in order to verify the applicable tax rate, shall be made through the tariffs of Common MERCOSUR nomenclature.
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For oil and gas exports, if the international price is lower than a specific benchmark value, a 45% rate is applied; on the contrary, if the price exceeds such benchmark value, export duties shall be higher based on a formula set forth by the regulation.
Benefits granted to exporting parties. Rebates Exporters of unused goods manufactured in Argentina shall be entitled to a total or partial rebate of the amounts paid as internal taxes in the different production and sale phases. Those rebates are applied to a value to be estimated based on the FOB value of the goods to be exported, from which the CIF value of imported goods inputs shall be deducted, as well as the amount paid as commissions and brokerage. The tax base for calculating rebates may not exceed that for calculating export duties. The applicable rebate percentage depends on the classification of goods in the MERCOSUR Common Nomenclature and currently ranges from 0% to 6%, except in the case of fish and crustaceans, mollusks and aquatic invertebrates, which amounts up to 10%. Drawback It is a customs system whereby the amounts paid for taxes levied on the import for consumption of goods are totally or partially refunded, as long as those goods are then exported for consumption in the following conditions: a)
After having been subject to a transformation, manufacturing, combination, mixture, repair or any other enhancement or improvement process in the customs territory.
b)
To be used to prepare or package other goods to be exported.
VAT refund See comment on exports in point 5.3.1. Temporary import for industrial improvement Through this system goods may be imported into Argentina for the purpose of being perfected through an industrial process, with the obligation to be exported in the new form for consumption in other countries; such re-exporting shall take place within a term not exceeding one year for goods manufactured in series and two years for goods not produced in series. Goods imported under that system are not subject to the duties and taxes levied on importation for consumption nor the statistics fee, although they are subject to any other fees for services. Additionally, the CIF value of such goods will be exempt from export duties.
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The importer is required to provide a guarantee to cover the duties and taxes that would be applicable if the goods in question were eventually imported for consumption. Some specific features of the system include the “system indirect user” and “stock replacement” elements. “Indirect users” are those who formalize the Temporary Importation Clearance and assume liability for compliance with the regulations but do not actually perform any process on the merchandise and, instead, they deliver it to a thirdparty for industrial processing. “Stock Replacement” is a device that allows importing merchandise earmarked for replacing identical merchandise of the same origin that was previously imported for consumption but after being submitted to industrial processing was exported for consumption. Stock replacement should be requested no later than 180 days after the date of the export of reference. Free-trade zones A free-trade zone is a jurisdiction where goods are not subject to the usual control of the customs service and their import and export are not subject to taxes. Activities allowed to be performed in free-trade zones include storage, trade, services and manufacturing, but the latter with the exclusive purpose of exporting the resulting goods to foreign countries. The main free-trade zone in Argentina is the La Plata free-trade zone, located 50 kilometers away from the City of Buenos Aires.
5.4.
Other taxes
5.4.1. Tax on bank account transactions and other similar transactions This tax is levied on debits and credits to checking accounts opened with banks governed by Financial Institutions Law. In addition, all cash movements or payments are subject to this tax, whatever the mechanism used, when made through organized payment systems in lieu of bank checking accounts. The general rate is 0.6% for bank debits and 0.6% for bank credits (and 1.2% when the movement of funds is not made through a bank account) and there are differential rates and exemptions applicable to certain transactions. The law establishes that the Federal Executive is empowered to resolve whether this tax is to be computed on account of other taxes (either fully or partially). Currently, 34% of the tax paid for bank account credits is computable against income tax and/or minimum presumed income tax (the computation is 17% in the case of taxable events subject to a 1.2% rate).
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5.4.2. Tax on transfer of title to real property owned by individuals and undivided estates This tax is levied on the transfers for good and valuable consideration of ownership over real property located in Argentina owned by natural persons, whether Argentine residents or not, or undivided succession estates, as long as such transactions are not subject to income tax. For sales of a person’s single home or land for the purpose of purchasing or constructing another home intended for living in, there is the option of not paying the tax under the conditions set forth in regulations. The tax rate is 1.5%.
5.4.3. Personal assets tax Natural persons and undivided estates residing in Argentina are subject to the general tax in relation to the assets located in Argentina and abroad. The tax is levied on assets existing as of December 31 - provided they exceed ARS 305,000 in value - applying rates that go from 0.5% to 1.25% according to the total value of the levied assets. On the other hand, natural persons and undivided estates not residing in Argentina are also responsible for paying this tax for property located in Argentina (in this case the applicable rate is 1.25%). On the other hand, the tax related to shares or equity interests in capital stock of companies governed by Business Associations Law No. 19,550, the owners of which are natural persons and/or undivided estates residing in Argentina or abroad, and/or companies and/or any other type of artificial person residing abroad, shall be assessed or paid over by the companies governed by such law, and the applicable rate shall be 0.5% over the value obtained by the equity method. The payment shall qualify as single and definitive. For the purposes mentioned in the preceding paragraph, it is irrebuttably presumed that the shares or equity interests in Argentine companies owned by foreign companies indirectly belong to natural persons domiciled abroad.
5.4.4. Stamp tax Overview This provincial tax is levied on acts formalized through public or private instruments. Each province has its own stamp tax law, which is enforced within its territory. The documents subject to stamp tax are agreements of any kind, deeds, acknowledged invoices, promissory notes, securities, among others. The general rate is around 1%, but on certain occasions, for example, when real estate is sold, it may reach 3%. However, rates vary according to the jurisdiction.
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Although through 2008 in Buenos Aires City the tax was only applicable to real property transfers and certain assets subject to registration and to the lease of real property in which business activities are carried out, as from January 2009 the tax began to be applied generally in that jurisdiction, with most of the agreements now subject to the tax (the general rate is 0.8%), as is the case in the rest of the jurisdiction. Several provinces partially abrogated stamp tax on all formalized financial and insurance transactions earmarked for the agricultural, industrial, mining and construction sectors under the commitment undertaken upon adhering to the Federal Pact for Employment, Production, and Growth.
5.5.
Treaties to avoid international double taxation
Argentina has in effect 17 treaties with a number of countries to avoid double international taxation and thus promote reciprocal investment and trade. In addition, a treaty with the Russian Federation that had been signed in October 2001 was ratified by Law No. 26,185 (published in the Official Bulletin on January 3, 2007) and it will become effective once the Governments have mutually notified the respective internal procedures required for its application. Listed below are the effective income tax rates under these treaties for the items in which an investor would be more interested: Country General income tax rate Germany Canada Spain Finland France Italy Sweden Bolivia Brazil Chile United Kingdom Belgium Australia The Netherlands Denmark Switzerland (d) Norway
Dividends (a) 0-35% (a) 15% 10% or 15% 10% or 15% 10% or 15% 15% 15% 10% or 15% 15.05 to 35% (c) 15.05 to 35% (c) 15.05 to 35% (c) 10% or 15% 10% or 15% 10% or 15% 10% or 15% 10% or 15% 10% or 15% 10% or 15%
Royalties
Interest
21 a 31.5% 15% 3% to 15% 3% to 15% 3% to 15% 18% 10 to 18% 3% to 15% 21 to 31.5% (c)
15,05% a 35% 10 to 15% (b) 0% or 12.5% 0% or 12% 0% or 15% 20% 20% 0% or 12% 15.05 to 35% (c)
21 to 31.5% (c) 15.05 to 35% (c) 21 to 31.5% (c) 3% to 15% 3% to 15% 10% to 15% 3% to 15% 3% to 15% 3% to 15% 3% to 15%
15.05 to 35% (c) 0% or 12% 0% or 12% 0% or 12% 0% or 12% 0% or 12% 0% or 12% 0% or 12%
The applicable rate is the general rate under Income Tax Law or that provided by the respective treaty, whichever lower. Also, Argentina has entered into specific international transportation treaties with several nations. a) b) c)
Please refer to Income Tax – Rates - Dividends On credits financing the sale of equipment, bank loans, and financing of public works: 10%. No specific rates have been agreed upon in the treaty.
d)
Based on the note drafted by the Argentine Government on 01/16/2012, it was decided to suspend the temporary application of the Switzerland Treaty.
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6. Labor and Social Security Legislation 6.1.
Labor Supply and Relations
Workforce Argentina has a skilled labor force. Well-trained employees are generally not difficult to locate in most industrial areas. However, in some areas that experience a substantial increase in the volume of industrial activity, a shortage of skilled labor may occur. Methods of recruiting employees vary, depending on the qualifications required, from hiring directly at the employer’s facilities to using specialized private employment agencies. Agencies are used especially in recruiting for managerial and technical positions. Many are located in Buenos Aires City and its surroundings, where the labor force is highly concentrated. Labor contracts are not required to be formalized in writing, and they usually are not.
Executive Compensation Executives receive various fringe benefits in addition to salary. Foreign companies usually provide such benefits in accordance with the parent company’s policies. The most common benefits are health plans including ophthalmology and dentistry, life insurance and payment of post-graduate studies. If the employer agrees to pay all income tax and social security contributions on salaries, executive compensation may constitute a significant cost to the employer. For instance, a salary equivalent to USD 54,000 a year free of income tax and social security may result in a total executive compensation cost to the employer of approximately USD 89,500. This kind of agreement is common for expatriates, but not for local employees.
Salaries and wages The salaries and wages for office and plant workers vary from one region of the country to another. Minimum salaries are generally established by collective bargaining, but supply and demand usually have great influence in determining the salaries of the best qualified workers.
Labor legislation Minimum Wage A single general minimum wage is established for all industrial and office workers. It is approximately equivalent to USD 599 (ARS 2,875) and USD 3.00 (ARS 14.38) for monthly and hourly salaries, respectively. Collective bargaining agreements establish more realistic minimum salary tables, which are the ones most often used.
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Labor legislation
A general Employment Contracts Law, supplemented by additional laws and regulations, governs employment conditions throughout the country. In addition, there are collective bargaining agreements that regulate the specific employment conditions for particular sectors of activity. However, the abovementioned law does not apply to farm workers or government employees, whose work conditions are established in separate laws and regulations. There are also special laws that deal with certain categories of workers (travelling salesmen, journalists, domestic staff, among others).
Labor Union Organizations Almost all industrial and office workers belong to some labor union. Such labor unions handle the collective negotiations, which cover both employment conditions and salaries and wages scales.
Collective Bargaining For many years only a single collective bargaining agreement for each particular sector of activity was accepted. In November 1991, a government decree permitted the parties to freely select the type of labor negotiation they considered to be the most suitable. The negotiation, therefore, can be by activity, by one or more sectors of an activity, by specialization or profession, by enterprise or by any other characteristic, but always respecting the provisions established in the main collective agreement effective for the activity.
System for the promotion and protection of reported employment Towards late December 2008, a law approved a system promoting registered employment, which provided for a reduction benefit lasting two years for the payment of employer contributions (only including the Integrated Retirement and Pension System, INSSJP (to fund the senior citizen’s healthcare plan, Argentine equivalent of Medicare in the US), National Employment Fund, National System of Family Allowances, National Registry of Rural Workers and Employees). Those contributions were reduced by 50% during the first year and 25% during the second year. It is expected that employers will maintain the benefits of the employment promotion system as long as they do not decrease the total headcount up to two years after its finalization. Employers would join this system originally for a period of 12 months as from the date on which the provisions of the law come into effect, and may be extended by the Argentine Executive every year.
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Labor Legislation
6.2.
Other Employee Benefits
Argentine labor laws are notable for the protection they provide to employees. Regulations cover labor contracts, forms of wage and salary payments, women and minors in employment, and various other matters. Some of the main regulations are detailed below.
Bonuses required by Law Mandatory bonuses are paid on June 30 and December 31 each year. They amount to one-half of the highest monthly remuneration paid to the employee during the preceding semi-annual period. This is called sueldo anual complementario (annual supplementary salary, i.e. thirteenth salary).
Paid Vacation Providing an annual paid holiday is mandatory. Vacation length ranges from 14 to 35 consecutive days, depending on the number of years of service. To be entitled to a vacation, an employee must have worked at least half of the working days in the calendar year. New employees are entitled to one day for every 20 days of effective work. The compensation payable over the vacation period is required to include a vacation bonus, which is about 19.6% for every day of vacation. Thus, the total increase above the monthly salary will depend on the number of days of vacation taken. Likewise, it is important to mention that the company must pay the remuneration related to the vacation period upon the beginning of such period.
Illness and Accidents In 1996, a new Workers Compensation Insurance Law came into force, which implemented a system that is in effect to date and was updated on certain aspects through recent amendments. Workers Compensation Law requires that a mandatory insurance policy be purchased from an authorized Workers Compensation Insurance Company, covering the cost related to medical care, professional rehabilitation, prostheses and orthopedic elements, funeral assistance and indemnities for partial or total disability and death as a consequence of occupational accidents and diseases. Employers who purchase workers compensation insurance policies are, in principle, exempt from any civil liability with respect to their employees and their heirs. The insurance premium is set as a percentage of the employee’s salary, which varies depending on the industry, number of employees and degree of compliance with safety regulations.
Unemployment Workers with more than six months of service on a job are included in a government unemployment insurance system.
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Under certain circumstances, they are entitled to receive monthly payments for a period of two to twelve months based on a variable percentage of the highest monthly salary collected in the six-month period prior to their unemployment. Such payments are taken from a fund comprising a portion of social security contributions. The unemployed are also entitled to receive medical care.
6.3.
Main Types of Employment Contracts
The different types of employment contracts provided by Argentine legislation are described below: ►
Types of contracts:
Indefinite period employment contract This feature need not be stipulated in writing in a contract, since the labor relationship is assumed to be without time limit, unless otherwise stated in the contract. In Argentina, it is not usual practice to formalize the employment contracts in writing. This type of contract begins with a 3-month trial period.
Fixed-Term Contract Labor legislation provides for the possibility of hiring employees under a fixedterm contract. This type of contract cannot exceed a 5-year term. The reason for entering into a fixed-term contract must be stated, e., that the person is hired in place of an employee who is ill or to deal with an extraordinary work load. If the contract is terminated before the end of the stipulated term, the employee is entitled to claim compensation for damages; such compensation is usually determined at the amount of the salaries that the employee did not collect because of the early termination. ►
Severance pay
Indefinite period employment contract The severance payment amount is generally equal to one month of the employee’s compensation for each year of service (or any period longer than 3 months). The calculation basis for the employee’s compensation for this purpose is the highest monthly regular and habitual compensation received during the last year or during the term during which the services were rendered, whichever shorter. This base should not exceed the triple monthly amount resulting from averaging all remunerations set forth by the applicable bargaining agreement. However, the Argentine Supreme Court ruled on a case (that is a precedent for the following ones) that by applying the cap established in the agreement, the monthly computable normal and regular compensation for the seniority indemnity cannot be reduced by less than 67% thereof, because it would be otherwise of a confiscating nature for the employee. In practice, many companies have used this criterion upon calculating the severance pay amounts.
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The severance pay amount must never be lower than once the monthly normal and regular compensation, which is taken as a basis. It is important to point out that, in the case of workers who are not included in collective bargaining agreements, the agreement related to the activity performed in the establishment where the services are rendered will be applicable. Severance pay may be reduced in cases of force majeure – e.g. production contraction for reasons not attributable to the employer – subject to having followed crisis procedures before government labor authorities.
Fixed Term of Contract - Longer Than 1 year The severance payment amount is generally equal to one month of the employee’s compensation for each year of service (or any period longer than 3 months). The calculation basis for the employee’s compensation for this purpose is the highest normal and habitual monthly compensation received during the last year or during the term during which the services were rendered, whichever is shorter. Such basis must not exceed 3 times the monthly amount resulting from averaging all the compensation amounts established in the collective bargaining agreement. The amount of the severance payment must never be lower than once the monthly compensation taken as a basis. ►
Severance pay in lieu of prior notice
Indefinite period employment contract The employer is required to inform the employee of its decision to terminate the employment relationship with the following prior notice terms: -
fifteen days prior to the dismissal date, if the worker’s length of service is less than 90 days; one month prior to the dismissal date, if the worker’s length of service ranges from 91 days to 5 years; or two months prior to the dismissal date, if the worker’s length of service exceeds 5 years.
Notice must be served formally and in a sufficiently documented manner, and the notice period shall be counted as from the day after it is served. During the notice period, the employee affected is entitled to take two hours off each day to search for new employment. In lieu of the notice period, employers may opt to pay compensation in cash equal to the salary which would have been earned in that period.
Fixed-Term Contract The employer is required to give notice of the termination of the contract at least one month before the agreed contract expiry date but not more than two months before such date.
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Labor legislation
►
Unused Vacations
When the employment relationship concludes, the employee should collect an amount equivalent to the proportion of vacation days accrued during the year. Such amount is paid to cover unused vacations. This amount is determined in the same way for both types of employment contracts. ►
Annual statutory bonus
Upon termination of the employment relationship, the employee must be paid the proportion of the yearly bonus accrued during that half year. For example, if an employee leaves the company at the end of November, the proportion of the bonus must be calculated considering the proportion of half a monthly salary in relation to the time worked during that half year (five months in this case). This amount is determined in the same way for both types of employment contracts. ►
Other contracts which do not amount to an employment relationship
Internships This type of contract can be entered into by students, since its main purpose is to foster the practice related to his/her education and qualifications. In order to enter into this type of contract, the company must sign agreements with universities or other educational institutions. In 2009 a new system of educational work experience traineeships was implemented, which establishes, among other things, that trainees will receive a sum of money of non-compensatory nature as a incentive allowance, which may not be lower than the base salary of the collective bargaining agreement applicable to the company, and which will be proportional to the amount of hours of the traineeship. Furthermore, as established in current regulations, the employer is required to provide health coverage the services of which include those set forth in Statutory Healthcare Organizations Law, with the employer being required to contribute 6% of the incentive allowance received by the trainee.
6.4.
Social security
Salaries paid to employees are subject to employer and employee contributions to be sent to the Social Security System (except for some cases, among which we can include directors-employees of companies that have opted to make contributions only as self-employed workers). The table below shows the employee and employer contributions, i.e. percentage of salaries, required by law: Contribution Contribution (employer) (employees)
Item Retirement
Law No. 24,241
10.17%
Family allowances
Law No. 24,013
4.44%
-
Federal Employment Fund
Law No. 24,013
0.89%
-
INSSJP (Pensioner’s Healthcare Organization
Law No. 19,032
1.50%
3.0%
Basic statutory healthcare organization
Law No. 23,600
6.00%
3.00%
23%
17%
Total
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11.00%
Labor Legislation
If the Company’s main activity is commerce or the provision of services, and its average sales for the last three fiscal years exceed, in principle, ARS 48,000,000 (USD 10,000,000), then the social security taxes borne by the company would total 27%. The amounts employers are to withhold from employees account for 17% of salaries, with a tax base cap of ARS 21,248.45 (USD 4,427) as from September 2012, for all items subject to withholding. In addition to the above, employers are required to pay the premiums of Workers Compensation Insurance, which covers the occupational accidents or diseases that employees might sustain or contract while working for the company. The premium to be paid depends on the risk as assessed by the insurance company from which the insurance is purchase.
Social benefits There are certain benefits referred to as “social� which constitute items that are non-compensatory, non-monetary, non-accumulable and non substitutable for cash in nature, which do not involve consideration in terms of work nor do they entail a financial gain. Social benefits are listed in section 103 bis, Employment Contract Law. The following items are not initially considered to be of a compensatory nature: (a) the company cafeteria, (b) reimbursements of medical and drug expenses for the employers and their families, (c) supply of apparel and elements to be used exclusively in their work, (d) reimbursement of expenses of daycare for children up to the age of six years, (e) supply of school supplies for children, granted at the beginning of the school year, (f) payments of training courses or seminars, (g) payment of burial expenses of family members that are dependants of the employer.
Exemptions Argentine legislation establishes a special exemption from withholdings and social security contributions applicable to all those professionals or technicians hired abroad to perform work in Argentina for a maximum period of twenty-four (24) months provided they have insurance covering old age, incapacity and death in their respective countries of origin and are residing temporarily in Argentina.
Self-employed workers Self-employed workers must make contributions depending on the categories established according to the activities they engage in and the annual turnover. The monthly average contribution totals ARS 697 (USD 145). Company directors and legal representatives of local branches are required to contribute to the Social Security System as self-employed individuals even if they are also working as payroll employees. Such persons are not under obligation to make contributions to the Social Security System as payroll employees and the respective employer contributions are not mandatory either.
79
Labor legislation
Creation of SIPA (integrated Argentine social security system). Elimination of the privately managed pension fund system Law No. 26,425 was passed to create a single Integrated Pension System with just one government-managed retirement system referred to as the SIPA (Argentine Integrated Pension System), funded through a pay-as-you-go government-managed system, guaranteeing enrollees and beneficiaries under the former privately-managed individual retirement system identical coverage and treatment as that afforded by this former system. Consequently, the privatelymanaged individual retirement account system that coexisted with the government-managed pay-as-you-go system at that time was eliminated. The latter will replace the former system. The services provided by a payroll employee or self-employed worker for the periods when the worker was a member of a privately-managed individual retirement account system shall be considered as if they have been rendered under a government-managed pay-as-you-go system for the purpose of calculating the benefits set out in section 17, Law No. 24,241. The benefits of the privately-managed individual retirement account system that have been calculated according to the type of life annuity shall continue to be paid through the appropriate retirement insurance company. Also, such regulation established the transfer to the A.N.S.e.S. (federal social security administration) of the resources that are part of the privately-managed individual retirement accounts of members and beneficiaries of the privatelymanaged individual retirement account system.
Totalization Agreements Argentina has entered into social security reciprocity agreements with Mercosur, Chile, Greek, Italy, Peru (not regulated), Portugal, Spain, Colombia, Slovenia and France. In addition, there are bilateral agreements signed with Brazil and Uruguay preceding the Mercosur Agreement. Moreover, a totalization agreement with Belgium has been signed and approved, as well as the Ibero-American Social Security Treaty, which are still pending regulation.
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