Investing and Doing Business in Argentina

What To Do With "Unofficial Expenses"

2011-06-15T17:15:00.004-03:00

One of the most difficult part about doing business in Argentina is dealing with people who aren't above board. Since taxes are so high here, there are plenty of companies and individuals who just refuse to play by the rules. If you are equipping an office, for example, most of the people who work on the project (carpenters, plumbers, painters, etc) will probably refuse to give you an invoice at the end of the job. When you send paperwork via a messenger service you will probably get a hand written receipt rather than an official invoice.

The best suggestion is to avoid doing business with people who refuse to invoice properly because it complicates everything. If you start working with people who don't play by the rules, you'll soon be forced into the same game. You can't legally pay these people from your company funds, so you'll have to pay them off the company books. And if you are paying them off the books, then you'll have to start getting income off the books to come up with the off the books funds to pay these people.

Pretty soon your business has two sets of books - the official kind and the unofficial kind. This will be a huge headache later when you need to do your annual taxes or even analyze easily how your business is performing. It means your accountant can no longer give you any kind of real help with your business (since he is only keeping the official books, and not the real books) he has no idea how the business is actually performing.

Resist the temptation to use off the books providers. You may save a little in the short term, but the long term costs are not worth it.

Inflation and How It Affects Us

2010-03-01T18:35:00.003-03:00

Today I received an email from a college student, looking to interview me about inflation and how it affects all of us living in Argentina. I thought this would be a good topic to post a blog entry on, so here we go.

How did Argentina put itself in this inflationary bind so quickly?

It was by no means quickly. There are a number of policies that have all contributed to the inflation we are now seeing. The inflation problem is not a new problem and is not something that just recently started. It has been a deliberate and increasing problem that the government has decided, for one reason or another, not to prioritize.

What is the best way for Argentina to bring the peso inflation down?

There are probably a hundred economists who would all give you a hundred answers on this one, but for me the principal problem is two-fold: the deliberate refusal to let the peso appreciate by the central bank (pushing up the price of imports) and the disincentives for investment in the local economy (causing demand to outpace supply).

What is your current occupation, and how has your job been affected by inflation?

I am a business owner and manager and my job has been affected by inflation in several ways. First, I have to constantly monitor the prices of the inputs in my products/services. If I see raw materials increasing, I have to increase prices to maintain my margin. However, if the competition is not raising prices, this option might not be available to me. That means I'm going to either have to accept lower margins or try to reformulate the product/service to use less raw materials if I want to maintain my margin.

How much has your standard of living improved since moving to Argentina?

For me personally, I would say it is about 30% better. I came from a smaller city in the US and housing prices are much higher here in Buenos Aires than where I am from. Coupled with the fact that you can't get a mortgage loan, it means the average family needs to invest much more in housing here. Groceries, eating out, and utilities are cheaper here in Buenos Aires. Anything that isn't made here is much more expensive: electronics, cars, etc. due to the crushing import taxes. Services and things that involve high labor costs, such as construction are cheaper here than in the US. So, it ends up being a mixed bag at best.

How does Argentina's heavy inflation affect its ability to work as a global power?

I don't think anyone would consider Argentina a global power. A regional power, maybe, but certainly not a global one. The biggest effect it would have on external actors would be through their commerce or trade with Argentina. However, just about every company selling goods outside Argentina are pricing their goods in dollars anyway, so the inflation of the peso doesn't really affect Argentina's customers.

How has the exchange rate from the dollar to the peso changed in Argentina since you've lived there?

When I arrived to Argentina the rate was about 2.8 pesos to the dollar. Now the rate is 3.9 to the dollar. So, we are talking about devaluation of 40% in the peso against the dollar.

How much is the average Argentinean affected by the currency?

The average Argentine is directly affected by inflation and devluation. If he or she is not able to negotiate a salary increase to match the rate of inflation, the purchasing power of their salary will shrink and squeeze their monthly budget. On a group level this leads to union conflicts with companies and the government during salary negotiations, protests, social unrest, etc.

Buenos Aires Technology District: An Interesting Option for Tech Companies

2009-12-02T16:14:00.004-03:00

Today I met with Carlos Pirovano, the Undersecretary of Investments for the City of Buenos Aires to learn about the Buenos Aires Technology District. The district is a 200 hectare zone that circles Parque Patricios.

Objective of the Technology District
The goal of the district is to revitalize the area surrounding Parque Patricios, which is an area that the undersecretary said has been targeted by Macri's government as a zone they want to focus on. Although they said they are not in competition with the technology park in the Province of Buenos Aires, I'm sure that the city doesn't want to lose technology jobs to the Province.

Benefits
Tech companies that move into the district are given a 10 (multinationals) or 15 (small businesses) year exemption from payment of most city taxes, including municipal taxes (ABL), sales taxes (ingresos brutos), and stamp taxes (impuesto de sellos). In fact, the district's largest company, Iron Mountain, was able to take advantage of the benefits even though they didn't actually move into the district. The district was actually created around their preexisting offices.

Who Qualifies
Just about any technology company will qualify, but only technology companies. As long as 51% of the company's income is related to technology, the company will qualify for the benefits. This means -- software development firms, hardware companies, technology education companies, internet companies, and even retailers that sell online (as long as 51% of the company's income comes from a website and not a physical store location).

Every technology company qualifies, no matter its size. The district already has companies with as few as 4 employees and as many as 1400.

Progress
The law become active in June of 2009 and there are already 22 companies operating in the district, most notably TATA, Iron Mountain, and Clarin Global. There is a lot of interest, however. At today's meeting with the undersecretary there were 11 companies present, including Oracle. According to the Ministry of Economic Development, in addition to the 22 companies already in the district there are currently 35 companies looking for offices with the assistance of Ministry and they are receiving 150+ inquiries every week. So, it looks like 2010 will be an important year for the district.

My Impressions
I have to say that the project appears very intersting and I am going to consider it seriously. My software company's office rental contract expires soon and we need to either renew or move anyway, so it will be an interesting option for us to consider.

I was impressed with the representatives for the technology district and how they help the companies through the process of registering. Each company is assigned to a specific investor representative who has an email address and phone number and can help your company through the process. Anyone who knows anything about doing business in Buenos Aires knows that this is very rare. Usually interactions with a government entity mean going to some faraway office, standing in line for 2 hours and then being told that you're missing a paper and have to leave and come back later and repeat the process.

The undersecretary told me that after submitting the documentation, they will review it and give you a yes or no answer within 5 days as to whether your company will qualify. If you qualify, they put you on a "pre-approved" list. After you're on this list, you then just need to go and rent or buy a property within the district and submit your rental contract or title. After that, within 15-30 days you'll be given notification from the city tax office that you've been granted the exemption from city taxes.

Given that this is Argentina, I have to say that it is a very efficient process. The national software promotion law can take 9 months - 1 year to qualify for and it is much more difficult for the companies to prove that their activities fall within the scope of the law. How do you prove that your business qualifies for the city? Simple, you sign an affidavit stating your company's line of business. That's it. They review your statement and will decide whether your business fits within the law, but it all seemed very simple.

I would suggest anyone that is looking for more information to contact the City of Buenos Aires' Center for Investors to receive the details directly. They have representatives who speak English and are perfectly equipped to attend to international investors.

Overview of the Monotributo System

2009-11-27T08:00:00.001-03:00

Monotributo - An Excellent Tax System For Sole Proprietors
This post will cover the monotributo system, a special parallel tax system that frees the sole proprietor from having to comply with the complex federal tax system Argentina imposes on businesses. A business owner starting out as a sole proprietor in the general system needs to pay the following federal taxes: autónomos (a monthly social security tax for independent workers that covers health and retirement), VAT (on a monthly basis), and income tax.

Four Federal Taxes In One
The monotributo system allows self employed people to avoid the complications of paying these taxes each month and, instead, use an alternate system which requires the payment of a fixed monthly tax, which varies depending on three variables: gross annual receipts, the physical space occupied by the business, and annual electricity consumption. In almost all cases, the monotributo system will result in the sole proprietor paying less taxes.

Enrolling in Monotributo
To enroll in monotributo, the taxpayer will need a DNI, a CUIT, and will need to complete AFIP form 183/F. If you don't have a CUIT, you can apply for one at AFIP while you are there to enroll in monotributo. If you do not yet have your DNI, you will need to bring a certificate from the Dirección Nacional de Migraciones which has your file number and states your residency status. If you don't have a visa which gives you work authorization, you won't be able to enroll. So, the first step for expats looking to enroll is to make sure you have your visa in order.

Choosing a Category
The taxpayer will need to enroll in one of the 13 monotributo categories, depending on the type of business activity that he or she is engaging in and based on the three variables discussed above. Categories A-E are for service businesses, while cateogories F-M are for retail and manufacturing type businesses. The table is listed on this AFIP page. All values are listed in pesos.

Recategorizing
If you start a retail shop and, based on the size of your store, you fall into Category I, for example, you will need to recategorize if one of the variables listed in the table above is exceeded. For example, if your monthly sales exceed $4000 pesos, you will need to move up a category.

Recategorizing can be done three times per year between the first and the seventh of the month in January, May, and September. This can be done online through the AFIP web page.

Resigning from Monotributo
Make sure to resign from the monotributo system if you no lnoger operate your business. Stopping the monthly payments is not enough. If you don't resign, you will accumulate debt with AFIP and the interest rates and penalties for non-payment are rediculous. It is the equivilent of owing money to the mob.

If your business becomes successful and you start earning above and beyond what is permitted by the monotributo system, you will need to resign from the system and join the general system (VAT, income taxes, autónomos, etc).

Settling Employee Conflicts in SECLO

2009-10-23T11:35:00.004-03:00

I sometimes think the employee/employer relationship in Argentina is set-up to deliberately generate conflicts. As an employer, you will find that it is only a matter of time until these labor conflicts rear their ugly head. When they do occur, the best option is to resolve them quickly, removing the employee and ensuring that the employee's legal options are limited.

As any employer in Argentina will tell you, labor conflicts are expensive. I know Argentines who have purchased apartments with the money they have won in labor disputes. Worse yet, every employee knows that the labor court judges are on their side and that employees win well over 90% of labor lawsuits.

After deciding to remove an employee, if you can come to an arrangement with him or her, a good option to use is the Labor Ministry's SECLO (Servicio de Conciliación Laboral Obligatoria) service. You will need to put the agreement in writing, fill out a form to request a date, and go personally with the employee to the Labor Ministry at Callao 110. Both the employee and the employer should be represented by council. In practice, two lawyers from the employer should be used to avoid complications. If you allow the employee to bring his own lawyer, you're just opening a door to further claims.

At the end of this process, the Labor Ministry will endorse the signed agreement and it becomes equivalent to a court judgment. The employer is obligated to pay the amount agreed upon and the employee gives up his or her right to any future legal remedies against the employer. It is important to note that the employer never admits to any kind of guilt or responsibility in these agreements, so they cannot be used as proof for other claims by third parties (i.e. the tax office, social security agency, other employees, etc).

Who Can Join Monotributo?

2009-09-29T12:57:00.002-03:00

Today's question comes from a reader with a "visa precaria" and he wants to know if he can join the monotributo system.

Reader's Question

Whilst you have said that you can not be a monotributista without a DNI, i would like to know if you can get one whilst awaiting your permenant residency. I am married to an Argentine and awaiting my papers - i have my 'Residency de Precaria' - will that be enough??

Who Can Join Monotributo
A "visa precaria" is just that, a precarious visa. The government is giving you a little bit of time for you to regularize your situation and get a real visa. A visa precaria doesn't entitle you to a DNI, since it isn't a residency visa. What you need to do is get a residency visa, either temporary or permanent, and then you can get your DNI and enroll in monotributo.

I had a temporary visa my first three years in Argentina and then changed to a permanent visa. During those years as a temporary resident, however, I could get a CUIT, open a bank account, invest in companies, enroll in monotributo, etc. A temporary residency visa allows you to do all those things. A visa precaria will not, however, since it isn't a residency visa.

Your Business' Official Address

2009-09-21T16:20:00.003-03:00

When registering your new business for the first time in Argentina, you will be asked to prove that your business is operating at a certain location. However, it is not enough to simply declare your address. You will need to "prove" it. This is done through a rental contract, presenting utilities in your business' name, a declaration from a public notary (escribano) etc. Before the government will give your business a tax id number (CUIT), you will need to prove its address.

This is sometimes difficult for new businesses, since just about everyone will ask you for your business' CUIT number before they will put any kind of service in the business' name or sign a rental agreement. These kinds of requirements will sometimes generate chicken and egg type situations where you can't start doing business until you have a CUIT, but you can't get a CUIT until you prove you are doing business.

The most complicated situation is when you try to declare an address that has already been declared for an existing business. The government will want to know why two businesses are operating at the same address, so be prepared to reply officially with the supporting documentation. In cases where this has been an issue for me, we have always resolved the issue by declaring the company to have the home address of one of the partners (assuming no other companies have been registered at that address) and then changing the company's official address after having been issued a tax id (which can be done simply over the internet).

Careful About Buying From Monotributistas Part II

2009-08-27T10:26:00.002-03:00

I received a follow-up question from my post the other day about the new retention scheme for monotributistas.

Reader's Question
Do you know if this change will affect English teachers who submit facturas to institutes or their clients at the end of each month?

Effect on Service Providers
An English teacher, as a service provider who invoices their client at the end of the month, is going to be subject to the new retention regime. Now, if the client is a consumer (i.e. an individual student), there will be no retention, since consumers are not required to control the tax situation of monotributistas. As consumers in Argentina the only obligation we have is to demand that all service providers provide us with an invoice with all purchases.

Assuming you are working for an institute, however, the situation is somewhat different. The institute will now need to control your invoices to ensure that you are not exceeding the monotributo limits. So, if you are enrolled in category A (which corresponds to $12,000 pesos per year), once you've issued invoices for $12,000 pesos to that institute, you will begin to see retentions of income tax and VAT unless you pass to a higher category (B, for example).

If you are invoicing the same institute each month and you don't have any clients on your own, you're probably not supposed to be in monotributo anyway. You should be enrolled as an employee of the institute and then you can avoid all this mess.

Careful About Buying From Monotributistas

2009-08-24T15:20:00.003-03:00

Beginning in September, companies will be required to carefully control their purchases from monotributistas. A new retention regime put in place by AFIP, Argentina's tax agency, turns every company into agents for the tax man. The new requirements involve inspecting whether the monotributista has exceeded the limits of the category he has enrolled in and, that being the case, the company is required to prepare a tax retention certificate using SICORE (after having done the paperwork to join the retention system). Uggghhh!

And what happens if the company doesn't do the tax retention? It'll be on the hook and owe penalties for the amount they should have retained.

Practical Effects
After this change goes through (scheduled for 1 September 2009), it'll be even more difficult to deal with monotributistas. When buying from monotributistas, companies already have roadblocks placed in their path that prevent them from earning any VAT credit on the purchase (all monotributistas are treated as final consumers and thus don't manage VAT credit) but the expense also cannot be deducted from the company's income taxes unless certain conditions are met.

Now with this new regime in place, companies will have to control their payments and retain taxes. I can tell you from experience with the SICORE program, that it is not designed for regular users. It is made with accountants in mind and it is not easy to use. That means any kind of purchase from monotributistas will require a phone call to the company's accounting department or external accountant to verify whether a SICORE retention certificate will need to be prepared.

What Will Happen in Reality
The net effect of all of this is that small companies will not want to accumulate any more payments to monotributistas. They'll just stop asking for invoices and make payments in cash (en negro as they say here). Companies that make all their payments officially will only deal with monotributistas if they are key providers and cannot be replaced.

In the case of providers who are not key to the company's operation, they'll switch for providers who can emit "A" invoices.

Consequences for Monotributistas
The main consequences of this new change is that it makes it a lot more difficult for monotributistas to provide services to companies. Monotributo still remains an interesting option for small businesses selling to the public at large, but selling to companies just got a lot more difficult.

Equity Financing: The Only Choice for Argentina Small Business

2009-08-12T15:31:00.007-03:00

In Argentina the only realistic way to obtain start-up funding for any kind of business venture is through equity financing or through some other vehicle that brings investors into your company. Luckily this type of financing is readily available for small businesses that have professional management with good contacts.

Why Equity Financing is a Realistic Option
The main reason equity financing is available in Argentina is that many individuals here would prefer to invest with friends, family, and business associates than with investment funds, professional money managers, or even banks. It all comes down to trust.

In Argentina, nobody trusts anyone. And if you don't trust anyone else, you certainly won't give them your money. That's why so often you'll see people investing with their brother-in-law, best friend from college, or parents putting money in a son's business. The financial companies here have a horrible reputation (justly or not) of being happy to take your money but not no friendly when it comes to giving it back. The State exercises such complete control over the financial industry that in times of crisis, the banks are converted into mere branches of the Central Bank, taking in deposits and transferring all liquidity to the State.

This type of scenario means that the average man on the street puts a lot more trust in people he knows than in some banker who needs to respond to the orders of the Government of the day.

Business Plans
Entrepreneurs should put some effort into building a realistic and well-thought out business plan, with realistic financial estimates. Just doing this will put them head and shoulders above the thousands of other wanna-be entrepreneurs who are making the rounds looking for funds. It sounds crazy, but in the years I've been here, I've met with all the following entrepreneurs seeking funding for their venture:

A mining outfit in Neuquén seeking $500,000 USD to restart a closed operation.
An entrepreneur looking to make consumer loans to police / military officers.
A landowner raising funds for a boutique hotel.
An entrepreneur raising funds for an ice cream factory.
A real estate agent looking for funds to convert a failing hotel into a timeshare.

I'm certainly not the biggest angel investor in Argentina, not by a long shot. I don't have a finance degree and I am by no means a professional financial analyst. However, not one of these people who presented their idea to me came prepared with any kind of figures or estimates. Not one had a business plan written down on paper. The mining group even suggested that I send my own geologist and team of analysts to evaluate their project, but that they were not going to pay anyone to put together any kind of estimates. I have no doubt that they still haven't found any funding with that kind of attitude.

In almost all cases that an entrepreneur arrived with clearly thought out figures, a solid plan, and recommendations from advisers I trust, I've invested. Sometimes it was a good investment, other times it didn't go as planned, but I've always believed in the entrepreneur who was running the business and confident that they were prepared to lead with a clear vision of where they wanted to go.

When a Sole Proprietor Should Pick the General Tax System

2009-08-11T11:55:00.004-03:00

In previous posts I covered when a sole proprietor should pick the monotributo system. It is a system I highly recommend for people just starting out with a small business in Argentina. However, there are some cases when monotributo is either not allowed or recommended for sole proprietors.

Exceeding the Monotributo Limits
If you exceed or expect to exceed the monthly monotributo limits, you can't enroll in this system. The limits are currently $72,000 pesos annually for service activities and $144,000 pesos annually for other activities. On an annual basis, the business cannot consume more than 10,000 KW of electricity for service businesses and no more than 20,000 KW for other businesses. Additionally, the business cannot occupy more than 85 m2 for service businesses or more than 200 m2 for other businesses.

Large Capital Investments
If you're starting a business that is going to require a large capital investment with purchases of equipment and materials, it probably is not a good idea to start as a monotributista and then switch to the general system. The reason being is that if you start in the monotributo system, all the VAT that you pay to purchase the equipment and materials is going to be lost. Keep in mind also, that since monotributistas are not subject to income tax, you won't be able to take the depreciation on your capital equipment or be able to deduct your materials.

Businesses that require large upfront investments may not pay any VAT taxes for a year or two due to all the VAT credit they have from their initial investments. Additionally, income taxes could be minimal after depreciating the equipment, materiales, and other expenses.

Importing
Monotributistas cannot import, period. If you have a business that is going to import, you will have to be in the general system.

Expats without a DNI
Finally, if you don't have a DNI, you can't enroll in monotributo. You'll need to form a company and operate within the general system.

Practical Advice
I would like to finish this article just by saying that if you have a small business and provide some small product or service and want to operate legally in Argentina without much difficulty, monotributo is a good option. Anyone looking to run a serious business with growth prospects needs to look to the general system.

Frank, from Sugar & Spice, commented on a post I made the other day about the monotributo system and some disadvantages. To use a cookie analogy, if you're an expat looking to bake cookies in your house and sell them to a few restaurants or shops, monotributo is fine. If you're going to be opening big stores (like Frank has done in Palermo), investing in expensive commercial ovens, selling your products to Jumbo or other supermarkets, monotributo is not going to work.

The General System vs Monotributo

2009-08-05T15:03:00.005-03:00

Today I received a comment from a reader about the advantages / disadvantages of starting a sole proprietorship under the monotributo system (which I have recommended) vs the general tax system.

Reader's Comment
The monotributo is fine for very small businesses or to generate some side income, but from my own experience you rapidly exceed the sales limit and are forced to register for IVA, pay for an accountant, autonomos, etc., which is then only slightly cheaper than operating as a corporation.

However transforming a business that started as a sole proprietorship into a corporation costs quite a lot of time and money, which easily takes away any initial tax advantage you may have gained by starting as monotributista.

If the growth projection of your business plan estimates that you will reach the monotributo limits within one or two years, you are better off forming a SRL or SA right from the start. And if the estimated growth is smaller you might want to reconsider starting the business in the first place...

Reasons to Pick Monotributo
Let me start by saying that everything stated above by the reader is correct. However, I still recommend monotributo for sole propritors starting out, especially ones from the United States. I'll go over a few of the reasons for this, despite the extremely low limits for monthly sales that monotributo provides.

Most businesses fail within the first two years. If, for some reason, the business venture doesn't go as planned, it is easier and costs much less to unwind a monotributo registration with AFIP than get rid of a failed SRL or SA. I personally know of a case where it took a business associate of mine more than two years to successfully wind down a company she was involved with. In the mean time, she had to pay monthly self employment tax (autónomos) until the company could be disolved.
Monotributo limits, while currently low, are likly to be increased in the near future. It is widely known that many adherants to the monotributo system surpass the yearly income limit by not declaring all their income. The government has a project designed to increase those limits (last I heard they were giong to be more than doubled). This obviously makes monotributo a more realistic option and gives the entreprenur more growing room.
No need for a fiscal controller (controlador fiscal). Sole propritors who are selling to the public do not need to purchase and operate these machines.
No tax retentions by banks, credit card companies, or other payers. Companies enrolled in the general system have money retained by banks and credit card companies (if they have a merchant account) for VAT and income tax. Sole propritors enrolled in monotributo are payed in full.
No monthly reports to file with AFIP. Assuming there are no employees, a monotributista doesn't have to file anything monthly with AFIP. The only requirement is to save and make the invoices available for inspection when AFIP requires it.
Pay your tax by credit card. Yes, you can even put your taxes on autopilot by having AFIP charge your credit card each month. Pay 11 months on time and then'll give you 1 month free.
Manage it yourself, no accountant needed. Accountants will always advise against enrolling in monotributo, since it won't generate work for them that will justify a monthly fee. Monotributo is easy enough that you can enroll yourself and manage it yourself without third party help.

For an expat who has recently arrived here and has a million other things to worry about and learn, monotributo is a system that is simple to enroll in and forget about it. You pay your monthly payment and you have the security that you're complying with the tax laws here in Argentina.

My next post will explore issues relating to the general system and when a sole proprietor might want to start-up directly in the general system.

Mission Impossible: Bank Financing

2009-07-23T16:51:00.000-03:00

If you're thinking about starting-up a new business in Argentina, you can pretty much forget about bank financing. There is no credit available unless you qualify for a special government-subsidized program. Banks are happy to continue lending to consumers at 50% annual interest rates, but there is no legal business that can support that level of interest rates.

Loans are hindered by many different factors that, together, conspire to make bank financing a distant dream for most entrepreneurs:

Argentina is locked out of international financial markets
Government debt refinancing (both national and provincial) scoops up most available liquidity locally, since they can't borrow internationally
Laws favoring debtor rights over creditor rights makes secured lending risky and unsecured lending almost non-existent
High inflation and punitive taxes drive lending costs through the roof (bank interest is subject to 21% VAT plus provincial taxes that are often 3 times higher than other types of businesses)
Most Argentine small businesses don't declare all their income in order to avoid taxes, thus producing businesses which can't prove they have the ability to repay the amounts borrowed

International or expat entrepreneurs should expect to raise all debt at home. Entrepreneurs should look into getting equity lines of credit on their homes if they have properties abroad or look for unsecured lines of credit in their name or in the name of their businesses abroad. Credit cards that permit cash advances or personal lines of credit at low interest rates (they do exist) can also be useful.

Uncertainty: The Only Certainty In Argentina Business

2009-07-22T14:35:00.004-03:00

Doing business in Argentina means living with uncertainty. Due to the foibles of each government, long-term planning isn't really possible and one could even say shouldn't be attempted. Anyone initiating any kind of business venture in Argentina needs to think about recovering all the money invested (and making a profit) in fewer than 5 years. A few examples I can think of businesses that have been destroyed by the government's administrative decisions:

Lunch ticket companies (the government began to tax these tickets as normal wages and thus caused their elimination from the market)
Private pension funds (the government appropriated all "AFJP" funds)
All producers of products in the consumer price index (price controls)
Farmers (brutal increase in export taxes)
Utilities (price controls)
Airlines (price controls & official interference by the Transport Ministry)
Public transit (price controls / constantly changing subsidy regimes)
Energy (price controls)

The list goes on and on. These are just some recent examples I thought of in about a minute or two. If I were to put together a comprehensive list, it would be much larger. All these industries have seen their conditions change dramatically through decisions by the government to either impose price controls, increase taxes to confiscatory levels, or in the case of Aerolineas Argentinas, destroy the company outright by fomenting union agitation to a level that renders the company totally inoperable.

"Normal" Surprises
In addition to brutal government changes that can effect an entire sector (such as what I described above), businesspeople should be prepared for more "normal" surprises that can arrive in the form of union negotiated pay raises or government decrees giving pay raises or special bonuses to employees.

Needless to say, in labor-intensive businesses with a large payroll, a 20% increase in salary expenses can create a huge gaping hole in a company's profitability.

Extreme Profitability: An Essential Requirement for Argentine Businesses
When considering a new business venture in Argentina, even pessimistic forecasts should result in extreme profitability. A healthy profit margin is needed to make up for the uncertainty that is inherent in Argentina's business climate. Any project that depends on a thin profit margin or more than 4-5 years to recover the money invested is going to be troublesome. I, personally, wouldn't invest in projects with those characteristics and I don't recommend anyone else does either.

New Rules For Transferring Money Into The Country

2009-07-21T18:09:00.004-03:00

For independent businesspeople bringing their own funds into the country, there are new Central Bank rules that should simplify the process for smaller transfers. When bringing funds into the country, legal Argentine residents (with a DNI) will be able to bring in up to $40,000 USD per month without presenting any documentation (just the standard bank forms). There are other requirements for people who are not legal residents.

If the transfer is over $40,000 USD per month, a certified bank statement will need to be presented showing the funds were in your account abroad at least 10 days.

In both cases, the account owner must be the same on the local account and the account abroad or the transfer will be rejected.

Independent Contractors vs. Employees

2009-07-17T07:43:00.005-03:00

We have a question that comes today about hiring employees vs. independent contractors.

Reader's Question
Can a US company that does not have a legal presence in Argentina hire an independent contractor (argentinian national or other national) to do work in Argentina on behalf of a global contract. Client’s client wants some temporary work performed in Argentina. Can client craft an IC contract or insist that the Argentinian national become a sole proprietor and not end up as a defacto employee. This could be occasional work, eg auditing.

I am aware some countries are very strict about IC arrangements and therefore deem IC’s employees and then end up resulting in permanent establishments for tax purposes. I am aware Argentina is fairly pro labor.

How to Set-up an Independent Contractor Arrangement in Argentina
The proper way to setup this arrangement would be to ask the worker to register either as a monotributista or in the regimen general (depending on how much he will be charging). After that, he'll need to register as an exporter with the customs office (since he will be performing services for export). This second step wouldn't be necessary if the company had a presence in Argentina.

Each time he needs to receive a payment, he will issue you an invoice with an "E" (for export) at the top. These invoices are numbered starting at 00000001. You can then wire transfer the funds to his account and he can collect the funds by presenting his copy of the "E" invoice to his bank.

Independent Contractors vs. Employees
Even though you may ask him to sign an independent contractor contract, in Argentina, labor rights cannot be renounced willingly by an employee. The labor courts can very well rule that your arrangement is a simulated independent contractor arrangement and that it was being used to cover up the employee/employer relationship. This is something that happens frequently in Argentina due to the fact that it is extremely costly to maintain employees on the payroll (due to social security charges).

How does the court determine if the employee is actually an independent contractor? The same way they do in the United States. They look to see whether you were the only employer of this person (i.e. checking the invoices). If you are receiving sequentially numbered invoices from the worker, you know that you are the only employer and you're putting yourself at risk. If you are paying monthly invoices that always have the same amount, it looks like a wage instead of pay for a specific work product. They also look to see where the work was performed, who provided the materials to complete the work, whether the worker was directed in his work, or whether he worked independently and was paid for a finished product.

Incentives For The Worker to Be Classified as an Employee
It will almost always be in the worker's interest to be classified as an employee rather than an independent contractor since the company will be responsible for providing a health plan and paying the social security charges.

There's also another important point. An employee in Argentina is entitled to mandatory severance pay when he is fired or laid off. An independent contractor is not entitled to anything when the contract ends.

If your company had a presence in the country and assets in Argentina, the worker could very well sue at the end of the contract and try and get the courts to declare that he was an employee. He would be demanding the company then make all the back payments for his social security plus pay him the required severance pay.

Practical Advice
Practically, I don't see this happening due to the fact that no employment lawyer here is going to take on a lawsuit against a foreign company with no presence or assets in the country. I just don't see it happening. My recommendations to the company would be to ensure that the invoices it receives are not sequential, that it structures the pay to be on a per job basis instead of a monthly basis (and for different amounts), and that the worker sign a contract with jurisdiction for all disputes being your jurisdiction rather than Argentina. If there ever was a dispute by the employee in Argentina you may be able to get the courts here to throw out a claim due to the jurisdiction clause.

Bank Account Taxes (impuesto sobre los débitos y créditos bancarios)

2009-07-14T18:19:00.003-03:00

Continuing our series on Argentina's taxes, today I am going to review the system of Bank Account Taxes, known officially as impuesto sobre los débitos y créditos bancarios. It is known more commonly as the check tax or impuesto al cheque. As the name suggests, the tax is charged on all credits and debits in a bank account. The amount of the tax is 0.6% for each credit and debit operation that appears in a bank account.

How The Tax Works
This means that paying anyone by check or via a checking account will result in a 1.2% tax above and beyond the payment issued. Take a hypothetical payment of $1000 pesos. You'll be charged $6 to make the deposit and another $6 when the money leaves the account.

As a small concession, a portion of this tax can be used as a credit against income tax owed. However, the amount is a small portion of the overall tax.

Exemptions
This tax can be easily avoided by non-business users of bank accounts by opening and transacting using savings accounts, which are not subject to the tax. The special salary accounts (cuenta sueldo) are also exempt from the tax. Business users are unable to avoid the tax, however, given that savings accounts are unavailable for businesses.

Property Transfer Tax (impuesto a la transferencia de inmuebles or ITI)

2009-07-10T11:49:00.003-03:00

Argentina has a federal property transfer tax called the impuesto a la transferencia de inmuebles or ITI. This tax is paid by the seller of a property and is currently 1.5% of the value of the property transferred. The notary (escribano) who is handling the sale will act as a retention agent and pay this tax to AFIP on behalf of the seller.

There is currently an exception to this tax if the seller declares that the property is his primary residence and that within one year, he will be acquiring a new primary residence. The exception will only be granted if the seller has just one property in his name.

The procedure to apply for the exception can be found on the AFIP website. After applying and receiving permission for the exception, the seller will receive a certificate from AFIP which should be presented to the escribano who is handling the operation for the buyer in order to avoid this 1.5% tax.

Retentions on Payments from Argentine Companies

2009-07-07T11:43:00.003-03:00

Reader's Question

How do you bill your clients for services without them retaining 33%. Just billed my client in Argentina(large S.A.) for consulting services in the US and they withheld. I am a US sole proprietor with invoices from the States so I dont know why they have to retaing for services performed outside of Argentina. I do have my own Argentinian S.A. which can emit a Factura "A" but once the money hits that account how do I get it to my personal account in the U.S. From what I here even if they pay my Argentinian S.A. they would still have to withold?

Suggestions
What the company is doing is retaining Argentina income taxes for the services you performed and paying that to AFIP. You should request a certificate from the company showing the money was paid to AFIP with your details. If you file an Argentine tax return, you’ll probably be able to use the payment to offset your income taxes. If you don’t file taxes in Argentina, the money is basically lost to you.

Consider charging 33% more to your Argentine clients or specify in your consulting contract that all retentions or taxes are the client’s responsibility. As a consultant, you should be entitled to the full amount you bill and it should be the responsibility of your clients to ensure that they deal with the local regulations of their country. Once you make the tax consequences your client’s problem, you’ll see that they’ll quickly find a way to pay you without any retention.

On the other hand, if you have an Argentine S.A., you could just bill from your S.A. You’ll need to include IVA, which is 21%. If you are the owner of the S.A., the company can pay you dividends (which are taxed at 35%). After paying the dividends in Argentina, you can transfer the money from your local bank account to your foreign (US) bank account. The foreign account will need to be in the same name as the local bank account or the bank probably will refuse to transfer the money. This is generally going to be more expensive and difficult than simply billing the client from the US.

If you can't pass the cost on to your customer and you expect to be doing significant business with this customer in the future, you may look into getting a bank account and a virtual office in a country that has an income tax treaty with Argentina. The U.S. does not have a double tax treaty with Argentina and therefore payments to U.S. persons or companies have withholdings taken at the highest rate. It is possible that if you had a bank account in a treaty country and billed from a virtual office address, you may have a lower retention rate.

Overview

Remember that any wiring of money in or out of Argentina is going to be complicated with many different forms to file and requirements to comply with. Argentina has active currency controls in place, so you can't expect to get money out without complications, taxes, or other controls. Argentina practices retentions for many different types of foreign payments -- dividends, interest payments, royalties, services, etc.

Foreign Tax Credit

You should consult with your U.S. accountant, but you may be able to claim the money withheld in Argentina as a foreign tax credit on your U.S. return, since it was withheld in concept of income taxes. This is why it is vital for you to obtain proof the money was actually deposited by the foreign company as income taxes (in your name) instead of a payment in their name. They should be able to supply you with a retention certificate showing the payment.

Foreign tax credits are interesting because they allow you to offset the payment dollar for dollar on your U.S. tax return, but only when the payment was made for income taxes.

Costs to Form a Limited Liability Company (SRL)

2009-07-05T08:00:00.000-03:00

For readers not accustomed to Argentine bureaucracy, this post will show the multitude of steps required to form a Limited Liability Company (SRL) and begin to operate a small business in the City of Buenos Aires. This does not include any steps necessary to actually obtain a place of business (i.e. office space, industrial space, or a retail store). These are the steps just to create the entity itself. After completing all these steps, the company will theoretically be ready to do business.

Steps

Choose a company name using IGJ form #3 (reserva de nombre) and pay the required fee. This reserves the company's name for 30 days.
Certify the signatures of the company's owners by a notary public (escribano).
Deposit the initial capital of the company in Banco Nación as a guarantee (the money is returned once the company is formed). At least 25% of the subscribed capital must be deposited. The shareholders must contribute the remaining capital within two years.
Announce the company's formation by publishing in the Official Bulletin. The cost varies depending on the length of the publication and the fee is charged per word and per line.
Pay the incorporation fee.
Register with the IGJ and pay the registration fee. Regular and urgent filings are available, with urgent filings having a higher fee.
Buy the company's books. These books will be used to record the company's resolutions, serve as the general journal, record wages, etc.
Fill out a form from the College of Notaries and submit books to a notary for certification before the IGJ.
The Manging Partner of the SRL must request a tax password (clave fiscal) from AFIP. All company taxes will be submitted using this password.
Request a tax identification number (CUIT) from AFIP and enroll the company in income and VAT taxes. AFIP will require evidence of the company's address (i.e. rental contract).
Register for sales taxes with the City of Buenos Aires en Rentas, again proving the company's address.
Register with the Social Security Administration (ANSES).
Select a Labor Insurance Company (ART - Aseguradora de Riesgos del Trabajo).
Submit the company's wages book for certification by the Labor Ministry.

Costs (in pesos)

The costs listed here are all the miscellanius fees that you msut pay to the various government agencies in order to form a company. The fees listed here do not include any profesional fees that you will pay your attorney, accountant, and any other professionals who are assisting with the incorporation process. Those fees vary depending on the professional.

$18 - Register company name.
$200+ - Certify signatures (an escribano will charge $100 per signature)
$36.50 - Banco Nación deposit fee
$500-600 - Publishing in the Official Bulletin.
$30 - Incorporation Fee
$282 - IGJ Urgent Filing Fee
$200 - Buy special books
$415 - Certify books with the IGJ
$50 - Register with Rentas
$75 - Certify wages book with the Labor Ministry
Total Cost: $1630 and up in government and other miscellaneous fees

Lawyers fees could range anywhere from $1200-1500 pesos, depending on the professional selected. At current exchange rates (3.8:1), that's about $800 USD (total, including both legal fees and government fees) to form an SRL. Of course if you're using an international law firm, a big accounting studio, etc., you could end up paying much more.

Expats Working in Argentina: How To Invoice Local Companies

2009-07-04T08:00:00.000-03:00

The following question arrived to me today by way of the Immigrant Mutual Aid Society, which is an organization here in Buenos Aires dedicated to helping expatriates and immigrants with a variety of issues. I'll post the question and then respond to the issue at hand.

Question

I've been living here in Buenos Aires for the last year and a half. I do free lance work film and tv, mostly advertising and documentaries for abroad. I have been working under the table this whole time, usually borrowing "facturas" from friends ect, or I have the money deposited into my account in the US, but now that I've started to generate a more significant income I am considering getting facturas of my own. Do you know how I would go about doing that? I've been on tourist visas this whole time and it hasn't seemed to be a problem yet, so I'm not too worried about a residency or healthcare or anything, my primary concern is about getting paid legally. What would you suggest?

Options For Expats Without Visas
There is no way to issue invoices (facturas) legally as an expat without a visa. As a tourist, you are not authorized to work in the country, so you cannot apply for the monotributo system and you can't enroll as a self employed worker either. The only way you can work and issue facturas locally is to form a company (SRL or SA) with an Argentine partner and then have your company issue the invoices. You will then be able to receive profits from the company in the form of dividends, but due to your expatriate status, you won't be able to work for the company.

Suggestions
My recommendation would be to get residency and start operating as a sole proprietor, either under the monotributo system if you qualify, or under the general system if you don't qualify for monotributo. If you can't get a visa or refuse to get one, you can form a company and start issuing invoices from your company. In this second case, you'll still be an illegal resident of Argentina and still breaking the law by doing work for your company while you're here. Nevertheless, at least you won't be committing tax fraud.

Given that obtaining a visa is not terribly difficult, the first and best option is to fix your migratory situation. While you may not have had difficulty until now, at any point migrations could deny you re-entry to the country based on your past history of overstaying your visa. Not to mention the fact that if your business is doing well, you are putting everything in jeopardy by operating illegally.

Registering a Trademark in Argentina

2009-07-03T08:00:00.000-03:00

When initiating any kind of commercial or business activity within Argentina, it is a good idea to protect your trademark. There are famous cases of trademark piracy here in Argentina. Here's a a recent one to illustrate this: When Starbucks first came to Argentina, they had all the normal Frappuccino offerings that are available in the US plus a few local flavors. Notible for its absence, however, was the Java Chip Frappuccino.

When I inquired with one of the store managers why the flavor wasn't available, I was told that someone else had beat them to registering their Java Chip trademark. Someone who had knowledge of Starbucks plan of expansion in Argentina registered their trademark first and was requesting that Starbucks pay them a fee to buy the trademark. A few months later Starbucks introduced the "Dark Mocha" Frappuccino, which is identical in every way except that it isn't called "Java Chip". So, it seems there was no agreement on pricing to buy the Java Chip name.

Registering Your Trademark
The process to register your trademark is a multistep process. Your trademark attorney should first do a search of the registry to find any names that are already registered that are similar to the name you are looking to register. Assuming no one has a name registered that is identical, you can proceed with the registration of your trademark.

Registration
The first step is to file for a registration. This involves filling out a form where you declare a class for the registration. There are 11 different classes for services and 34 classes of products. It may be necessary to register in multiple classes to fully protect your products/services. After you have chosen the classes to be used for registration, the request is filed with the INPI (Instituto Nacional de la Propiedad Industrial) and they will approve or deny the filing. The filing can include both names and drawings in black and white. The whole process will take about 60 days.

Publication
The second phase is publication. After approval has been given by INPI, the trademark must be published in the Trademark Bulletin. Other registrants will have 30 days to oppose the registration. Opposition of just one trademark holder is enough to deny registration. If no one opposes the registration, the trademark will be granted.

Negotiation
Assuming someone opposes the registration (which is very likley and has happened in every single trademark I have registered), the only way to register the trademark is to convince the trademark holder who has opposed the registration to withdraw their complaint with the INPI. This is done first through negotation. Usually an offer can be made to limit the use of the new registration in order to avoid it causing confusion with an existing trade name.

Mediation
If negotations have been unsuccessful, the registrant can request (and pay for) a mediation between the two parties. The goal is to work with a mediator to find some common ground and try to convince the opposing party to withdraw their opposition.

Lawsuit
The final option available is the initation of legal action against the opposing party. The registrant can request the court to rule on the valididity of the opposition. A lawsuit of this type can take up to three years to resolve and if the court rules against the plaintiff, the defendant's legal fees must be paid by the plaintiff.

Different Ways of Hiring Argentine Lawyers

2009-07-02T08:00:00.001-03:00

In Argentina there are typically three different ways of hiring a lawyer:

Fixed monthly fees (abono mensual). This is the most common way to hire a lawyer and the preferred method by most small to mid size companies (pymes). The fee could range anywhere from $1000-3000 pesos for a start-up phase company with very little need for legal services on up to $5000-10000 pesos for larger companies who have active legal disputes on an on-going basis.
Fixed fee for specific services. This would be a fixed fee for doing a specific service, such as a specific contract, drafting the formation documents for a company, etc. This is the next most common way to contract a lawyer.
Finally, you have the billable hour. This is used only by top tier law firms that are working on huge jobs for major multinational clients. The vast majority of Argentina small businesses do not pay lawyers on an hourly basis.

My recommendation is that micro businesses in the start-up phase pay lawyers for specific jobs. Once the company begins to hire employees, starts getting visits by unions, needs contracts drafted on a regular basis, and begins to have disputes, then it is time to get a lawyer for a fixed monthly fee.

I have nothing against lawyers (my father is a lawyer), but I have always detested the system of the billable hour. There is nothing worse than hiring a lawyer to do a simple job and getting back a bill that costs 5-10 times what you thought it would cost. That's why I would never recommend anyone to pay a lawyer hourly, especially in Argentina. I pay lawyers in the US hourly because that is the only way they will charge, but given that Argentina is a bit more evolved in respect to legal billing, it makes sense to take advantage and contract a lawyer per job or by the month.

I have three different lawyers I use on a semi-regular basis:

Employment Lawyers
The lawyer I use most often is my employment lawyer, which we have on a monthly contract. It is a given that when you are dealing in industries which are 100% unionized and you have to take on employees who are uneducated, conflictive, and uncooperative, there are going to be employment disputes. The most common employment dispute is the firing. The company will fire a conflictive or unproductive employee and deny severance, stating the employee was fired with cause while the employee will allege that the firing lacked just cause and demand the required severance pay.

Corporate/Contract Lawyers
I use my corporate lawyer on a per-job basis when we need contracts drafted or analyzed, we are performing a merger or acquisition, forming a new company, we are negotiating the terms of a lease, etc.

IP Lawyers
To register a patent or trademark in Argentina, you will need an IP lawyer. Every time I start a new company and we need a trademark registered, I use an IP lawyer to handle the registration on a per-job basis.

Obviously each business will have their own individual legal needs depending on what line of business they are in, but every new business will probably need lawyers specalized in the areas outlined above.

Transactions Between Related Entities: Transfer Pricing in Argentina

2009-06-30T08:00:00.000-03:00

When a parent company pays a subsidiary for goods or services or vice versa, complications can arise between the interests of the company and the government. The government wants the local company to charge the highest price for its goods/services and pay the least on goods and services purchased abroad when it comes to transactions between related parties -- thereby increasing the earnings (and thus the income tax that results) of the local company.

In Argentina, companies performing transactions with related entities are required to submit transfer pricing reports, transfer pricing tax returns, and documentation that supports the price that was charged. The government may administratively "modify" the price that was charged for tax purposes if it feels the company is trying to intentionally undercharge related entities (or overpay them in the case that the subsidiary is making payments).

The principle at work is called the "arm's length standard" and it states that the price to be used must be the market price for the goods or services in questions, had the Argentine company been dealing with a non-related party on the open market. This is the principle used for transfer pricing issues in the United States and practically every other country. When it comes to commodities and other goods for export where prices are readily available on a world market, export taxes will be charged based on market prices, without regard to what appears in the invoice, even when the transaction is not between related parties.

Be aware that large multinational corporations often have entire departments dedicated to developing the documentation required justify the prices they charge between their subsidiaries in different countries. It may be more convenient for smaller international businesses that are unwilling to spend the time and money necessary to justify these arrangements to source their goods and services from independent suppliers or distributors rather than through the parent company itself.

Big multinationals are so concerned about this issue they will sometimes sign "advance pricing agreements" between the two governments involved and the company, which allow them to avoid costly tax disputes between dueling governments, each concerned with keeping the profits within their territory.

Social Security Taxes (Cargas Sociales)

2009-06-29T08:00:00.000-03:00

Social Security Taxes or cargas sociales are the primary non-wage cost component of employing Argentine workers. The taxes are paid by employers and employees and they are mandatory.

Employees
The company must retain 17% of the employee's gross wage as the employee's contribution to social security. The employer is responisble for making the payments and serves as the retention agent for the government.

Employers
Small companies pay 23% of the employee's salary while large companies must pay 27%. These contributions are in addition to the discounts made from the employee's gross salary.

The total charges, 40% for small companies and 44% for large companies, are paid on a monthly basis. It is important to note that for all intents and purposes, the entire 40% charge falls on the shoulders of the employer. When hiring an employee, the only thing employees will be asking is how much they will be paid net of all deductions (en mano as they say here).