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Argentina tax plan could impact demand for int'l investment funds

Argentina tax plan could impact demand for int'l investment funds

Argentina’s proposed tax reform plan could impact demand for foreign investment strategies as new taxes might cut into local investors’ returns in these products.

The proposed plan, announced on Tuesday, would tax individuals at 15% on income from foreign currency or indexed instruments and 5% on inflows from debt assets denominated in Argentine pesos, with a floor to protect small investors.

The result is this could lead local Argentine investors to rethink their international allocation as dollar-denominated products and ETFs are popular ways for them to access foreign markets. In turn this could also impact international asset managers looking to bring their strategies to Argentina investors as demand might slow.

Under current law, people aren’t taxed on income from financial investments, according to legal expert Martín Litwak, who provides advice to international financial firms.

As of Wednesday, it wasn’t clear if all instruments would be subject to the new taxes but Litwak said the new framework could lead investors to take a second look at their portfolios.

‘Argentine assets have returned a lot all this time, and I think that, definitely, interest rates will now have to be higher for people to enter. The Argentine market might lose steam as investors have to consider [taxes] they didn’t have to consider before,’ Litwak said.

He added: ‘We don't know exactly what the law will look like. But there's no doubt they'll be a lot of reshuffling [of portfolios].’  

The plan, which would be implemented over five years, proposes to keep income from stocks trading in Argentina tax-free. Among other moves, it would also slash the corporate income tax from 35% to 25%, a cut to be offset by the proposed personal fee. 

Overall, the reform would cost the country 0.3% of GDP in the long term, according to a press release about the plan's economic impact. The Congress, which would have to approve the proposal, is set to receive the draft in coming days.

'Let's change'

Since being elected in 2015, president Mauricio Macri has sought to kick-start Argentina’s convalescent economy, which according to the World Bank contracted by 2.5% in 2014. Moves have included ending currency controls and allowing bankers to advise clients on offshore as well as onshore money.

The tax reform, another step in Macri’s plan, came on the heels of a solid win in legislative elections by his Cambiemos party over the leftist coalition led by former president Cristina Fernández de Kirchner.

Treasury Minister Nicolás Dujovne said the Cambiemos government had ‘inherited an economy plagued with distortions and macroeconomic problems’ from Kirchner, according to a statement. Cambiemos means ‘Let’s Change’ in Spanish.

‘We propose a tax reform that eliminates distortions and allows us to move toward a more equitable system, which contributes to the creation of high-quality jobs and fosters investment as well as economic progress,’ Dujovne said.

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