Argentina's long-awaited tax reform has left investors divided on whether the new framework will spell doom or be a boon for foreign mutual funds.
The country's Congress passed a reform in late December that, among other changes, taxed individual Argentine investors on income from financial investments for the first time. Under the new scheme, the rates are 15% on profits from US dollar-denominated assets and 5% for income in pesos, like the initial draft for the tax had proposed.
These taxes apply to local bonds and term deposits, two very popular investments among Argentines because of their historically high yields, but not to stocks trading in the country’s exchange.
Foreign funds kept their taxes of 15% for capital gains and a progressive rate of up to 35% for distributions such as dividends, said César Litvin, CEO at Argenine law firm Lisicki, Litvin & Asociados.
Two investors who spoke to Citywire Americas were split on whether the taxes, which would cut into the returns of local bonds, would lead to a drop in demand for those products and to more appetite for foreign vehicles.
A director at an Argentine broker-dealer who spoke on the condition of anonymity said his clients have started inquiring about foreign products because the taxes made Argentine bonds less attractive.
He pointed out that due to a long-standing treaty, Brazilian and Bolivian bonds won’t be subject to these new taxes, putting Argentine bonds at even more of a disadvantage.
‘Previously the difference [between yields in Argentina and abroad] was a lot. Today it’s not much, and with the tax they are comparable,’ said the director. ‘Investors are starting to ask about mutual funds. Before this they wouldn’t even look at them - you’d send them the idea and it had no repercussion. Now it’s having [an impact].’
However, Santiago Bouquet, an associate at Argentine broker-dealer Fenix Securities argued that local investors who buy Lebacs, the short-term debt instruments issued by Argentina’s central bank in pesos, will keep purchasing the papers and won’t suddenly flock to foreign assets.
‘We’re in a moment in which the safest instrument in the country returned 10% in dollars [in 2017]. Show me a better return than that. Put any tax you want on [Lebacs],’ he said.
He also alluded to the widespread optimism about Argentina’s future, product of a series of reforms by president Mauricio Macri's government, as a reason why local investors would want to keep their money at home.
‘Normally people would take their money out of the country when they had a lot of mistrust on politics or Argentine assets. But it’s not the moment for people to [mistrust Argentina],’ Bouquet said.
He added: ‘[Foreign] funds are investing in Argentina. Why would Argentines invest abroad?’
The new tax rules have also forced investors who had put their assets in offshore trusts after Argentina's tax amnesty, which closed in early 2017, to rethink those structures, Litvin, a tax attorney, said.
These schemes allowed investors to defer income taxes, which carried rates of up to 35%, as long as the trusts didn't distribute dividends to their owners. However, under the new rules trust owners will be taxed on all the income received by the structures, including dividends.
As a result, investors are now looking for new, tax-avoiding structures.
'Investors are starting to use foreign funds that don't distribute dividends, and that when you exit with a capital gain instead of paying a 35% tax you'll pay 15% for the sale,' Litvin said.