Official announcements: Are new VAT and money laundering coming?

Economy Minister Luis Caputo made statements indicating that the National Executive Branch would be considering establishing a national VAT rate of 9%. This entails "federalizing" the provinces' authority to sanction a provincial VAT that would offset the current 12% VAT collection they currently receive through the Federal Tax Sharing System, given that the full VAT rate is 21%.

This idea of ​​tax reform is in line with the President's message at the opening of the Ordinary Sessions of the National Congress, where he mentioned that the national government would propose lowering the rates of the main national taxes, so that the provinces would then apply similar taxes to finance their expenditures: "federalization" of certain taxes.

The purpose of this reform is to make the provinces as tax-competitive as possible, enabling them to generate greater investment within their territory. In other words, to compete with each other.

The National Constitution establishes, in Article 75, that both the Nation and the provinces are empowered to establish indirect taxes, including VAT.

Currently , 90% of VAT is shared . The remaining 10% is used to finance Social Security benefits.

Of the 90% shareable tax, 40% goes to the national state and 60% to the provincial states . This means that 46% of VAT revenue finances the national state—that is, 40% of the 90%, plus the 10% that finances Social Security benefits.

The aforementioned 46%, applied to the general VAT rate (21%), represents approximately 9 points of the current 21 VAT points , which ultimately coincides with the rate that the National State would seek to collect for itself with this eventual reform - always to the extent that this 9% ceases to be shared, due to the implementation of a provincial VAT.

To reduce the national VAT rate to 9%, the initiative would have to be passed by the National Congress, since, according to the VAT law, the general VAT rate can only be reduced to 25% by executive decree. A greater reduction through this mechanism would be unconstitutional, as would changing the VAT share of the taxable income.

If it were feasible for the national government to retain a 9% VAT rate, the provinces would have the power to establish a "complementary" provincial VAT rate for themselves.

Thus, the most productive jurisdictions will have incentives to set rates lower than 12%, given that, under the current revenue-sharing scheme, they contribute more resources than they receive, such as CABA, the province of Buenos Aires, and Santa Fe . Or they would have the alternative of investing surpluses in housing, education, and productive infrastructure.

The less productive provinces, such as those in the North and Cuyo, except Mendoza, should establish provincial VAT rates higher than 12% if they do not streamline their public spending if they intend to maintain the tax revenue they receive from the current Federal Revenue Sharing System.

The situation in the Patagonian provinces would be more neutral.

Ultimately, it is a reform that will most likely have to be considered after the October elections , with a different legislative composition.

This legislative agreement could eventually be difficult to achieve, especially in the Upper House, because 16 provincial jurisdictions receive, under the current Co-participation Regime, more tax resources than they would actually generate with a provincial VAT, given their low contribution to the National GDP (which is the basis for collecting VAT and any other tax).

Finally, the provinces will face an additional challenge in managing the complexity arising from the need to harmonize, supervise, and collect this new provincial tax.

Furthermore, this initiative does not resolve the distortions caused by the current Gross Income Tax , since this provincial VAT, as proposed, does not replace it, except if excessive increases in addition to 12% of the provincial VAT rates were sanctioned.

In addition to the new VAT, Minister Caputo suggested the possibility of establishing a penalty-free mechanism that would facilitate the use of dollars outside the banking system, in order to re-monetize the economy and sustain economic growth.

The possibility of using these dollars for the purchase of durable goods would have a monetary limit of US$100,000 per taxpayer.

On the other hand, unlike recent money laundering cases, the mechanism that will apparently be chosen in this case to externalize assets and income outside the system would be the so-called "Spontaneous Presentation Regime."

Unlike a tax whitening or amnesty, which requires the passage of a national law, the establishment of a potential spontaneous filing regime could be carried out under Article 113 of the Tax Procedure Law, which allows for its implementation through a decree of the National Executive Branch, supplemented by ARCA regulations.

This regime, unlike a traditional whitewash, cannot establish tax reductions on externalized assets/income, but it does have the power to waive fines and compensatory and punitive interest arising from spontaneous filing.

To encourage taxpayers to enter this regime, the ARCA could establish a payment plan with favorable terms for the repayment of the principal of taxes—primarily VAT and income tax—derived from externalization.

This regime will require provincial approval to waive fines and interest on gross income, but not the capital of the tax, as this regime would not allow it, unlike money laundering.

From the perspective of the Tax Criminal Regime, the tax authorities will most likely withdraw any complaint in this regard , on the understanding that, if the taxpayer makes a spontaneous presentation, the trick or deception necessary for the existence of a tax crime would disappear.

Finally, as in the case of recent money laundering cases, the Financial Intelligence Unit's powers will remain fully exercised to review any filings that contain evidence linked to the crime of money laundering.

It will be necessary to wait for the design and presentation of the respective regulations of this VAT "federalization" scheme and the virtual "new money laundering" and how the parliamentary composition and the respective agreements evolve, in order to conclude whether these initiatives are truly feasible .