In recent years, Argentina has had different views regarding the application of the Income Tax on financial income. This opinion note analyzes this issue, based on the characteristics of said tax and the fact that it generates the obligation, leaving open the scope of this tax on an activity that, on the one hand, encourages investment and, on the other, inefficiency in terms of production.
Introduction
When we try to define the Income Tax, the first thing that comes to mind is its main feature: progressivity. This direct tax, whose objective is the redistribution of income, can be achieved through income scales and increasing rates.
At the end of 2017, the government of Engineer Mauricio Macri, through the promulgation of Law 27.430, made changes to tax matters. Among the changes, it set new parameters for the imposition of the tax on financial income. This tax decision on financial income did not last long, since the income in question was again exempt, in most cases, when the government of Dr. Alberto Fernández took office and gave way to Law 27.541, called Social Security and Productive Reactivation within the framework of the public emergency.
These different tax positions and their significant effects on investments in countries seeking development have generated diverse opinions.
In this analysis, two issues will be addressed that relate to the previously mentioned divergences, starting from the following questions: Does the Income Tax comply with its progressive characteristic? How does the exemption of financial income impact the Income Tax?
Inequity can affect progressivity
Firstly, the exemption of financial income generates inequity, since there are certain profits that are exempt and others that are not. Therefore, a person who generates the same income as another person may be subject to a lower-scale tax, which externalizes a horizontal inequality.
Likewise, this privilege can also produce a vertical inequality, since most people who invest in financial income are generally in a better economic position compared to those who do not. This, in some way, causes certain subjects who have greater profits than others to end up paying less tax. Consequently, we would be facing a vertical inequality.
Therefore, by presenting these inequities, the Income Tax is being caused to not comply with its main characteristic, which is to be progressive.
It should be remembered that second-category incomes are those for which the purchaser does not carry out direct exploitation and is far from any personal effort to obtain them, with the capital factor taking precedence almost exclusively (Loreno, Armando and others. Income Tax Treaty 2, Bs. As, 2010, Ed. ERREPAR, pag. 233)
For this reason, it would be unfair and not very encouraging to benefit from these incomes over those from personal work.
On the other hand, the exemption from the tax would present another divergence by exposing a inefficiency. Indeed, the return to certain exemptions, which had been repealed by law 27.430, brings various situations that had already been attempted to be solved with the cedular tax, where the concept of Income = Consumption + Savings (Y=C+S). In this way, taxpayers are encouraged to carry out acts not covered by or exempt from Income Tax, thereby colliding with the principle of efficiency.
In a country where employment, consumption and productive investments are required, it is not advisable to encourage financial income gains through tax exemptions that do not extend to other activities. inequity The resulting inefficiency acts as an incentive channel and distorts the market. While it may be the case that an inefficiency is advisable, this will depend on the reasons and needs of a nation, but in all cases, the disparate consequences that would be observed in the market should not be ignored.
Exemptions are created by legislators for non-tax purposes. In this specific case and given the current situation, in our opinion, an exemption on financial income contradicts the needs of the country.
Investment and production
Now, financial income deposits help the bank (or intermediary) to grant credits. In this way, they give rise to what economists call: savings, investment and production.
Without wishing to be simplistic, we believe that direct investments in production, such as purchasing machinery or creating a factory, are more useful than financial income. Starting from what is fair and what ends up being convenient, it would be more appropriate to deduct taxes from direct investments (regardless of whether they can be amortized over their useful life) than to exempt financial income.
It can certainly be argued that an investor needs capital to build a factory, which is generally obtained through loans, and in order for these to be abundant, it is not advisable to tax financial income. This is based on the fact that mutual funds have capital from individuals that will be returned with certain interest. If the fund grants loans in exchange for a passive interest rate, it will end up taxing these operations, causing higher costs and affecting borrowers who could use loans to produce.
This is probably a point directed more towards the economic vision and not so much towards the tax one, but in our opinion, for the purposes of analysis it is not advisable to separate these two fields.
In relation to these concepts, today the percentage of credits in our country is low and financial income is not taxed. This shows that credits are not being directed towards production, with the aggravating factor that they are not being collected from speculative income either.
Barreix said that the Income Tax is the backbone of the tax system and in Latin American countries the income is wasted. revenue potential and therefore his redistribution. This last point is important, since the characteristic of progressiveness of the Income Tax has its function in redistribution. The author assigns different reasons for what he calls “empty shell””, such as excessive deductions, evasion and low rates. (Barreix, A.; Garcimartin, C.; Valayos, F, “The personal income tax: an empty shell”, July 2012)
In Latin American countries such as Argentina, tax collection is low, with a tax rate of 24,2% for legal entities and 3,7% for individuals. The opposite occurs in developed countries, which have a tax rate of 9,6% for legal entities and 52% for individuals (according to data from the Organization for Economic Cooperation and Development –OECD-).
Notwithstanding the above, which reveals inequities and inefficiencies, returning to the specific topic discussed here, the relevance of Barreix's concept is that in Argentina tax collection is low, for different reasons that should be resolved. But given these shortcomings of our tax system and in the current context, financial income should be taxed.
Given the inequalities suffered by companies (accrual - balance sheet theory) compared to individuals (perceived - source theory), it could be sought to reduce the rate. Thus, profits would be taxed only when they meet the requirements of the source theory and the tax authority would not lose its ability to collect taxes if it were to tax financial income.
Aside from the fact that the tax on individuals for financial income is low, we understand that it would solve certain inequities generated and would make it possible to achieve a truly progressive Income Tax and not, regressive, as it currently stands. The difficulty of collecting it, which has led to a deferral of the market, should be resolved and therefore it should be simplified, avoiding excessive costs (money and time).
On the other hand, there is an inconsistency in that the rent is taxed (art. 94: global scale), but not, for example, the fixed term (0%), which contributes to greater tax inequality.
In microeconomics, the impact of a tax is analyzed and who ends up paying it. In the case of rent, most of the time it affects the consumer (tenant). This makes it more expensive for people to be able to rent, while subjects who bet on financial income will obtain benefits, exposing a scheme unfair e inefficient between productive and financial gain.
Warren He argued that taxing consumption was regressive (the opposite of what he advocated Andrews), because savings would be exempt and that would mean there would be less motivation to consume (inefficiency). For this reason, given the reduction in consumption there would be less distribution of capital. (Warren, Alvin Jr, Fairness and a consumption-type or cash flow personal income tax.)
In accordance with this and recalling that taxes or exemptions have, in themselves, extra-fiscal purposes at the time they are established by the legislator, it is not reasonable, in our opinion, that savings be exempt in these cases, since it removes the incentives to consume.
Conclusion
The way in which our tax system has been behaving with respect to financial income in recent years, beyond whether or not its exemption is appropriate, ends up producing distrust e legal uncertainty.
It would be healthier to have a defined and long-lasting scheme than one with constant variables, more related to whoever is in power than to the needs of the market, which results in a lack of interest in investing and producing.
These changing behaviors over time, added to the cost of paying taxes in Argentina, discourage all investment. No one can escape the fact that the high level of bureaucracy and complexity of our tax system generates uncertainty about what must be paid and for how long, thus affecting the provisions that every subject who intends to carry out a profitable activity must necessarily have. The same tax that existed until the modification of Law 27.541 presented not only difficulty at the time of its liquidation, but also little collection capacity. The obstacle was so great that it distorted the tax and liberal professionals, as well as members of the treasury, in many cases ended up entering the amount to be taxed incorrectly.
In this sense, we consider it a step backwards to exempt profits from financial income. They must be taxed to guarantee equity and progressivity, essential requirements for this type of tax. But it is also an indispensable requirement to generate economic efficiency, balancing equality and the objectives of savings with productive investment, and thus achieve a competent tax system, beyond the collection itself.
Citizens must comply with their tax obligations, but at the same time, they expect tax policies and systems that are efficient, uniform and with a high degree of legal certainty over time.
Felipe Coronel de la Torre is a lawyer at the Guifecor & Associates Law Firm
Aduana News is the first Argentine customs newspaper to launch its digital version. With 20 years of experience, its publications and initiatives aim to provide the most relevant knowledge on customs issues in order to contribute to safe trade in the region.
