Javier Milea’s tax amnesty entices Argentines to declare hidden millions

Argentines are declaring hundreds of millions of dollars in previously hidden savings in a tax amnesty that libertarian President Javier Milei hopes will boost the country’s moribund economy and limited foreign exchange reserves.

Private dollar deposits in Argentina’s banks are accelerating ahead of the September 30 deadline for the first phase of the scheme, although data has not yet been released on the amounts specifically declared under the amnesty since it began in mid-July.

Central bank data showed Argentines made net deposits of $728 million in July and $749 million in August. This was up from an average net monthly withdrawal of $532m in the first seven months of Mile’s presidency – and from average net withdrawals of $70m per month in the two years before the leader took office radically in December.

Argentina’s long history of economic turmoil, marked by hyperinflation, currency controls and governments restricting access to savings, has pushed citizens to hold about $258 billion outside its financial system, according to official estimates for early 2024. Some unknown was not declared. to the authorities.

Experts said most Argentines keep savings in dollars – either stuffed under mattresses, in safes or in accounts in the US and other countries.

The government believes that using those greenbacks would help solve its two big problems: reviving a real economy that has been hit by a long-running crisis and Miley’s austerity measures and adding to the central bank’s severely depleted foreign exchange reserves. .

“We are in a moment of historic change for Argentina and the amnesty plays a very important role,” Economy Minister Luis Caputo said late last month. “The goal is not to collect taxes, but to relaunch Argentina.”

Figures shared with the IMF suggest the government expects about $40 billion in dollars, property and other assets to be declared. They hope that a significant portion of the money will flow into Argentina’s financial system and that the treasury will collect $1.5 billion in taxes.

Dollar deposits in Argentine banks are a proxy for interest in the amnesty, as those declaring cash dollars must deposit them, while those declaring large amounts in overseas accounts or other large assets must deposit some money for to pay penalties.

Following the rise in dollar deposits, “it looks like the government’s $40 billion target is achievable,” said Salvador Vitelli, head of research at consultancy Romano. “It would be a significant amount for the Argentine economy.”

Argentine governments have held a tax amnesty every four years, on average, over the past two decades as tax evasion has worsened in the face of tight currency controls and tax hikes. The most successful amnesty was led by conservative President Mauricio Macri in 2016, with $117 billion declared.

But financial advisers said some Argentines would be put off joining Mile’s amnesty by the memory of what happened after Macri’s: When the leftist Peronist movement returned to power in 2019, it raised the maximum annual tax rate on personal wealth in Argentina from 0.25 percent. in 2018 to 1.75% for assets held in Argentina and 2.25% for those held abroad, hitting recently declared wealth.

But several factors will drive participation, said César Litvin, chief executive of tax consulting firm Lisicki, Litvin and Associates.

A long-awaited information-sharing scheme with US banks will come into effect this month, automatically notifying Argentina’s tax agency about accounts held in the country by its citizens. Argentina adopted a similar agreement with dozens of other countries in 2017.

If caught outside the amnesty, undeclared account owners face late tax charges, interest and penalties.

The terms of the amnesty, meanwhile, are generous. Argentinians can declare up to $100,000 of tax-free assets and will pay a one-time penalty of 5 percent for amounts over declared before Sept. 30, rising to 10 percent for those declared between then and Dec. 31.

They can also opt to prepay wealth tax on their newly declared assets for the next five years at a lower rate and set the rate they pay until 2038.

“It’s very cheap compared to other amnesties, and the element of fiscal stability is very attractive given the history of (political) changes,” Litvin said.

Argentinians will also be exempt from paying taxes on amounts above $100,000 if they invest in a range of local government and corporate bonds, stocks and new real estate projects. The latter option is meant to boost the construction industry, where activity fell 35 percent year-on-year in June after Milei slashed the public works budget.

Caputo said the scheme would “accelerate” the government’s plan for “currency competition,” in which pesos and dollars would be used freely in Argentina. This plan has for the time being replaced Mila’s controversial commitment to dollarize the economy.

Argentina’s central bank currently holds about $27 billion in gross foreign exchange reserves, but its “net” reserves — excluding loans from the IMF, China and other creditors and money deposited by banks to back consumer deposits — are nearly $3 billion in the red. , Vitelli said.

The $1.5 billion the government hopes to collect in taxes would increase net reserves, while dollars deposited in Argentine banks would increase gross reserves.

That should give the central bank “oxygen” to make day-to-day transactions and intervene in currency markets, boosting market confidence, Vitelli said.

As successful as Mile’s amnesty is, it’s unlikely to bring home all of Argentina’s missing dollars, said Diego Fraga, a tax lawyer and professor at the country’s Australasian University.

Argentinians who declare assets under the amnesty could choose to keep them abroad or withdraw them from banks after declaring them, he said.

Meanwhile, loopholes in US information sharing will protect some account holders there, such as those who use legal entities to hide the identity of the payee.

Fraga added: “You still hear a lot of people saying, ‘I don’t think Argentina is going to change yet.’ I’d rather keep my money elsewhere.”