Entrepreneurs – Argentina’s New “Value Added Engine”

By Carlos Casanovas & Gustavo Scravaglieri

Posted: 21st August 2015 09:11

Entrepreneurship ecosystem has been growing strong during the last years in Argentina.  The traditionally good quality of Argentine human resources plus numerous factors has turned entrepreneurs into a tool that the country is using as a “Value Added Engine” to generate new jobs and growth out of its borders.  In this sense, as we will analyse below, tech entrepreneurs in Argentina lead the rank for the most economy drivers during the last years with clear examples such as MercadoLibre, Despegar, etc. 
 
Government takes a stand
 
Argentina has become in recent years an attractive place to start technological companies and other type of technology related businesses, either to provide local or global services (in the region or worldwide).  Multiple factors have contributed to such growth, including the existence of highly trained and qualified personnel with technical and language skills, the fast development of telecommunications, a reasonable cost scheme, and a convenient time zone, among other factors. 
 
Additionally, local talent has been increasingly gaining recognition for its software, tool creation and adaptability attracting the most important technology companies worldwide and investment funds looking for a potential good investment.
 
This is due mainly because Argentine tech companies have been proving a low cost operation with high value IP rights that multiply exponentially the initial investment. Several tax benefits have been granted to this type of activities and others are expected in the near future so as to allow an increase in the potential of these activities in Argentina.

As a first landmark of this type of benefits, Law 25,922 (in force as from 2005) establishes a regime for the promotion of the Software industry.  The regime basically comprises (under certain requirements):
   
The regime covers a great variety of activities, such as creation, design, development, production, implementation and tuning-up of software systems, including those programs created for their installation on processors used for different purposes by third parties.  In order to benefit from this promotional system, taxpayers must register themselves in the National Registry of Software Providers and Technology Services.
 
Another important fact to consider in relation to these activities is the enforcement of a regime which allows taxpayers to obtain the reimbursement of Input VAT on expenses incurred in the local market which are destined to exports of services.  While such regime existed in the past for exports of goods, through General Resolution 2000/06, the national tax authorities extended such regime to exporters of services.
 
At a provincial level, several jurisdictions have established different regimes to promote this type of activities.  On the one hand, many of them have adhered to the national law and have assimilated software activities to “industry” so as to benefit from exemptions usually granted to manufacturing activities.  Furthermore, some provinces have specifically created promotional regimes for activities related to software, data processing, call centres, among others.  For instance, the City of Buenos Aires (Law 2,972) created a “technological district” where companies can benefit from turnover tax and stamp tax exemptions, as well as other property tax benefits.  The Province of Buenos Aires has included processing, services related to databases, software and consulting activities, among others, within the industrial promotional regime (Law 13,656), which also establishes turnover tax, stamp tax and property tax benefits.
 
Working Capital - Foreign Exchange Regulations.  Critical element that limits the entrepreneurship ecosystem to grow bigger
 
Working capital is crucial for entrepreneurs upon starting and developing their businesses.  FX limitations tend to lower investments from foreign angel investors, crowd funding and venture capitals delaying the growth of the entrepreneurship ecosystem.
 
Argentina has been experiencing a hardened approach of the foreign exchange regulations policies for the control of the inflow and outflow of funds.  For example, outflow of funds to pay services rendered by non-residents, import of goods, payment of financial debts, etc. is only allowed if some specific documentation is filed with a local financial entity and the local tax authority.  These outflow controls have generated an unexpected invisible financial barrier for the inflow of investments as they have made unclear to foreign investors when they will collect their returns.  This barrier has been fortified with the local “encaje”, a 30% non-interest bearing mandatory deposit for a one-year-term for any financial loan from abroad (certain exemptions apply). 
 
These kind of controls made very difficult to obtain reasonable financing for local entrepreneurs, which is also affected by an important gap between the exchange rate value of the “official” dollar that can be purchased in the Central Bank (used for the inflow of funds from services, loans, etc.) and the “non-official” value of the dollar (somewhat higher and sensible to political and inflation variables).  Thus, a more favorable ecosystem may be generated with less exchange control restrictions and a more real dollar exchange rate. 
 
Argentine Entrepreneurship in the future
 
Argentina has the capability to turn into a global entrepreneur generator.  This is possible because it has all the necessary foundations to generate an excellent entrepreneurship environment. 
 
Even though the National Promotion Software Regime was timely enacted and really helps entrepreneurs we believe that it is time to step up and generate a consistent cooperative regulatory and administrative environment which includes both national and provincial governments, as entrepreneurs have become without question a “Value Added Engine” for Argentina and may hold the key for a most expected country growth.
 
Carlos Casanovasis EY Argentina Tax Managing Partner and Tax Market Leader.  Prior to this role, he was the leader of EY Argentina International Tax Services and Transfer Pricing division (2002-2013).  Carlos is a CPA and has more than 20 years of experience.  He is a professor at the post-graduate school of Universidad de Buenos Aires.  Carlos has published various articles and lectured at numerous international seminars on tax issues and investments abroad.  He was National Reporter at 2013 IFA Congress in Copenhagen; Subject: “Exchange of information”.
 
Tel.: 54 11 4318 1619
carlos.casanovas@ar.ey.com
 
Gustavo Scravaglieri is the partner in charge of International Tax Services and Transfer Pricing in Argentina.  He is also responsible for the Global Trade and Indirect Tax.  He is a CPA and has more than 20 years of experience in tax, including International Tax Advisory.  Gustavo is a professor at the post-graduate school on Taxation at the University of Buenos Aires.  He has published various articles on tax issues.  He is a frequent speaker in various tax conferences, both in Argentina and abroad.  He is a permanent speaker in the Argentine Association of Fiscal Studies.  He was Argentine speaker at the 2012 IFA Congress-Latam (Uruguay).
 
Tel.:  54 911 30590723
gustavo.scravaglieri@ar.ey.com

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