Report Nº: 105003/01/2024
The omnibus law partially limits bank withholding taxes. This will be legally challenged by the provinces that rely heavily on Sales withholdings. A better option is the total elimination of withholdings and offering the provinces that the AFIP (the federal tax agency) collects Sales Tax together with VAT.
One of the main distortions covered by the Argentine tax system is the payments in-advance regimes of the provincial Sales Tax acting through withholdings on payments made with bank transfers, debit and credit cards, and virtual wallets. These regimes promote the use of cash as they increase the costs of using digital money. In addition to incentivizing a very inefficient payment mechanism (cash), the most damaging aspect is that they generate tax evasion.
The Omnibus law elevated to Congress addresses this important issue in Article 213. The intention would be to exempt smaller taxpayers from bank withholdings. The approach is partial since it would benefit a relatively small universe of taxpayers. In other words, it would leave a large part of the perverse scheme of bank withholdings active. The second important weakness is that there is a high probability that the provinces, which intensively use bank withholdings to collect their Sales Tax, will challenge legally the article.
To understand the position of the provinces regarding their Sales Tax withholdings, it is useful to analyze the importance of such withholdings for provincial public finances. According to official data, for all the provinces, it is observed that:
These data show that bank withholding regimes are very important for the provinces. In summary, approximately 1 out of every 3 pesos of Sales Tax is collected through withholdings on bank transactions, cards, and virtual wallets. This suggests that a strong provincial rejection is foreseeable and that, if the article is approved as it stands, it is very likely that legal challenges will quickly appear.
Congress could make a very positive contribution to the development of the economy by improving the design of the withholding rule. The objective should be that the banking, debit and credit, and virtual wallet payment systems are not distorted by mechanisms that use it to advance the collection of taxes. To this end, it should be expressly established that banks, credit cards, and virtual wallets cannot be obliged to apply withholding taxes. The immediate impact will be great administrative and financial relief for taxpayers and a reduction in tax evasion because they will spontaneously tend to use less cash payments.
For this approach to be attractive to the provinces, together with the prohibition of bank withholdings, it is necessary for the AFIP to enter into collaboration agreements with the provinces to integrate the collection of the federal VAT with the provincial Sale Tax. This integrated collection is operationally feasible and will ostensibly improve tax compliance. By promoting the use of digital money, the AFIP and the provinces will have better information on payments, which will make it possible to broaden the taxable base for both VAT and Sales Tax. For the provinces, it is an opportunity to increase tax revenue by ceasing to apply bank withholdings at the same time.
The omnibus bill in Congress addresses an ambitious agenda of transformations. One of them is to limit bank withholding taxes. If Congress makes some adjustments to its wording, eliminating all withholding taxes and promoting the integration of Sales Tax with VAT, it will be possible to move forward more ambitiously in promoting the use of digital money without entering into conflict with the provinces. The result will be a tax system more empathetic to citizens and with lower levels of evasion.
