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Inflation, Tax Hikes, and Drought:
Argentina’s Economy Faces Stormy Skies

By February 7, 2019 No Comments
Inflation, Tax Hikes, and Drought: Argentina’s Economy Faces Stormy Skies

Over the last few years, Argentina has been in the spotlight for its massive economic changes; it has shifted away from a very closed economy to the “vulture funds” scandal, to the election of a new government that promised bold liberal economic policies to revitalize Argentina’s economy.

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A Closer Look at Argentina’s Economy

To understand Argentina’s current situation, it is important to note that its inflation rate is one the highest in the region. The Argentine peso lost its value at a very high rate, making the government’s debt more expensive, paving the way to reach an agreement with the IMF for a $50 billion loan—a desperate and unpopular decision among voters in the country. In addition to high inflation and an already-weakened peso that lost 50% of its value, 2018 brought the worst drought in decades, slashing the harvest of corn and soybeans, the main export products of Argentina’s economy.

After several months of recession—and despite all efforts from the government—Argentina’s economy is expected to continue to plummet throughout 2019 as a consequence of all fiscal and monetary tightening policies, strong inflationary pressures, tax increases, and strict legislation for foreign investors that have hindered customer spending and prevented foreign investors from establishing operations in country.

In terms of immediate impact for local businesses and businesses seeking to expand operations in Argentina, the decrease in purchasing power, increase on prices due to inflation, and tax burden may represent a significant increase on operational costs.

Impact on Argentina’s Exports of Goods and Services

In order to face the economic crisis, Argentina’s government has decreed a 12% tax on the export of goods and services. It grants all rights to export goods and services and may not exceed 4 ARS per every dollar. In case exported goods and services are subject to other taxes, 12% will be calculated on top of those taxes already applicable per current legislation. Although this tax is to be applicable to any transaction as of January 1, 2019 and until December 31, 2020, the government is yet to regulate its implementation.

Impact on Employment Terminations and Employer Burden in Argentina

On November 13, 2018, the government of Argentina published Decree 1043, valid until March 31, 2019. This decree is issued under a declared state of emergency where high inflation has led to a decrease in purchasing power for all Argentine employees. With this decree, the government’s intention is to prevent unfair dismissals due to a stagnant economy and to protect the economic stability of employees in country. In accordance with this, employers will be required to abide by the following rules until March 31, 2019, or until the end of the state of emergency.

Dismissals without just cause:

  • Dismissals without just cause are only determined by the Ministry of Labor. All employers that want to terminate an employee’s contract must first notify the decision to the MOL at least 10 days in advance of their termination date. The employer will be required to attend a conciliation with MOL to explain reasons for dismissal. Failing to follow this process will represent fines and closure of business for the employer.
  • Should the MOL consider that reasons for dismissal are valid then they will allow termination and work with both employer and employee to compliantly terminate the employment relationship

Bonus payment to offset decrease in purchasing power:

  • One-time payment of a 5,000ARS bonus towards end of 2018
  • All employees from the private sector are entitled to receive a ARS $5,000 (~US$138) bonus paid 50% on November and 50% on December
  • This bonus is not considered part of salary and therefore employer contributions are not applicable in entirety. Only workers compensation will be contributed by the Employer based on the bonus amount

Trust in an Experienced Global Expansion Partner  

Argentina offers incredible opportunities—but with those opportunities come risks, especially under times of political and economic instability. Working with an experienced partner can help mitigate these risks by providing country-specific reports, on-the-ground insights, and unmatched support and unrivaled knowledge throughout the expansion process.

If you’d like more information about expanding into Argentina (or any of the 185-plus countries in which we operate), reach out to Velocity Global today. With our full suite of global expansion services that includes our International PEO (Professional Employer Organization) solution we can have you up and running in your new market in as few as 48 hours—no matter where your global expansion takes you.