Argentina economics for software services buyers

Yesterday, I received an email from an old client, who has hired full time engineers in Argentina, asking me about the economic situation of software outsourcing companies after the new government regulations. He was referring to the new argentinean government regulation for foreign money exchange. So, I gave him some background information.

Why so much USD in Argentina?

Argentineans, for years, were used to save in foreign currency, specially in US dollars, as a way to protect themselves from inflation and economic crisis. US dollars are also used by the Argentinean Central Bankto maintain and somehow control the value of our currency, the Peso. Argentina is the second country in the world after Rusia, with more US dollars outside USA. Another strange thing that happens here is that all real estate operations are made in USD. That doesn’t happen, for example, in our neighbor Brazil, where their currency, the Real is used exclusively for everything, and I think that is what we should do.

The recent economic crisis in Europe is making european companies here to transfer US dollars to Europe, to help their central branches. I’m not sure why, that is apparently not a good thing. Some private savers are also changing more pesos to USD because they fear of the European crisis.

All these scenarios made the government create a new regulation in which they demand that, whoever wants to change Pesos into USD, to prove how they obtain their money.

The issue is that a good part of the pesos which were changed into USD were not legally justified from people or companies who did not pay their taxes. So now, if they don’t have a legal way to demonstrate how they obtained the pesos, they are not allowed to buy USD.

For outsourcing companies doing their things within the law, this is not a problem. I can receive payments from foreign companies as usual and I could buy USD if I wanted.

What changes

As I said before, for companies doing things within the law, that is, paying their taxes, nothing changes. An argentinean company or individual has NO reason to demand more money from you because of this new regulation. Our costs did not go up because of this in any way.

The usual flow is that the outsourcing company emits a valid invoice (valid for the argentinean law) , client transfer the funds, usually via international bank transfer (SWIFT code), and the money is cleared in the company’s account, always in Pesos, which is our national currency.

If, for any reason, the company needs to buy foreign currency, they can do it without any problem, because they report their sales to the Tax Agency monthly.

It is true that providers using services like Xoom or Western Union received their payments in USD before the new regulations and no justification for the origin of the funds were asked for them. The difference now is that, if they want to continue receiving their funds in USD, they will have to prove the origin of the funds; if not, they will pay them in Pesos, at the official exchange rate.

The trick here was that those providers were declaring that the funds received were “familiar help”. That was definitely outside the law.

How to tell if you are hiring within the law

Now, if you are a foreign company hiring argentinean services you may be asking if you are hiring providers within the law.

If you are not hiring registered providers, that means you are paying less than the market value or that your providers are making more because they are not paying their taxes.

Even though you don’t need an invoice, it is your moral obligation to request one.

An argentinean invoice has some elements that will help you determine if it is legal or not.

CUIT

This is the tax identification number. It is a 11 digits number, usually represented as ##-########-#.

If the invoice of your provider does not include this number, you are not receiving a legal invoice and you are probably helping to tax evasion.

With this number, you can find out if you are hiring a provider who is registered in the tax agency. You could go to AFIP, click the Constancia de Inscripción link, and make a query using the CUIT (no dashes).

You could get two result types:

  1. If it says “Régimen Simplificado para Pequeños Contribuyentes” means he is registered in the simplified program for small taxpayers (commonly referred to as “Monotributo”), which is OK. But you should also check the category, which is a capital letter.

    In this page, you can see how much is the tax for each category (values expressed in Pesos). The first column shows you the category letter. The second, the top anual income for each category and the last two columns shows you the total tax they have to pay for services and goods respectively.

  2. If it doesn’t say “Régimen Simplificado para Pequeños Contribuyentes”, your provider is in the “General” program, which is more suitable for companies with an anual income of 46,000 USD or more. This program has more controls from the tax agency and taxpayers are forced to report monthly sales and spendings. They usually pay more in taxes (aprox. 30%), but they can deduct spendings.

Invoice letter

If the services provided are used outside Argentina, your provider should give you an E type invoice wether he is in the Monotributo program or not.

The difference between C and E invoices in Monotributo, for services, is formal. It doesn’t mean they pay different taxes with one invoice type or the other. So some providers could also give you a C type invoice but that should not be a problem.

You should not receive an A nor B invoice, unless you buy directly IN Argentina, because that means that you would be paying the sales tax (21%) and, as a foreign company, you should not pay it.

Transfer method

If you send the funds through international bank transfer, it is very likely that your providers will have to present the invoice that justifies those funds to the bank, to get the money cleared into their bank account.

If you are paying your programmers through services like Western Union or Xoom.com, and you are not asking your providers a valid invoice, you should know that these services do not demand to present an invoice to release the funds, so it is an easy method to skip paying taxes.

Argentinean inflation

Argentina, like many other countries in Latin America is experiencing a continuous growth since 2003. The collateral effect is inflation. That means that, each year, we need more Pesos to live.

Anual inflation in 2010, according to government is approximately 11%. But, to private consultants it is 25%. The trick is that not all the consultants reveal their measure methodology but government does. And government inflation is more country broad while private consultants focus more on big cities. An average between both values is acceptable.

If your provider express the prices in USD, he can make some difference with the exchange rate variation, but it is not enough to cover from inflation. For example, in the last year, USD went up 10%, wich is not enough to cover the average inflation.

In 2011 we might not experience as much of inflation as last year or, at least, not more. But beginning 2012, we will experience a higher cost in services like electricity, gas and water, specially in Buenos Aires and surroundings.

The case of my old customer

My opinion is that his providers were lying and trying to deceive him. They told him that they had to register as exporters and to pay more taxes. They pretended a raise of 30%, which is crazy in any industry.

The fact is that software providers do not need to register as exporters (that is for goods that go through customs), and they don’t have to pay more taxes than what they should be already paying from the beginning.

Probably, these providers realized that they won’t be able to be paid in US dollars anymore, because they are not producing invoices for their work or they are not properly registered and paying their taxes.

Why they would need US dollars? As I said at the beginning, argentineans are used to save in this currency, to protect from inflation or to buy a property. But it is also true that they can exchange the US dollars for the Pesos they need for living at a higher exchange rate than the official in the black market for, easily 15% or 20% more.

Author: Marcelo Ruiz

Marcelo has been working as a software developer for more than 15 years. He has participated in projects for companies in USA, Mexico, Argentina, Europe and Africa. He is skilled with Microsoft technologies such as ASP.NET, MVC, C#, WCF and SQL Server, among others.

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