A WORLD BANK COUNTRY STUDY Public Disclosure Authorized Argentina Tax Policy for Stabilization and Economic Recovery Public Disclosure Authorized FILECOPY Public Disclosure Authorized ,~~~W _ Public Disclosure Authorized I A WORLD BANK COUNTRY STUDY Argentina Tax Policy for Stabilization and Economic Recovery The World Bank Washington, D.C. Copyright i 1]990 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433,U.S.A. All rights reserved Manufacturecl in the United States of America First printiing April 1990 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. 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ISSN: 0253-2123 Libraryof Congress Cataloging-in-PublicationData Argentina : tax policy for stabilization and economic recovery. p. cm. -- (A World Bank country study) Includes bibliographical references. ISBN 0-8213-1541-2 1. Taxation--Argentina. 2. Fiscal policy--Argentina. I. International Bank for Reconstruction and Development. II. Series. HJ2505.A75 1990 339.5'25'0982--dc2O 90-35701 CIP PREFACE This report is based on the findings of a World Bank mission that visited Argentina between April 17 and May 5, 1989. The mission comprised the following members: Luca Barbone (Mission Leader) Jaime Vazquez-Caro (Tax Policy and Tax Administration) Jorge Mac6n (Tax System and Income Tax Issues) Jose-Manuel Gonzalez-Paramo (VAT) Miguel-Angel Lasheras (VAT) Alberto Porto (Provincial Finances) Contributions were also received from Guillermo Perry (Taxation of Energy Products); Michael McKee (Effective Tax Rates on Capital Income); Richard Bird (December 1988 Tax Reform). The report benefitted from the studies produced by the Tax Policy Group (Public Sector Technical Assistance Loan, PSTAL AR-2712), under the direction of Juan Carlos Gomez-Sabaini. Particular thanks are due to Viviana Duran. Research assistance was provided by Gy6zo Gabor. Roberto Manrique provided research assistance and coordinated the organization and editing of the report. Invaluable secretarial support was given by Lien- Hiep Nguyen and Francine Coscolluela. - iii - CU_RENCYEQUIVALENTS Currency Unit - Austral Official Exclhange Rate, February 1, 1990 US$1..00 - A$1,950 A$1,000 - US$0.513 FISCAL YEAR January 1 - December 31 GLOSSARY CUIT Codigo Unificado de Identificacion Tributaria (Unified Taxpayer's Identification Code) DGI Direcci6n General Impositiva (General Tax Directorate) EEC European Economic Community FONAVI Fondo Macional de Vivienda (Housing Fund) GdE Gas del Estado (National Gas Company) OECD Organization for Economic Cooperation and Development VAT Value-Added Tax YPF Yacimientos Petroliferos Fiscales - iv - TABLE OF CONTENTS Page Nos. COUNTRYDATA vii EXECUTIVE SUMMARY......................................... ix CHAPTERI: MACROECONOMICPERFORMANCE AND THE TAX FINANCING OF GOVERNMENTEXPENDITURES ..... 1 A. Fiscal Instability and Tax Revenues 1... B. Macroeconomic Developments and Aggre- gate Revenue Performance ............ l0 CHAPTER II: THE TAX SYSTEM: BETWEEN MODERN TAXES AND TAX HANDLES ......... ..................... 18 A. Overview: The Structure of the Tax System ............ .................. 18 B. Modern Taxes and Tax Handles 23 C. Tax Policy: The Growth of Tax Expendi- tures .26 D. Efficiency and Equity Aspects of the Tax System .30 E. Tax Policy: 1984-88 .34 CHAPTER III: TAX ADMINISTRATION ..... ..................... 40 A. Administration and the Legal Tax System 40 B. Administration and Substantive Tax Law ................................. 43 C. Individual Compliance: Procedural Laws 45 D. Administration: The Internal Organi- zation Laws . .49 E. Administration: How Has DGI Fared? 53 F. Reconmendatios . .61 CHAPTER IV: REFORMSFOR STABILITY AND GROWTHIN THE 1990S 66 A. Tax Reform: Main Lines of Action 66 B. Direct Taxes: A Proposal for Funda- mental Reform .68 C. Generalization of the VAT .81 D. Taxation of the Energy Sector 91 E. Emergency Tax Measures and the Imple- mentation of the Reform .94 - v - TABLE OF CONTENTS (Continued) Page Nos. CHAPTER V: FEDERAL-PROVINCIAL FISCAL RELATIONSHIPS ..... 97 A. Revenue Sharing ..... .................. 97 B. Own Revenues of Provincial Government . 105 C. Decentralization of the Tax System 109 APPENDICES: 1.1: Tax Revenues, Outpujt and Inflation 117 2.1: Evaluating the Tax Burden in Argentina .120 2.2: Marginal Effective Tax Rates on Capital Income ........................ 123 4.1: Adjustment for Inflation .132 4.2: Taxation of the Energy Sector - Alternative Scenarios .136 REFERENCES .................... ............................ 142 - vi -- COUN4TRYDATA - ARGENTINA AREA POPIILATION DENSITY a 2766.9 thou.. sq.bm. 32.0 million (1968) 10.7 par sq.bn 1.5% anua -goth 16.9 par sq.km of ...abia land POPULATION CH-ARACrERISTICSa/ EALTH b/ Crud. Birth Rat. (par 1000) 23.6 Population Par phyaician (thou..) 0.5 Crude Oaath Rat. (par 1000) 8.9 Population par hospital bad (thous.) 0.2 Infant Mortality (par 1000 1ba birth.) 34.4 INCOME DIS7RIW.JI 101 b/ DISTRISPJTION OF LAND OWNERS3HIP X of natona.. Incoma, highnat quintila 50.31 1 oana by top 10% of lan oar I of national incm, Il..ast qunia4.4% 8 uanad by-amllast 10% of land uana ACCESS TO SAFE W4A189 (1980) ACCESS TO ELECTRICITY (1969) I of pultonrhn65% 1 of population 95% I of populatio-url17% NUTJRITION af EDUJCAT ION Caloria intaka as If raquira...ants 119.21 Adult litaracy rata 1 (1980) 951 Par capita protain intaka (grams par day) 99.7 Primary school anoiatIa 1001 @W PER CAPITA IN 1988 c/ 2537 GROSSNATIONAL PRODUCT IN 1988 di' ------------------------------ I AN**AL GROWTHRATES (% constant prin... US% Mnb. of (S- - - -- - - - - -- - - - - -- - - - - (curat pricaa.) 1970-75 1975-80 1980-85 1988 NP at marbat pri-a 75820.6 100.0 2.9 1.8 -3.4 -0.7 roaDomastic In-ntmant 10095.4 13.4 1.9 4.4 -16.2 -4.7 roaNational Sa-i'ge 74856.2 9.9 0.5 2.0 -13.8 29.9 Currant Account Ba[anca -2839.2 -3.5 Eaporta of Good. A NrS 10337.3 13.7 -4.7 14.1 5.2 58.8 Imports of Goods £L WS 7849.4 10.4 0.8 13.3 -13.0 -4.5 OLITPUIT, LABOR FORCE AND PRO!IJTIVITY IN 1988 VaIua Addad (contant pricaa) labor Forc-a V.A. Par Worhnr U151 MIn. % of Iota.I housanda 1 U111% Agr;Iuctura 10897 15.2 1370 12.0 7951.0 Induatry 24291 34.0 3588 31.4 6773.8 Sa...na- 36358 50.8 6464 56.6 5824.3 l.oal GDF at Factor Cost 71544 100.0 11421 100.0 6264.4 OOVEI*#4fNf FINANCE fi' Cona.i;datad Nonfinanial Pubic~ lactor- g/ Central Gouarnmant Aust. MI., 1 of GDP Auat. Mn. I of GDP 1987 1987 1983-87 1987 1987 1983-87 Currat Ravanca 54881 30.8 35 1 18598 10.5 9 1 Curran.t Eupandituras 59995 33.9 37.8 20527 11.5 8.0 Curra nt Balance -5334 -3.0 -2.7 -2939 -1.1 1.1 Capital Eapandituras 9102 5.1 7.4 551 0 3 0.4 Surplus h/ -13079 -7.4 -9.3 -12723 -7 2 -8.9 Eatarnal Financing (nst) 7411 4.2 1.8 6660 3.8 1.8 a/ Fo-r tha psriod 1982-1985. bi' For tlo. period 1970-1978. 0/ Currant US dollars Estieatsd using Banb Atlas mat,hodology. di' Currnt US dollar aeimte -Ielultnd fro data in c..natant 1970 aarla si' Calculatad by applying 1980 anau sham to 1988 posulatio., f/ Eaac-tsd budgat eaimta nourrant ..uatralas. 8/ Ecdaprovincial go-rnmnts h/ lTek. into account all rnuaand anpandituras. - vii - COUNTRY DATA - AROENTINA MONEY,CREDIT AlD PRICES 1980 1981 1982 1983 1984 1985 1986 1987 198e (Milli-, of sustrles; sod of period) Money nd Quasi Mony 8.0 16.0 38.3 193.8 1193.5 7624.5 16229i 44433 240353 Domestic BSal, cr-di to Public Sector 17 6.4 22.8 76.4 596.8 2845.1 5710 18624 86274 D-b.atic 00-1, C,.d;t to Pri-at Sector 8.3 22.2 68.9 290.8 1902.1 8980.6 18495 48819 222373 Moraey and Qua.; Moray a U of ODP 22.3 21.0 15.5 15.2 12.2 14.2 17.1 15.9 17.4 Wholesale Prica Index (1985-100) 0.067 0.188 0.775 3.961 28.747 133.4 210.6 593.7 3153.9 Annuel percentage oh-gs- ;n Genera Wholessl Price Indac 33.8 180.6 312.2 411.1 625.8 364.0 57.9 181.8 431.6 Bark Credit to Public Sector 69.8 282.8 251.7 237.2 681.6 376.7 100.7 226.2 363.2 Ban, Credit to Pristo iSator 108.5 166.0 210.5 321.9 554.1 372.1 83.7 198.0 355.5 BALANCE OF PAYMENTS 1975 1980 1985 1988 MERCHANDISE EXPORTS (Aer-ge 1984-1988) (LSS HMill;ons) LUS M.