Regularization / situation correction / normalization / tax pardon / repatriation / externalization of assets / fiscal disclosure / amnesty. Different names that mean essentially the same thing.
This is not an issue relating solely to Latin America. In the past, countries like Australia, Belgium, Colombia, Ecuador, Spain, the Philippines, France, Honduras, India, Ireland, Italy and Panama have implemented some kind of tax pardon/ amnesty program. Other countries, such as Denmark, Finland, Greece, Mexico, New Zealand, Norway, Peru, Portugal and Sweden, at one time or another, have also instituted relief schemes to normalize fiscal conditions.
Argentina concluded its own asset amnesty program in late 2016. Of a GDP of $583 billion, $116 billion worth of assets have been disclosed. The amnesty means an increase of approximately 12% of GDP to the economy’s tax base.
In the last 60 years, the country has sanctioned and carried out 20 of these amnesty programs with differing results. It is worth pointing out that they were all “for one time only”.
For many years, some citizens have sought a safe-haven for their capital abroad due to political, financial or security reasons. The results of this diversification, particularly in developing countries, could negatively impact the economy and increase the cost of private and sovereign financing. The effects of reduced tax collections are generally compensated by an increased tax burden with possible consequences for the country’s economic development.
I believe this repatriation of capital will have short, medium and long-term impacts. For now, the effects are unseen by most but they will become much more obvious in 2017 and beyond.
The immediate effects include: reduced debt cost, increased tax revenue, tax deficit reduction and possible credit risk improvements not only for the sovereign but also for private entities that need to access the local credit market and markets in stronger currencies than the peso. With this multitude of potential investments, building a capital market that allows financing in the local currency will be easier.
To be eligible for amnesty / repatriation, individuals must not only pay a special tax but they must also make payments on earnings from what they have declared so far. For example, 35% on earnings generated by their investments (excluding certain Argentinian assets, Brazilian and Bolivian sovereign debt). The way to avoid this cost is to have a portfolio invested in Argentinian bonds or sovereign bonds from the countries mentioned above or Argentinian provincial bonds that are also exempt.
In any case, there are side effects. For example, Argentinian bond portfolios are over exposed to local debt issuances making the portfolios undiversified.
In fairness, this success has been achieved in the midst of severe restrictions on non-declared assets abroad, with a local government managing to generate investor confidence, multiple business opportunities in Argentina and very low portfolio returns internationally (let’s recall that $8 trillion worth of bonds are operating at negative rates).
The challenge we are facing is to get these portfolios to a level of diversification and return that brings peace of mind to our clients and bankers.
Column by Raul Ponte, Senior Portfolio Manager Beta Capital Wealth Management Crèdit Andorrà Financial Group Research.
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