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Buenos Aires legislature passes tax reform

Buenos Aires legislature passes tax reform

On January 8th the legislature of Buenos Aires passed a new tax law to shore up the province's finances.

The Buenos Aires provincial government—not unlike its federal counterpart—faces a tenuous financial situation. The latest official data show that provincial government debt rose by 37% year on year, to Ps644bn (US$10.7bn, or 9.1% of gross regional product) by endSeptember 2019. Moreover, more than 80% of this debt is held in foreign currency, with a significant share contracted on a short-term basis. As a result, the province faces maturities of around US$2.7bn in 2020.

To address these issues, the newly elected governor, Axel Kicillof of the leftist Frente de Todos (FdT) Peronist coalition, sent a tax reform proposal to the provincial legislature in order to keep the government's revenue constant in real terms. Although the tax reform will not provide the government with the revenue it needs to close its financing gap for the full year, it is intended to help to balance the books, meet immediate-term repayment obligations and send a positive signal to investors ahead of debt-restructuring negotiations.

At the heart of Mr Kicillof's tax reform proposal was an increase in realestate taxes, of between 15% and 75%, with higher-value properties being taxed more heavily. The proposal also included increases to the gross sales tax on professional services, medicines, and cable broadcasting. Lastly, it incorporated a rise in the automotive sales tax on a sliding scale to make it more progressive. The reform seeks to raise tax revenue by an average of 55%, roughly in line with expected end-2019 inflation.

However, the final version of the reform imposes a moderately lower tax burden than Mr Kicillof had initially intended, as the FdT had to make concessions to the centre-right Juntos por el Cambio opposition coalition, which holds a majority in the Buenos Aires Senate (the upper house). As a result, the government expects the reform to yield moderately lower revenue than originally envisioned—to the tune of around Ps10bn.

Impact

on the forecast Our forecasts are unchanged. The developments in Buenos Aires province mirror those at the national level in that the government is resorting to tax increases (as opposed to spending cuts) in order to prop up the public finances. However, in both cases, financing risk will remain high until the conclusion of negotiations around debt restructuring.

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