Argentina's Economic Changes: Peso Devaluation and Tax Reform Updates

The newly elected administration led by President Javier Milei brought swift changes to Argentina’s economy. On December 13, the Argentine peso was devalued by more than 50% against the U.S. dollar. Several other changes that were announced include gradual subsidy cuts, eliminating government ministries, and reduced payments to Argentina’s provinces.

Argentine Peso Devaluation

Argentina has suffered from economic crisis going back over two decades since the country defaulted on its international debt for the first time in 2001. More recently, Argentina has suffered from the COVID-19 pandemic, high energy prices driven by the Russian invasion of Ukraine, and long-lasting droughts damaging the supply of crops. These contributed to the country’s increasing inflation and decreasing foreign exchange reserves. The country struggled to make debt repayments due to the cascading effects of these global events. With the ongoing exchange rate and debt crisis, President Milei decided to move forward with the extreme devaluation as an attempt to cut the fiscal deficit and avoid a prolonged period of hyperinflation.

The devaluation of the Argentine peso will severely weaken the buying power of those holding Argentine pesos and protests were organized in Buenos Aires following the change. On the other hand, the devaluation did spur exporters to bring U.S. dollars into the country, boosting foreign reserves as intended. The International Monetary Fund was pleased with the decision and IMF Managing Director Kristalina Georgieva stated that this is “an important step toward restoring stability and rebuilding the country's economic potential.” Argentina will soon begin paying back the IMF with the help of a liquidity loan given by the Development Bank of Latin America and the Caribbean. Other effects of the peso devaluation include fuel prices spiking in December and future export prices for crops decreasing.

Argentina Tax Update

• UPDATE as of October 1, 2023: Argentina tax reform was implemented in response to the economic challenges of hyper-inflation and a weakening currency. The tax rules evolved throughout the year and regulations to implement the changes were not simple to implement since the monthly payroll withholding rates differed between two partial tax years - (a) January to September, and (b) October to December. Year to date monthly withholdings from previous periods were to be taken into account, and any over-withholdings for prior periods were to be refunded to the employee via payroll.
• The key changes included in the final tax reform effectively eliminates income tax liability for most lower and middle-income employees, and an adjusted tax rate schedule is applicable only to higher income taxpayers. Employees are limited in the deductions and allowances claimed for the taxability of earnings. The maximum is tied to a multiple of the statutory minimum monthly wage (SMVM) that is periodically adjusted for inflation. Currently the maximum annualized deduction is capped at ARS 23,760,000. Income below the threshold is not subject to tax. Income exceeding that threshold is subject to a “schedular” progressive tax, using rates from 27% to 35%. The tax brackets will also be adjusted for inflation periodically based on the SMVM. We expect the SMVM to increase again in January 2024. The social security wage base also increased effective September 1, 2023. The annualized maximum employee contribution is ARS 1,952,933 and the combined rate is unchanged at 17%.
• The net effect of these changes is a substantial decrease in tax for all incomes and an increase in social security for higher incomes.
• Since the calendar year 2023 reflects changes occurring during the year, we are recommending that Argentina outbound employees that are tax-equalized be authorized for a 2023 annual tax equalization settlement since there may be some under or over-withholding of hypothetical taxes throughout the year.