Argentine Currency Controls Hamstring More than just Real Estate

On the way to the ranch and back, the hot topic of conversation for my missus and me was the sudden dollar controls instituted by the Kirchner adminstration two weeks ago (Taos Turner has a great write-up in yesterday's WSJ.)

While the WSJ concerns itself with the controls'  biggest impact: real estate and related industries such as construction ...the restrictions on buying dollars are affecting just about any sector in which you have to "put your name" on a transfer of title.

This is affecting the sale of automobiles, a sector which has seen spectacular growth in Argentina in recent fiscal quarters.

The biggest aspect not mentioned by the WSJ is ...they are not confined to dollar purchases.  Even peso purchases of real estate and automobiles must be pre-approved by AFIP. Such purchases are allowed if the purchaser can show that sufficient income has been reported to AFIP, Argentina's counterpart to the IRS in the US.

In first-hand reports that my missus and I have received, the replacement purchases ...in pesos ...of automobiles stolen or totaled have not been permitted in advance of payment by insurance companies.  The reason given being that there was not yet a verifiable source of income for the replacement of those vehicles.

In one particular case, a child was not allowed to purchase an automobile with pesos gifted to him by his parent because tax records could not support how the child could possess the pesos necessary to the transaction were earned/gained.

In that case, the parent could purchase the vehicle in the parent's name and allow the child to drive.  However, the child could not show the parent as the source of the income ...much like one would show a lending institution as the source of a new car purchase.

The controls are not a result of a presidential decree nor legislation but rather an adminstrative rule by AFIP, Argentina's counterpart to the IRS in the US.  The rules are now resulting in AFIP requiring purchasers of any sort of "title transfer" purchases, in both dollars and/or pesos, to show how previous years' tax returns justify that retained wealth.

Even so, the controls are purported to be part of an effort to stop "capital flight" of US dollars from Argentina ...and pesos from being converted into dollars which then leave the country.  Since the controls are still not well understood, it´s difficult for me to say how much farther they will reach nor if they will have the desired effect of stopping capital flight.

The new electronic approval process for these title-transfer purchases is being facilitated by a data-processing system which has been reported on nationwide TV as being state-of-the-art.

The approval process depends on the buyer´s previously reported earnings as reported on their Argentine tax returns.  For example; if a buyer has reported sufficient income to purchase land, houses, apartments, or cars; the purchase is approved. 

If, however, the buyer appears to tax authorities as someone who has never earned/gained sufficient income to afford such a transaction, the purchase is not allowed to take place ...and further inquiries by the tax authorities into possible tax-avoidance could reasonably be expected.

In one´s imagination, the approval process could be extended to any transaction which results in a receipt suitable for tax purposes.  For example, the payment for any service that approached a peso-amount similar to the sale of a small used-car, could be subject to the tax authority's pre-approval process.  If the buyer could not show from previous tax returns that he possessed such purchasing power, the sale could not officially take place.

In our own experience as cattle ranchers, we fear for the "middle-men," consignment agents who make things happen between buyers and sellers.  If, for example, funds are paid by cattle buyers who can legitimately justify spending those large sums of cash ...which are then transfered to a commission agent ...my missus and I are worried that the commission agent might not have the necessary tax-reported funds to transfer that payment to us for our lovely cattle.  Even worse, the data-connectivity of very rural places is very bad.  Ordinary, current transactions in those areas are often shutdown due to the failure of already "state of the art" systems.

In reality, this system is already being described as an impressive albeit temporary measure.  Both the WSJ and our own anecdotal accounts point to an attitude of "this, too, shall pass."

In the rural community, these measures are being described as a "stop-gap" between now ...in which foreign reserves have fallen ...and April of 2012 in which government foreign currency reserves will be replentished from what could be a record soybean export crop.  At that date, the long-time national policy of entering the forex market by selling those new soya-dollars will depress the local value of the dollar.

In the meantime, Argentines' appetite for traceable purchases and even the traditional foreign vacation season could be curtailed.  Fears are already being expressed regarding how these measures could affect credit card purchases.