Will they stop looking at Uruguay?: Knowledge firms already have their law and are excited about 10 key points
The figures are eloquent: 88% of companies feel the impact of the drop in activity as a result of the quarantine. In the case of small and medium-sized companies, the number of victims is 91%, while in those with less than 50 employees it is 73%.
These numbers, which denote urgency, correspond to the Argentine software and computer services industry, a sector that thanks to its phenomenal international expansion was able to overcome in recent years the trail of economic crisis that were accumulating, one after another, in the battered Argentine industrial fabric.
However, this apparent advantage did not leave it immune to the advance of the coronavirus, an unprecedented phenomenon in its scope, since it impacted everyone equally. As a consequence, the collapse of multiple businesses had a spectral tune throughout the world.
The scope of COVID-19 knows no borders; therefore, the companies linked to the so-called "4.0" industry had no place to take refuge, both within borders and in their own country.
This unprecedented situation also had another "stick on the wheel": the delay in the promulgation of the expected new version of the Knowledge Economy Law, which provides benefits to companies in the sector and which, until now, has remained unchanged to the awaits the opening of the parliamentary sessions.
It is worth reviewing the route of the initiative, not without turbulence:
- In February, the Government sent to Congress the bill to reform the norm promoted during the administration of Mauricio Macri, who had achieved its unanimous enactment in the Senate last year
- However, the Alberto Fernández administration considered that this law "left out" small and medium-sized firms and that, in addition, it contemplated a fiscal cost designed before the deepening of the crisis
- Within this framework, its validity was halted, while the Knowledge Secretariat, headed by María Apólito, began the layout of the new draft in which other dependencies of the Ministry of Productive Development also participated.
Everything indicated that the project would become law in late March. But the coronavirus "stuck its tail": the sessions were suspended and the sector, which bills more than U$S 3 billion annually (and more than $ 7 billion if other business units are added) was left pedaling in the air waiting for a norm that, in moments of total stop, becomes more urgent than ever.
Finally, after six months of back and forth, the project was approved by deputies, with 246 votes in favor and just two against.
In a session that lasted until late Thursday, the Knowledge Economy Law took a key step for its approval, which now depends on the positive opinion of the Senate.
Changes, one by one
As iProUP anticipated, one of the pins that will fit most tightly in the measurement "equalizer" is that of equity. In other words, the benefits have a greater impact on small and medium-sized companies but without harming unicorns.
"How are we going to go against Mercado Libre, which generates a lot of quality employment, is a source of innovation and is committed to financial inclusion, by allowing any business to accept cards," was heard in the corridors of Irigoyen 250.
In this sense, the new initiative seeks to relax the requirements for small and medium-sized companies to access the promotion regime with advantages similar to those of large companies.
"It is a pro-SME law. They have fewer entry and revalidation requirements than large ones," remarks a source from the Ministry of Productive Development. In this way, the main changes are:
The new regulation stipulates that to access benefits, companies must comply with two of the following three obligations:
a) 70% of its turnover must originate from the activities promoted or accredit the use of such disciplines to add value or innovation in products, services and processes. This is mandatory for firms offering "professional services"
b) Invest in training of employees dedicated to activities for 3%, 5% or 8% of their salary, depending on whether they are micro, medium or large companies. And disburse in research and development an amount similar to 1%, 2% or 3% of your turnover, according to the aforementioned categories
c) Export knowledge goods or services for 4%, 10% or 13% of their total income, also according to the size of the organization
The original rule provided for an expense of 3% of turnover in R&D and 8% of the salary in training.
As iProUP announced, companies wishing to remain in the promotion regime must demonstrate every two years that they increased their investment in R&D by at least 0.5%, 1% in training and 1.5% in exports. This was not covered in the original standard.
3) Tax reduction
The original law stipulated a 15% reduced Aliquot of Profits for the companies registered to the registry that maintained their staffing during the validity of the regime.
On the other hand, the project sent to Congress establishes a 60% deduction in the total amount of this tax, both for the profits obtained in national territory and abroad.
However, the original rule established a non-taxable minimum of $ 17,000 for each employee, but the Solidarity Law reduced it to 7,000.
Another novelty is that the attached companies that generate export operations will not be liable to VAT withholdings and requirements.
"It is more beneficial, but it is only for the activities promoted. Before, the 15% rate was for all company tasks. 60% is better for firms whose majority of the business is dedicated to knowledge," reveals Sebastián M Domínguez, partner of SDC Asesores Tributarios.
According to the accountant, this implies the same problem as the Software Law and that this new standard came to solve: "Firms have to keep separate accounts because they must determine the results of the activities promoted compared to those not promoted."
However, it highlights as a disadvantage of the new project that taxes paid abroad will not be taken as a tax credit.
"When you lend abroad, the client from abroad withholds the taxes from that country. The previous law allowed taking it on account of Earnings, now it is computed as an expense that is deductible because it belongs to the taxed activity," he remarks.
On the other hand, the project maintains the duration of tax incentives throughout the entire term of the law, that is, until 2030.
4) Employer contributions
The firms that apply to the law may convert into a tax credit voucher (transferable once) of 70% of the contributions to the health and retirement systems for the employees dedicated to the activities promoted. Before, it was 1.6 times the total contributions of the entire staff and twice in the case of professionals with a doctor's degree.
However, it has a ceiling: up to seven times the payroll of section II of medium-sized companies, which stipulates 535 workers. In other words, contributions of up to 3,745 people may be deducted. If the staff expands, the bonus will include new professionals.
"If a company has 4,000 employees, over 255 employees the benefit will not apply, only for the 3,745. But if in the second year 100 new employees are hired, then the bonus will be over 3,845 workers," they explain from the portfolio that Kulfas directs.
5) Additional benefits
As this medium anticipated, companies that provide employment in the interior of the country and centers far from large cities. In effect, the tax bonus will be 80% instead of 70% for each employee residing in unfavorable areas or provinces of less "relative development".
Furthermore, this incentive extends to firms that hire female professionals, people with disabilities, experts with postgraduate studies in STEM careers (science, technology, engineering and mathematics), and beneficiaries of social plans.
This novelty refers to companies that do not export a Knowledge service, but use it as their own input or that of subsidiary firms in the country or abroad.
The witness case is Mercado Libre, which does not develop software for third parties - as Globant does - but rather to add value to its own business.
However, the electronic commerce giant will be able to receive the benefits of the law, since it contradicts only one of the three.
As iProUP anticipated, small firms were left out of the regime for not having the requirements, especially because of the 70% of billing related to the knowledge economy.
This was especially pointed out by the SMEs in the electronic sector, which had begun to include more software in their solutions, but did not reach that level.
Thus, the official government project establishes that microenterprises less than three years old can apply if they prove that they carry out some of the activities promoted. However, after four years of enrollment they must meet all the requirements.
8) Fiscal quota
As iProUP announced, the Executive's proposal speaks of a "fiscal quota" as of the second year of the law's effectiveness, which will be distributed among the participating firms according to the criteria to be carried out by the Enforcement Authority.
"It is a problem. Because companies today invest thinking that they will have that benefit, but perhaps the following year they will get less according to the criteria that are set. Although the cost estimate for the State is reasonable, it should establish the quota updated by inflation in the 10 years of validity ", warns Domínguez.
9) New background
The norm approved during the macrismo inaugurated the Knowledge Economy Fund (FONDCE), made up of 1.5% of the advantages that companies would contribute for their participation in the registry. Furthermore, 4% of these incentives for the audit and control of the regime were to be transferred.
As reported by iProUP, this will be replaced by the Trust Fund for the Promotion of the Knowledge Economy (FONPEC), which will consist of a trust with the contribution of 4% of the benefits transferred by the member firms. It will be used for the promotion of SMEs and startups, training programs and activities to encourage the knowledge industry.
10) New body
In support of the Enforcement Authority, the new law establishes the creation of an Advisory Council, made up of institutions from the scientific and technological system that will provide their opinion in cases where discrepancies arise regarding the relevance of incorporating a company into the regime.
The charm of Uruguay
According to Domínguez, "it is positive that they are approving the law because everything was suspended, so it is much better to have it than not to have it." And he does not doubt it: it is still more "business" to have the firm based in eastern territory.
"What it is creating is a continuity of the Software Law, with some changes to make it broader, but many requirements were lowered," he says.
And he points out: "Last year they wanted to reduce them due to the fiscal cost, but more so now with the pandemic, the collection that went down considerably and the deficit." Among the points against, it lists:
- "You can no longer take as tax credit the withholdings they made for profit from an Argentine source abroad that can be taken as an expense. For that, there was no need for a law."
- "The profit of the minimum taxable income was also lowered"
- "Fiscal stability was modified, it is no longer 10 years"
- The fiscal quota may put a cap on profits in the future and goes against predictability.
In addition, Domínguez clarifies that the Uruguayan regime is more much more beneficial because:
- "It offers free availability of foreign currency in case of exporting, without having to resort to the MEP dollar"
- "It allows opening an account in the US without the funds reaching Uruguay"
- "Businesses and are based on free zones pay very little for service exports"
- "Uruguay has no rights on services exports"
However, he warns: "It is a myth that I can go to Uruguay so easily. You have to open a company, take on employees, operate it." In effect, moving to the neighboring country has its "fine print".
"Yes, you can open a company and contract services to the Argentine firm, but it cannot be just an intermediary or 'rubber stamp' that does nothing, since the AFIP can detect it and the benefits are lost," he adds.
For his part, Jonás Bergstein, from Estudio Bergstein de Montevideo, tells iProUP that Uruguay offers institutional and economic advantages to foreign investors. They are to emphasize the tributary ones, between which it emphasizes:
- Income tax: Uruguay remains attached to the territoriality criterion. That is, it taxes income generated in that country and, with few exceptions, those obtained abroad are exempt.
- Wealth taxation: taxes the assets located in the country, not those that are abroad. In the case of companies, the rate is 1.5%
From the above, it can be concluded that companies without activity or assets in Uruguay are not subject to taxes in that country (with the exception of corporations that pay a control tax of about US $ 500 per year).
The remittance of dividends and profits abroad is exempt if the firm does not have taxable income of local origin, which is an important advantage for a company of Argentine owners.
Finally, Argentina is close to approving the Knowledge Law and surely, once approved, the registry is created so that firms can register and receive benefits. And that Industry 4.0 strengthen its role as the engine of the country.