Argentina's AFIP reveals compliance secrets
In an exclusive interview, Guillermo Michel, Deputy Director of the Deputy Directorate General of Technical and Institutional Coordination at La Administración Federal de Ingresos Públicos (AFIP), talks to International Tax Review about recent and future compliance initiatives, the challenges the tax authority faces, inter-jurisdictional cooperation, and why it wants taxpayers to be successful in their economic activities.
International Tax Review: What are your biggest concerns at AFIP at the moment?
Guillermo Michel: At the moment we have a clear focus on the annual tax goals that provide genuine financing to our growth and development. The government tax policy leads us to focus on the potential tax evasion schemes in international high income sectors such as commodity exporters. This is our concern not only because of tax evasion itself, but also because it contributes to the efficient controls of foreign exchange involved in these international operations. In this sense, it is worth mentioning that we are a highly professional organisation with a great deal of information collected in real time.
For example, we have just implemented controls on a typically Argentine high income economic activity: the sector linked to professional football. In the context of transfers of Argentine football players between two local clubs we have identified millions of dollars that were being channelled through small and medium intermediary football clubs in foreign countries (with certain transparency weaknesses). Consequently, we made adjustments in these areas by, for instance, cancelling the tax ID of 146 football agents and intermediaries and by creating a reporting information system about football players.
ITR: Recently released tax collection statistics (for April 2012) indicate an increase of almost 25% compared with April 2011. What do you put this down to? Is it because of any particular compliance or enforcement efforts from AFIP?
GM: Increase in tax collection is the result, mainly, of the increase in the collection of VAT and income tax, which together accounted for more than 77% of the total tax collection in the first quarter. The rise in these taxes reflects an increase in the overall economic activity – higher consumption, salaries and level of transactions through financial institutions. We have also experienced an increase in social security contributions and import/export duties.
It may not be possible to link this rise to a particular compliance or enforcement initiative; however, it is worth mentioning some of the main actions adopted by AFIP, which include:
compulsory use of electronic invoice;
new information reporting regimes on high-income taxpayers (expensive school fees, high credit card consumptions, travels abroad and so on);
ex-ante controls on services and imports;
the electronic single window of international trade (AFIP General Resolution 3255); and
a more significant presence of tax auditors all over the country.
This has helped to strengthen the risk perception from a taxpayer point of view.
ITR: What are the biggest obstacles or challenges that the tax system and the tax department face? How can these be overcome?
GM: We still have a problem that we face in international trade because of the use of low-tax jurisdictions to channel our exports and imports. However, thanks to the work carried out at the OECD's Global Forum on Transparency and Exchange of Information – of which we are an active member – we are developing a growing network of tax information exchange agreements (TIEAs) that will help us in this area. On the other hand, the exchange of customs-related information in real time through the Indira IT system contributes to the efficiency of our controls. By means of these actions we are in line with the state-of-the-art technology which allows us to enhance our auditing tasks, as well as to work with information in real time.
ITR: How would you describe the relationship between AFIP and corporate taxpayers?
GM: We have a fluent dialogue with taxpayers through the entities that represent them (boards, associations of public accountants, bars, chambers and so on). To this end, we hold regular meetings in different forums and consultative groups that deal with customs, tax, social security resources and SME issues. To follow up certain topics, if necessary, special transitory committees are formed which assess such issues in greater detail. These areas of discussion are chaired by the head of the Federal Administration of Public Revenue assisted by the Directors-General of Taxes, Customs and Social Security Resources.
ITR: What do revenue officials want taxpayers to know most at the moment? What is the most important message?
GM: The message is simple. We have to control the correct application of tax laws and we will do anything within the legal framework to ensure the highest level of compliance with tax laws at the easiest and most cost-efficient way for taxpayers and the tax administration. Taxpayers should be aware that we are exchanging information with other entities and state agencies that reveal their real purchasing power, which should be in line with the taxes paid.
We should not be seen as the obstacle to get through because we want taxpayers to be successful in their economic activities. As part of their success is due to the infrastructure and public services rendered by the state, which contributes to creating a favourable market climate and business opportunities, they have to contribute to its maintenance.
ITR: What does your country's tax system have to offer the international community?
GM: There are no general recipes applicable to all countries, however we do not believe tax competition is an efficient way to attract genuine investments to develop a country's economy. We believe the efficient use of tax revenues in the creation of the abovementioned favourable economic atmosphere, particularly in periods of international crisis, is the best way to show international investors that they can trust in our economy and do business in a way that benefits them and the country. Unlike many countries, we believe corporate taxation does not discourage economic activity and that if we rely only on personal taxation (income or consumption) the result will be a smaller internal market and the consequent weakness of our economy.
ITR: How actively do you engage with other countries' revenue departments? Who do you interact most with?
GM: We have interaction with other tax administrations in the exchange of experiences and the use of international cooperation, such as exchange of information. We host many seminars to exchange experiences, particularly with Central American countries. We also participate actively in the Inter-American Center of Tax Administrations (CIAT) and other international organisations where we have an observer status, like the OECD. In the last four years, because of an active programme of negotiating and signing TIEAs, and the recent accession to the OECD Convention on Mutual Administrative Assistance in Tax Matters, we have experienced a 150% increase in the network of exchange of information partners. In practice, we make intensive use of these instruments through requests for information, which in 2011 increased 200% from the previous year, allowing the production of definite evidence on tax evasion and aggressive tax planning. On the other hand, in 2011, Argentina was once again appointed to be a member of the World Customs Organisation (WCO) Policy Commission on behalf of the Americas and actively contributes to spreading good practices in the different manuals on risk management or revenue promoted by the WCO. It is worth mentioning that Argentina will host the CIAT 47th General Assembly in 2013. Furthermore, during the visit of CIAT's Executive Secretary to Argentina, he congratulated AFIP for its work on tax auditing and the use of technology, highlighting that our tax administration takes the lead in Latin America in the detection and sanctioning of tax evasion.
ITR: Is tax transparency becoming more of a focus for you? Do you think companies in Argentina are becoming more transparent in their tax affairs?
GM: We are a member of the Global Forum and its Peer Review Group, so tax transparency is one of our main issues. We have recently introduced information reporting regimes that allow us to obtain real time information on companies' ownership, trust's ownership, international transactions of goods and services, and expenses of high wealth taxpayers. Moreover, we will introduce the Tax Data (QR code), which is a new tool that will enhance AFIP's auditing capacity. By means of a smartphone, inspectors and citizens will be able to read the information code of a business and have online access to different data on the fiscal status of the trader. We believe that companies are aware of the higher risks they are facing now, so they are gradually becoming more transparent.
ITR: What have been the main tax developments over the last year, and what should we be looking out for in the year ahead? Are any reforms or tax treaty network developments on the way?
GM: We have significantly improved some areas thanks to the use of technology-intensive tools, such as the electronic invoice. We have also improved the control of our commodity exports sector, with a particular focus on paper companies used to channel exports through low-tax jurisdictions or regimes. In this regard, we have identified several manoeuvres involving transfer pricing arrangements and tax treaty abuses, which are now being discussed in tax courts.
As you are aware, we had to terminate some of our tax treaties to stop this kind of abusive behaviour, but I am confident we will be able to conclude new agreements with those countries soon, to allow both parties' bona fide investors to do business in a secure, fair and friendly tax climate.
Finally, the new audit strategy involves:
maximum use of available technology. Working with all field units that AFIP has – customs, social security resources and taxes;
centralised exploitation of information (internal and external): we work not only with data gathered by AFIP but also with data collected by other entities;
field operations to verify that the declared reality is in line with the physical reality; and
a new control scheme. We used to work with ex-post controls, now we are evolving to ex-ante and online controls. This new strategy will enable the agency to "know beforehand".