Félix Rolando analyzes the impact of the elimination of internal taxes on the final price of certain products and highlights the pyramid effect that this type of taxation generates in the commercialization chain.
We reproduce below the complete article published by iProfesional:
Experts warn that in some items the consumer will not be fully benefited by a drop in prices as a result of the repeal of internal taxes by the Labor Modernization Law, but that part will be passed on to the profit margins of companies.
The elimination of excise taxes, effective as from Wednesday, April 1, is quite broad, because it refers to items such as insurance, cellular and satellite telephone services, luxury items, and motor vehicles, motors and boats for recreation or sports and aircrafts.
Why not all tax cuts will go to prices
But Federico Anna, from Allende & Brea, warns that “we are not facing a general tax cut, but a selective pruning of the tax system”.
“There will be areas where the consumer will probably see a concrete and relatively rapid improvement, and others where the effect will be more limited, more indirect or concentrated in certain segments,” he says.
“In other sectors, the rebate may be felt in the pocketbook; in others, especially, it will be felt in the cost structure and market margins,” he explains.
“Therefore, this reconfiguration of the tax burden on certain consumption will have obvious winners in some sectors and rather more debatable benefits in others,” he says.
“As is often the case in tax matters, repealing a tax is legally straightforward; getting that relief to the consumer in full is rather more complex,” he emphasizes.
On the other hand, “the real impact on prices will not be immediate. In practice, what usually happens is that there is previous stock, lists that have not yet been adjusted and a commercial chain that needs to readjust. Therefore, it will only be seen more clearly in a period of 30 to 45 days how much will be transferred to the price”, says Fernando López Chiesa, from Lisicki, Litvin & Abelovich law firm.
Why the pyramidation effect works in favor of the downturn
According to Félix Rolando, from Andersen Argentina, “internal taxes are a consumption tax applied at the first stage, whether import or industrial, and have a strong impact on the sale price of products, since they are generally very high”.
Therefore, he maintains that “with the elimination of this tax, a significant reduction in the retail price is to be expected, since, if the retail price is not reduced, then the benefit of the elimination would be exclusively for the economic agents involved in the production and sale of said product”, he remarks.
“In addition, the impact must be significant because, in general, the taxes applied in the first stage produce the so-called pyramid effect, i.e., the price that the consumer ends up paying for the tax is much more than what the State charged for the tax itself,” he said.
What are the most and least benefited items?
Anna specifies the following scenario of lower prices in different sectors:
From a legal point of view, the effect is clear: from now on, the tax liability ceases to exist for the taxable events included in those items and which are perfected as from the effective date of the measure.
In other words, the tax is no longer applicable to the new transactions covered by the repeal, although the obligations related to previous periods remain, of course.
In this regard, the reform has a simple and direct effect: it reduces the tax burden on certain consumption and services.
Price decreases on a case-by-case basis
However, the real economic impact will not be uniform, but will vary according to the items, Anna points out:
Cellular telephony
The elimination of the tax has the potential to be reflected quite visibly in the user’s bill, because it is a massive service with an easily identifiable price.
By eliminating a tax that was levied on the bill issued to the user, there is a direct reduction in the tax cost of the service.
If the market fully passes on the decrease, the consumer should see an equivalent decrease in the final component of his bill, although in practice this will depend on how each company rearranges prices, promotions, charges and packages.
There may always be the temptation to absorb the reduced margins through promotions applied on a “semi-permanent” basis against this elimination of the tax component that was passed on to the user.
Insurance
The effect may be more diffuse, since the final value of the premium depends not only on the tax burden, but also on variables such as the loss ratio, the cost of reinsurance, technical reserves and the commercial policy of each insurer.
There may be a drop in prices there, but probably not automatically or homogeneously, since it depends on each individual policyholder.
Vehicles and luxury goods
For vehicles, vessels, aircraft and luxury items, the impact will be even more uneven.
Historically, these taxes were levied on certain goods or segments of higher value, so their elimination does not necessarily benefit all consumers in the same way.
In such cases, tax relief tends to be more concentrated in certain markets or in middle-high and high-income consumption.
“Therefore, while one part of the reform can be read as a reduction of distortions or as the elimination of taxes that had become outdated, another part opens a broader discussion on who will be the real beneficiaries in fact,” Anna considers.
Source: Iprofesional.com
If you have any questions about this topic, please do not hesitate to contact us:
Félix Rolando
Tax Partner
felix.rolando@ar.Andersen.com