15 June 2011

What To Do With "Unofficial Expenses"

One of the most difficult part about doing business in Argentina is dealing with people who aren't above board. Since taxes are so high here, there are plenty of companies and individuals who just refuse to play by the rules. If you are equipping an office, for example, most of the people who work on the project (carpenters, plumbers, painters, etc) will probably refuse to give you an invoice at the end of the job. When you send paperwork via a messenger service you will probably get a hand written receipt rather than an official invoice.

The best suggestion is to avoid doing business with people who refuse to invoice properly because it complicates everything. If you start working with people who don't play by the rules, you'll soon be forced into the same game. You can't legally pay these people from your company funds, so you'll have to pay them off the company books. And if you are paying them off the books, then you'll have to start getting income off the books to come up with the off the books funds to pay these people.

Pretty soon your business has two sets of books - the official kind and the unofficial kind. This will be a huge headache later when you need to do your annual taxes or even analyze easily how your business is performing. It means your accountant can no longer give you any kind of real help with your business (since he is only keeping the official books, and not the real books) he has no idea how the business is actually performing.

Resist the temptation to use off the books providers. You may save a little in the short term, but the long term costs are not worth it.


01 March 2010

Inflation and How It Affects Us

Today I received an email from a college student, looking to interview me about inflation and how it affects all of us living in Argentina. I thought this would be a good topic to post a blog entry on, so here we go.

How did Argentina put itself in this inflationary bind so quickly?

It was by no means quickly. There are a number of policies that have all contributed to the inflation we are now seeing. The inflation problem is not a new problem and is not something that just recently started. It has been a deliberate and increasing problem that the government has decided, for one reason or another, not to prioritize.

What is the best way for Argentina to bring the peso inflation down?

There are probably a hundred economists who would all give you a hundred answers on this one, but for me the principal problem is two-fold: the deliberate refusal to let the peso appreciate by the central bank (pushing up the price of imports) and the disincentives for investment in the local economy (causing demand to outpace supply).

What is your current occupation, and how has your job been affected by inflation?

I am a business owner and manager and my job has been affected by inflation in several ways. First, I have to constantly monitor the prices of the inputs in my products/services. If I see raw materials increasing, I have to increase prices to maintain my margin. However, if the competition is not raising prices, this option might not be available to me. That means I'm going to either have to accept lower margins or try to reformulate the product/service to use less raw materials if I want to maintain my margin.

How much has your standard of living improved since moving to Argentina?

For me personally, I would say it is about 30% better. I came from a smaller city in the US and housing prices are much higher here in Buenos Aires than where I am from. Coupled with the fact that you can't get a mortgage loan, it means the average family needs to invest much more in housing here. Groceries, eating out, and utilities are cheaper here in Buenos Aires. Anything that isn't made here is much more expensive: electronics, cars, etc. due to the crushing import taxes. Services and things that involve high labor costs, such as construction are cheaper here than in the US. So, it ends up being a mixed bag at best.

How does Argentina's heavy inflation affect its ability to work as a global power?

I don't think anyone would consider Argentina a global power. A regional power, maybe, but certainly not a global one. The biggest effect it would have on external actors would be through their commerce or trade with Argentina. However, just about every company selling goods outside Argentina are pricing their goods in dollars anyway, so the inflation of the peso doesn't really affect Argentina's customers.

How has the exchange rate from the dollar to the peso changed in Argentina since you've lived there?

When I arrived to Argentina the rate was about 2.8 pesos to the dollar. Now the rate is 3.9 to the dollar. So, we are talking about devaluation of 40% in the peso against the dollar.

How much is the average Argentinean affected by the currency?

The average Argentine is directly affected by inflation and devluation. If he or she is not able to negotiate a salary increase to match the rate of inflation, the purchasing power of their salary will shrink and squeeze their monthly budget. On a group level this leads to union conflicts with companies and the government during salary negotiations, protests, social unrest, etc.

02 December 2009

Buenos Aires Technology District: An Interesting Option for Tech Companies

Today I met with Carlos Pirovano, the Undersecretary of Investments for the City of Buenos Aires to learn about the Buenos Aires Technology District. The district is a 200 hectare zone that circles Parque Patricios.

Objective of the Technology District
The goal of the district is to revitalize the area surrounding Parque Patricios, which is an area that the undersecretary said has been targeted by Macri's government as a zone they want to focus on. Although they said they are not in competition with the technology park in the Province of Buenos Aires, I'm sure that the city doesn't want to lose technology jobs to the Province.

Tech companies that move into the district are given a 10 (multinationals) or 15 (small businesses) year exemption from payment of most city taxes, including municipal taxes (ABL), sales taxes (ingresos brutos), and stamp taxes (impuesto de sellos). In fact, the district's largest company, Iron Mountain, was able to take advantage of the benefits even though they didn't actually move into the district. The district was actually created around their preexisting offices.

Who Qualifies
Just about any technology company will qualify, but only technology companies. As long as 51% of the company's income is related to technology, the company will qualify for the benefits. This means -- software development firms, hardware companies, technology education companies, internet companies, and even retailers that sell online (as long as 51% of the company's income comes from a website and not a physical store location).

Every technology company qualifies, no matter its size. The district already has companies with as few as 4 employees and as many as 1400.

The law become active in June of 2009 and there are already 22 companies operating in the district, most notably TATA, Iron Mountain, and Clarin Global. There is a lot of interest, however. At today's meeting with the undersecretary there were 11 companies present, including Oracle. According to the Ministry of Economic Development, in addition to the 22 companies already in the district there are currently 35 companies looking for offices with the assistance of Ministry and they are receiving 150+ inquiries every week. So, it looks like 2010 will be an important year for the district.

My Impressions
I have to say that the project appears very intersting and I am going to consider it seriously. My software company's office rental contract expires soon and we need to either renew or move anyway, so it will be an interesting option for us to consider.

I was impressed with the representatives for the technology district and how they help the companies through the process of registering. Each company is assigned to a specific investor representative who has an email address and phone number and can help your company through the process. Anyone who knows anything about doing business in Buenos Aires knows that this is very rare. Usually interactions with a government entity mean going to some faraway office, standing in line for 2 hours and then being told that you're missing a paper and have to leave and come back later and repeat the process.

The undersecretary told me that after submitting the documentation, they will review it and give you a yes or no answer within 5 days as to whether your company will qualify. If you qualify, they put you on a "pre-approved" list. After you're on this list, you then just need to go and rent or buy a property within the district and submit your rental contract or title. After that, within 15-30 days you'll be given notification from the city tax office that you've been granted the exemption from city taxes.

Given that this is Argentina, I have to say that it is a very efficient process. The national software promotion law can take 9 months - 1 year to qualify for and it is much more difficult for the companies to prove that their activities fall within the scope of the law. How do you prove that your business qualifies for the city? Simple, you sign an affidavit stating your company's line of business. That's it. They review your statement and will decide whether your business fits within the law, but it all seemed very simple.

I would suggest anyone that is looking for more information to contact the City of Buenos Aires' Center for Investors to receive the details directly. They have representatives who speak English and are perfectly equipped to attend to international investors.