Overview of the Monotributo System

Monotributo - An Excellent Tax System For Sole Proprietors
This post will cover the monotributo system, a special parallel tax system that frees the sole proprietor from having to comply with the complex federal tax system Argentina imposes on businesses. A business owner starting out as a sole proprietor in the general system needs to pay the following federal taxes: autónomos (a monthly social security tax for independent workers that covers health and retirement), VAT (on a monthly basis), and income tax.

Four Federal Taxes In One
The monotributo system allows self employed people to avoid the complications of paying these taxes each month and, instead, use an alternate system which requires the payment of a fixed monthly tax, which varies depending on three variables: gross annual receipts, the physical space occupied by the business, and annual electricity consumption. In almost all cases, the monotributo system will result in the sole proprietor paying less taxes.

Enrolling in Monotributo
To enroll in monotributo, the taxpayer will need a DNI, a CUIT, and will need to complete AFIP form 183/F. If you don't have a CUIT, you can apply for one at AFIP while you are there to enroll in monotributo. If you do not yet have your DNI, you will need to bring a certificate from the Dirección Nacional de Migraciones which has your file number and states your residency status. If you don't have a visa which gives you work authorization, you won't be able to enroll. So, the first step for expats looking to enroll is to make sure you have your visa in order.

Choosing a Category
The taxpayer will need to enroll in one of the 13 monotributo categories, depending on the type of business activity that he or she is engaging in and based on the three variables discussed above. Categories A-E are for service businesses, while cateogories F-M are for retail and manufacturing type businesses. The table is listed on this AFIP page. All values are listed in pesos.

Recategorizing
If you start a retail shop and, based on the size of your store, you fall into Category I, for example, you will need to recategorize if one of the variables listed in the table above is exceeded. For example, if your monthly sales exceed $4000 pesos, you will need to move up a category.

Recategorizing can be done three times per year between the first and the seventh of the month in January, May, and September. This can be done online through the AFIP web page.

Resigning from Monotributo
Make sure to resign from the monotributo system if you no lnoger operate your business. Stopping the monthly payments is not enough. If you don't resign, you will accumulate debt with AFIP and the interest rates and penalties for non-payment are rediculous. It is the equivilent of owing money to the mob.

If your business becomes successful and you start earning above and beyond what is permitted by the monotributo system, you will need to resign from the system and join the general system (VAT, income taxes, autónomos, etc).

Overview of the Monotributo System

Who Can Join Monotributo?

Today's question comes from a reader with a "visa precaria" and he wants to know if he can join the monotributo system.

Reader's Question

Whilst you have said that you can not be a monotributista without a DNI, i would like to know if you can get one whilst awaiting your permenant residency. I am married to an Argentine and awaiting my papers - i have my 'Residency de Precaria' - will that be enough??

Who Can Join Monotributo
A "visa precaria" is just that, a precarious visa. The government is giving you a little bit of time for you to regularize your situation and get a real visa. A visa precaria doesn't entitle you to a DNI, since it isn't a residency visa. What you need to do is get a residency visa, either temporary or permanent, and then you can get your DNI and enroll in monotributo.

I had a temporary visa my first three years in Argentina and then changed to a permanent visa. During those years as a temporary resident, however, I could get a CUIT, open a bank account, invest in companies, enroll in monotributo, etc. A temporary residency visa allows you to do all those things. A visa precaria will not, however, since it isn't a residency visa.

Who Can Join Monotributo?

Careful About Buying From Monotributistas Part II

I received a follow-up question from my post the other day about the new retention scheme for monotributistas.

Reader's Question
Do you know if this change will affect English teachers who submit facturas to institutes or their clients at the end of each month?

Effect on Service Providers
An English teacher, as a service provider who invoices their client at the end of the month, is going to be subject to the new retention regime. Now, if the client is a consumer (i.e. an individual student), there will be no retention, since consumers are not required to control the tax situation of monotributistas. As consumers in Argentina the only obligation we have is to demand that all service providers provide us with an invoice with all purchases.

Assuming you are working for an institute, however, the situation is somewhat different. The institute will now need to control your invoices to ensure that you are not exceeding the monotributo limits. So, if you are enrolled in category A (which corresponds to $12,000 pesos per year), once you've issued invoices for $12,000 pesos to that institute, you will begin to see retentions of income tax and VAT unless you pass to a higher category (B, for example).

If you are invoicing the same institute each month and you don't have any clients on your own, you're probably not supposed to be in monotributo anyway. You should be enrolled as an employee of the institute and then you can avoid all this mess.

Careful About Buying From Monotributistas Part II

Careful About Buying From Monotributistas

Beginning in September, companies will be required to carefully control their purchases from monotributistas. A new retention regime put in place by AFIP, Argentina's tax agency, turns every company into agents for the tax man. The new requirements involve inspecting whether the monotributista has exceeded the limits of the category he has enrolled in and, that being the case, the company is required to prepare a tax retention certificate using SICORE (after having done the paperwork to join the retention system). Uggghhh!

And what happens if the company doesn't do the tax retention? It'll be on the hook and owe penalties for the amount they should have retained.

Practical Effects
After this change goes through (scheduled for 1 September 2009), it'll be even more difficult to deal with monotributistas. When buying from monotributistas, companies already have roadblocks placed in their path that prevent them from earning any VAT credit on the purchase (all monotributistas are treated as final consumers and thus don't manage VAT credit) but the expense also cannot be deducted from the company's income taxes unless certain conditions are met.

Now with this new regime in place, companies will have to control their payments and retain taxes. I can tell you from experience with the SICORE program, that it is not designed for regular users. It is made with accountants in mind and it is not easy to use. That means any kind of purchase from monotributistas will require a phone call to the company's accounting department or external accountant to verify whether a SICORE retention certificate will need to be prepared.

What Will Happen in Reality
The net effect of all of this is that small companies will not want to accumulate any more payments to monotributistas. They'll just stop asking for invoices and make payments in cash (en negro as they say here). Companies that make all their payments officially will only deal with monotributistas if they are key providers and cannot be replaced.

In the case of providers who are not key to the company's operation, they'll switch for providers who can emit "A" invoices.

Consequences for Monotributistas
The main consequences of this new change is that it makes it a lot more difficult for monotributistas to provide services to companies. Monotributo still remains an interesting option for small businesses selling to the public at large, but selling to companies just got a lot more difficult.

Careful About Buying From Monotributistas

When a Sole Proprietor Should Pick the General Tax System

In previous posts I covered when a sole proprietor should pick the monotributo system. It is a system I highly recommend for people just starting out with a small business in Argentina. However, there are some cases when monotributo is either not allowed or recommended for sole proprietors.

Exceeding the Monotributo Limits
If you exceed or expect to exceed the monthly monotributo limits, you can't enroll in this system. The limits are currently $72,000 pesos annually for service activities and $144,000 pesos annually for other activities. On an annual basis, the business cannot consume more than 10,000 KW of electricity for service businesses and no more than 20,000 KW for other businesses. Additionally, the business cannot occupy more than 85 m2 for service businesses or more than 200 m2 for other businesses.

Large Capital Investments
If you're starting a business that is going to require a large capital investment with purchases of equipment and materials, it probably is not a good idea to start as a monotributista and then switch to the general system. The reason being is that if you start in the monotributo system, all the VAT that you pay to purchase the equipment and materials is going to be lost. Keep in mind also, that since monotributistas are not subject to income tax, you won't be able to take the depreciation on your capital equipment or be able to deduct your materials.

Businesses that require large upfront investments may not pay any VAT taxes for a year or two due to all the VAT credit they have from their initial investments. Additionally, income taxes could be minimal after depreciating the equipment, materiales, and other expenses.

Importing
Monotributistas cannot import, period. If you have a business that is going to import, you will have to be in the general system.

Expats without a DNI
Finally, if you don't have a DNI, you can't enroll in monotributo. You'll need to form a company and operate within the general system.

Practical Advice
I would like to finish this article just by saying that if you have a small business and provide some small product or service and want to operate legally in Argentina without much difficulty, monotributo is a good option. Anyone looking to run a serious business with growth prospects needs to look to the general system.

Frank, from Sugar & Spice, commented on a post I made the other day about the monotributo system and some disadvantages. To use a cookie analogy, if you're an expat looking to bake cookies in your house and sell them to a few restaurants or shops, monotributo is fine. If you're going to be opening big stores (like Frank has done in Palermo), investing in expensive commercial ovens, selling your products to Jumbo or other supermarkets, monotributo is not going to work.

When a Sole Proprietor Should Pick the General Tax System

The General System vs Monotributo

Today I received a comment from a reader about the advantages / disadvantages of starting a sole proprietorship under the monotributo system (which I have recommended) vs the general tax system.

Reader's Comment
The monotributo is fine for very small businesses or to generate some side income, but from my own experience you rapidly exceed the sales limit and are forced to register for IVA, pay for an accountant, autonomos, etc., which is then only slightly cheaper than operating as a corporation.

However transforming a business that started as a sole proprietorship into a corporation costs quite a lot of time and money, which easily takes away any initial tax advantage you may have gained by starting as monotributista.

If the growth projection of your business plan estimates that you will reach the monotributo limits within one or two years, you are better off forming a SRL or SA right from the start. And if the estimated growth is smaller you might want to reconsider starting the business in the first place...

Reasons to Pick Monotributo
Let me start by saying that everything stated above by the reader is correct. However, I still recommend monotributo for sole propritors starting out, especially ones from the United States. I'll go over a few of the reasons for this, despite the extremely low limits for monthly sales that monotributo provides.

• Most businesses fail within the first two years. If, for some reason, the business venture doesn't go as planned, it is easier and costs much less to unwind a monotributo registration with AFIP than get rid of a failed SRL or SA. I personally know of a case where it took a business associate of mine more than two years to successfully wind down a company she was involved with. In the mean time, she had to pay monthly self employment tax (autónomos) until the company could be disolved.
• Monotributo limits, while currently low, are likly to be increased in the near future. It is widely known that many adherants to the monotributo system surpass the yearly income limit by not declaring all their income. The government has a project designed to increase those limits (last I heard they were giong to be more than doubled). This obviously makes monotributo a more realistic option and gives the entreprenur more growing room.
• No need for a fiscal controller (controlador fiscal). Sole propritors who are selling to the public do not need to purchase and operate these machines.
• No tax retentions by banks, credit card companies, or other payers. Companies enrolled in the general system have money retained by banks and credit card companies (if they have a merchant account) for VAT and income tax. Sole propritors enrolled in monotributo are payed in full.
• No monthly reports to file with AFIP. Assuming there are no employees, a monotributista doesn't have to file anything monthly with AFIP. The only requirement is to save and make the invoices available for inspection when AFIP requires it.
• Pay your tax by credit card. Yes, you can even put your taxes on autopilot by having AFIP charge your credit card each month. Pay 11 months on time and then'll give you 1 month free.
• Manage it yourself, no accountant needed. Accountants will always advise against enrolling in monotributo, since it won't generate work for them that will justify a monthly fee. Monotributo is easy enough that you can enroll yourself and manage it yourself without third party help.
  

For an expat who has recently arrived here and has a million other things to worry about and learn, monotributo is a system that is simple to enroll in and forget about it. You pay your monthly payment and you have the security that you're complying with the tax laws here in Argentina.

My next post will explore issues relating to the general system and when a sole proprietor might want to start-up directly in the general system.

The General System vs Monotributo