July 20, 2017 / 8:51 PM / 2 years ago

Argentina suspends capital gains tax for foreigners ahead of reforms

BUENOS AIRES (Reuters) - Argentina on Thursday suspended a tax on foreigners’ capital gains, just two days after it had been announced, after market participants complained the surprise move was inconsistent with President Mauricio Macri’s pro-market agenda.

In a notice in Argentina’s official gazette on Thursday, tax collection agency AFIP said the 13.5 percent tax on non-residents’ profits in Argentine equity markets - which it had announced on Tuesday - would be suspended for six months. That could allow Argentina to address the measure in broader reforms expected after legislative elections in October.

Attracting foreign investment and strengthening Argentina’s relatively small capital markets are key priorities of Macri’s administration, and the initial news on Tuesday that the tax would be implemented contributed to a selloff in Argentine assets and a drop in the peso currency against the U.S. dollar.

“It was a surprise because it’s not something one would expect from this government, which is very pro-market,” said Martin Saud, senior trader at Balanz Capital in Buenos Aires. “It goes against all the measures they’re taking to attract financing and investments.”

Treasury Minister Nicolas Dujovne told reporters on Wednesday that the measure would be suspended because it would be difficult to implement quickly. In its Thursday notice, AFIP said market participants had complained to the national securities regulator about the measure.

The tax was passed into law in 2013 under populist former President Cristina Fernandez, whose capital controls and restrictions on foreign firms repatriating earnings deterred investment.

AFIP never issued a regulation implementing the tax. After Macri swept to victory in late 2015 on a market-friendly platform, traders and tax lawyers assumed he would change the law rather than put the tax in place.

“Everyone thought that this was not going to be done this way,” said Eduardo Aguilera, an international tax lawyer with Marval, O’Farrell & Mairal in Buenos Aires. “When we realized it was taking so long to be implemented, we thought maybe they were thinking of correcting all the mistakes and implementing a new law.”

The pace of reforms has slowed since Macri allowed the peso to float, settled with holdout creditors and began cutting subsidies shortly after taking office.

But the administration is working on a broad reform to the country’s tax code, as well as a capital markets reform aimed at removing obstacles to investment. Both are expected to be considered after October’s congressional elections.

Additional reporting by Eliana Raszewski; Editing by Peter Cooney

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