BUENOS AIRES -- Direct investment funds created in 1993 by the Argentine government to promote economic development face almost assured extinction because of a decree imposing a 33% income tax on all profits.
Leaders of the industry have banded together to force retraction of the decree, issued by the government of Carlos Menem in late February. Investors in the funds help finance such things as the planting of crops or the purchase of building materials; returns are based on the sale of the finished products.
Direct investment funds -- which can be for periods as short as one year or as long as 20 years -- have proven to be attractive diversifiers to Argentine public pension plan funds, which tend to be heavily weighted in public bonds and local stocks.
While the first sponsors of the funds were smaller firms with farming backgrounds, large banks such as Banco Santander have recently entered the fray. Santander has revealed plans for agricultural funds, as well as real-estate funds in the near future.
The decree sought to define more precisely a gray area in the law that allowed these funds to qualify for the same tax treatment as mutual funds investing in stocks, bonds and other traditional securities.
Since its creation in 1992, the local mutual fund law has exempted traditional mutual fund profits from income taxes. When the law creating direct-investment funds was introduced a year later, it was first assumed that these products should have the same tax treatment. But since the launch of the first of these funds in the past two years, they have been looked at as potential revenue targets of the local tax bureau.
Carlos Silvani, director, Direccion General Impositiva, said the exemption was unacceptable because these funds have "productive activities" that compete directly with other entities -- such as planters or building developers -- whose profits are subject to the 33% income-tax rate. Exempting the funds from the burdens of the tax was creating an unfair competitive situation, he said.
To fight the decree, an ad-hoc committee consisting of members of the eight fund managers and the accounting and legal entities working with the budding sector are planning an appeal to the Justice Department, which is notorious for its rubber-stamping of most initiatives launched by the executive branch.
The direct-investment fund industry, which has attracted more than $100 million primarily from pension funds and institutional investors, argues in favor of an exemption because funds must pass through a burdensome regulatory process before they can be launched.
For example, each fund needs to obtain a credit rating; hire an administrator, custodian and brokers; undergo periodic audits; and mail reports to investors -- all adding to costs that everyday corporations don't have to bear.
With the prospect of a third of potential fund profits being lost to taxes, some are beginning to worry about the viability of such funds, which were created to spur economic activity.
But the government's need to avoid cries of favoritism will make it difficult to heed the claims of fund managers.
The decree is one of a slew of revenue-raising measures the government has introduced in the past two months in an attempt to close a widening budget gap.
For example, the Menem government has raised the ire of a broad swath of the public by calling for the assessment of a 21% value-added tax on cable television and on monthly HMO-type health plans.
The decree will affect results of the current fiscal year, which for most agricultural funds ends in May or June. When the tallies are made on this year's crops, the government will be awaiting its check for a third of the profits.
The industry is resentful, noting that one of the principal benefits of the funds was their income-tax exemption.
"The government wants to change the rules retroactively and assess a tax on investors who were exempt at the time they acquired their shares," said Horacio Crespo, accountant with Harteneck, Lopez & Cia., the local affiliate of Coopers & Lybrand.
Others said the decree contributed to "judicial insecurity," since it was hurriedly issued without taking time to hear the industry's viewpoint or pass through the Congress.
