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Emerging Markets Show Positive Feedback Loop from Tax Amnesty

Emerging market countries have suffered chronic outflows of wealth due to tax evasion, perhaps more than countries in the developed world. That might be why many EM governments have set their sights on the enormous amount of wealth currently outside their borders.

Jan 27, 2017 // 2:41PM

Tax amnesty laws are becoming a popular mechanism used by EM countries to attract capital back to their shores.  Indonesia, Argentina, Brazil, Chile and now Mexico are a few examples of countries that have implemented tax amnesty programs, all with different conditions and of course with various results.

Argentina’s government declared that they had recovered US$97.84bn in assets by the completion of the second phase of its tax amnesty programme, which concluded on 31 December 2016. The newly reported cash is subject to a 10% tax, much lower than the country’s standard income-tax rate.

The new law includes an extension that allows Argentines with foreign assets to declare them until the end of March 2017, but they will be subject to a 15% tax between January and March. If they choose not to repatriate their funds, they could face prosecutions by the authorities.  Wealthy Argentines have been reportedly holding somewhere between US$200bn and US$400bn in assets – cash, properties, and other assets with varying levels of liquidity – abroad.

Brazil's government collected US$15.83bn in taxes and fines under the amnesty programme for undeclared assets abroad, which ended on 31 October 2016.  The southern country, which is currently rocked by one of the worst recessions in decades – was counting on that money to balance its 2016 budget and avoid a record fiscal gap.

On January 2017, Mexico launched an asset “repatriation” program with the intention of facilitating the restitution of funds kept abroad by Mexicans.

For a six-month period, Mexican resident taxpayers and permanent residents who obtained income that was kept abroad until December 31, 2016 may elect to pay a flat 8% tax rate on any repatriated funds, way below the 35% average income tax.

The phenomenon isn’t just popular in the Americas. In Indonesia, more than 612,000 taxpayers joined the central government's tax amnesty program and declared approximated US$321bn in previously unreported wealth as of 31 December 2016, surpassing the government’s target set in July that same year.  This has been so far, the most successful tax amnesty program in terms of the money recovered.

Not everyone is as optimistic about these kinds of schemes. When the Indonesian government initially launched the tax scheme program, it was met with several protests and particularly strong resistance from unions, which argued that the programme “unfairly pardoned” wealthy taxpayers.

Other analysts believe tax amnesty programmes hurt taxpayers, arguing that they might discourage other citizens from continuing to comply with their tax obligations.

 Jan Dehn, Head of Research for Ashmore Asset Management, believes the success of these tax amnesty programmes is a reflection of, and contributor towards, their material improvements over the past year, especially in Argentina and Brazil.

“In many ways, the big stash of wealth residing outside many EM countries is a legacy of much worse times in the distant past, where no one trusted local banking institutions and where there were no decent investment opportunities and no credible financial assets to invest in within EM countries”.

“EM economies are now part of the main benchmark indices and their markets are deep and broad. It is, therefore, time to get the rump of high net worth assets to go home.”

He also says the tax amnesties will have a meaningful long term impact on these countries’ economies because of their expanded liquidity and tax bases.

“These measures will reinforce a gradual change in the international market towards more positive sentiment around EM, especially Latin America. However, there should be a disproportionately bigger positive impact on local markets, which will become more liquid as a result of wealth being pushed into local assets.”

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