On May 1, the Governor of the Province of Santa Fe will give a speech that will mark the beginning of the legislative year of the province. As usual, the head of the executive branch is expected to review his administration and outline the general guidelines for the current year.

However, beyond the various projects that can be implemented by the ruling party or those that can be contributed by the opposition, in economic terms there is a limit to the realization of all of them in a limited period. This limit is given by the resources that the province obtains and the capacity of the organization to manage them (state capacity being also a resource).

Regarding this point, the report presented in this edition shows the configuration of the economic structure of the province of Santa FeThat is, the setting in which economic activity takes place, and from which the different levels of government extract their resources through taxes to carry out state activity.

As usual, one of the biggest limitations for writing the report is the lack of systematic or updated statistical information.

To solve this issue, alternative sources of information have been used, which, although not perfectly compatible with each other, allow us to get around the problem, until common trends (or, at least, not incompatible ones) are detected.

Consensus for Santa Fe

The national government agreed with almost all the provinces (except San Luis) a fiscal consensus, which consists of guidelines for the distribution of resources and a commitment to reduce expenses and taxes. The Province of Santa Fe joined the Fiscal Pact in February of this year through Provincial Law 13.748, published on February 19 in the Provincial Official Gazette.

One of the important aspects of this negotiation is that the fiscal consensus enables the province to demand a proposal for payment of the nation's historic debt. This debt originated from the undue withdrawal of shared funds, but in November 2015 Santa Fe obtained a favorable ruling from the Supreme Court of Justice, even without enforcement.

In general terms, the national government is seeking to alleviate the problem of the fiscal deficit at both the national and provincial levels. Its strategy is based on the tax system, which consists of the following dilemma: reduce tax pressure (and, therefore, tax revenue) to increase business activity (and thus increase tax collection).

For example, for 2020 the fiscal consensus provides that several branches of activity will be exempt from provincial gross income.

This dilemma is based on another dilemma in terms of resources: in order to bear the cost of the proposed change in the fiscal regime, debt is taken on to support the imbalances that have arisen, not only in relation to the fiscal problem, but on the many open fronts.

Since borrowing has a cost in terms of interest payments, the extensive use of this instrument generates a new dilemma regarding the speed of implementation of the different strategies organized from the current perspective of the national government.

The agreement will take effect this year and must be complied with before December 31, 2019. It provides for the approval of several national laws and, perhaps the most complex objective, to agree on a new federal tax sharing law.

Meanwhile, the provinces are committed to modifying the gross income tax, property tax, stamp tax, payroll taxes, municipal taxes, and other specific taxes.

These changes are expected to affect the provincial government's income. In 2017, the Gross Income Tax (IIBB) -the main provincial tax collection- represented 25,28% of the total resources of the government of the province of Santa Fe, including those received through national revenue sharing, while projections for 2018 estimate a share of 26,64%.

On the other hand, of the resources obtained by the province from this tax, they reach 79,88% in 2017 and 78,42% in 2018, of the tax resources of the province.

According to the terms of the tax agreement, it is foreseen that -for example- for 2020, three branches of activity will be exempt from paying IIBB, all of which belong to the primary sector. Meanwhile, the two branches that foresee the highest rate (6%) are financial services and mobile telephony.

Now, on the basis of what economic structure is the change in tax regime carried out? The report attached to this note, which is available for download, explains the composition by productive sectors and the relative weight in the generation of added value for the economy of the Province of Santa Fe in general, and of the Greater Rosario Agglomeration (AGR) in particular.

The table below shows the modifications of the basic aliquot of the tax for the current fiscal period and in relation to 2017 and 2016. As can be seen, for 2018 a basic rate of 4,5% is contemplated regardless of the level of turnover of the companies, and which is equal to the level of the maximum rate of previous years. That is, in terms of the basic rate and in comparison with 2017, the province increased the imposition of the IIB.

In contrast, these amounts can only be put into operation once the so-called Santa Fe SME Law, through which the province adheres –with modifications- to the fiscal stability regime of national law 27.264; with which companies categorized as SMEs are recipients of a set of tax benefits, which include a wide range of taxes, including the IIB. Thus, what increases in general terms is counterbalanced by tax benefits received by SMEs in the province.

What happens with those branches of activity for which special or specific regimes are available? Provincial Law 13750 does not show major differences in this regard. Some general industrial activities, as well as slaughter and meat sales, go from paying a rate of 0,5% to a higher rate of 2%.

The same applies to other industrial activities such as the processing of cereals and oilseeds or those under the fasón modality, which are taxed at a rate of 1,5% instead of 2%. Furthermore, the decree shows an update of the taxable amounts (but not the rates) of the billing sections for activities related to gambling and leisure.

Those who will not benefit from the 2018 regulations are: small taxpayers. The table below shows that although an average 25% year-on-year update is applied to monthly payments for all categories (basically, an update in line with the inflation recorded in 2017), the impossible billing sections have not been modified.

In this sense, any taxpayer who is in the intermediate level of their category (with the exception of I) and adjusts their billing to a minimum level of 25%, should be forced to recategorize to a higher level in the next fiscal year.

Finally, the directly identifiable beneficiaries of the new configuration of the tax regime are the so-called SMEs.

Although the set of measures is broader than the one dealt with in this article, with regard to the IIB (and also the Stamp Tax), adherence to the fiscal stability regime provided for in article 16 of National Law 27264, has as a counterpart, the commitment by the provincial government not to increase the amounts of the rate until December 31, 2019.

In order to obtain a more complete overview of the configuration of the economic structure of the province of Santa Fe, and on which the imposition of the tax regime affects, we invite you to read the report that we make available to you.