VAT on interest, another Argentine rarity

As we emerge from the election turmoil, which saw the exchange rate and interest rate stretched to their limits, impacting economic activity, the outlook is now much clearer.

As the ability to govern is supported at the polls, in the provinces and in Congress, the National Government It is now promoting structural reforms, as necessary as their treatment was protracted.

With the dollar far enough away from the upper limit of the band and the real interest rate falling to 10% annually, there is an opportunity and, in principle, a necessity to increase private sector borrowing.

Argentina It is among the bottom ten countries with the lowest private debt ratio in the world.

With household debt at 6.4% of GDP and debt at least 4% in 2023, Argentina is on par with economies such as Bangladesh and Suriname and just above others such as Pakistan.

This is about 14 times less than the average household debt of 65% OECDa bloc that Argentina wants to join.

Even corporate creditworthiness is extremely low: in 2025, private sector debt to the financial system would amount to just 5.8% of GDP.

Although there are several factors that explain our low debt levels, from cultural to economic, the tax burden on the cost of debt plays no small role.

In fact, companies add an additional 6.4 points of debt through the capital market, which represents cheaper financing in terms of interest rate, but is also largely exempt from VAT and other state taxes.

He VAT on interest It is another tax anomaly that characterizes us and that we consider normal. In Argentina Only the interest on mortgage loans for single-family homes is exempt from VAT and other local taxes.

At the international level, countries that tax interest on financial intermediation transactions are an exception. Inside OECD Only Türkiye, Mexico and Colombia tax financial interest with VAT or an equivalent tax.

In Argentina in addition to VATAdded to the credits are provincial taxes, stamp duties and, generally, gross income tax, with financial services being the second most taxed activity after gambling, with rates reaching 9% depending on the jurisdiction.

The impact is significant: a personal loan with an average financing cost of 106% APR increases to 157% if we include 21% VAT, 9% IIBB and 1.2% stamp. 49% higher annual effective costs due to tax burden.

Despite the tax penalty, VAT on interest on loans to households represents 10.5% of total VAT revenue, equivalent to 0.7% of GDP, a relative share that is expected to decrease with the normalization of active interest rates.

In the case of trade credits, this is generally achieved through a reduced rate of 10.5% when dealing with registered taxable persons, so that the share of VAT collection on interest is lower, accounting for only 2.3% of total VAT or 0.2% of GDP.

The European Union expressly points out that financial services are exempt from tax because it is difficult to precisely determine the tax base, i.e.

But more importantly: too EU Taxing interest through VAT makes credit more expensive, affects investment, consumption of durable goods and access to housing, and increases the distortive effect of the tax.

Other developed economies add a basic conceptual point: the VATor other similar taxes tax consumption, while a credit is an act of financing, while consumption arises when the credit is used for that purpose.

Financial intermediation is a fundamental driver of economic growth. It converts the savings of some into the consumption and investments of others.

Credit allows an increase in current consumption through an immediate increase in aggregate demand, but also an increase in supply through an increase in investment, favoring economic growth in both directions.

Since April 2024, much of the economic recovery has been driven heavily by credit growth, a recovery that slowed as pre-election interest rate volatility impacted financial intermediation activity.

Loans are very sensitive to changes in interest rates.

A significant reduction in financial costs would make it possible to accelerate economic growth, close budget gaps through higher levels of activity and avoid penalizing private consumption, especially those with fewer resources who rely on debt to stabilize consumption and/or finance projects.

With the new conformation of the congressHe Government is preparing to reform Argentina’s tax system. In this context, eliminate the VAT on interest It would be a decisive step towards a more rational tax system and, fundamentally, a stronger stimulus for economic growth.