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New taxes threaten Argentine investment

For Azurix SA, an Argentine water utility owned by Enron Corp, the tax bill will be US$1 million higher this year.

The company is among dozens of utilities, banks and supermarkets in Argentina that are being forced to pay higher payroll taxes to help the government close a financing gap and avoid a debt default.

The tax increase, part of a package of revenue-raising and cost-cutting measures, is a gamble by the government that it can restore investor confidence by balancing its budget at the risk of prolonging a recession and deterring future investment.

"This is definitely a matter of one step forward, two steps back," said Christian Stracke, Latin America fixed income strategist at Commerzbank Securities in New York.

Economy Minister Domingo Cavallo, who first announced across- the-board spending cuts two weeks ago, has been forced to give in to unions, retirees and legislators to win backing for the plan.

The opposition Peronist party said last night it wants to reduce salary cuts for state workers, and will delay a Senate vote on the spending cuts until next week.

Argentina's floating rate bond due 2005 rose 1 to 70.94 bid and 71.38 offered, according to prices quoted by J.P. Morgan Securities Inc. That lowered the yield to 27.2 percent. The yield has doubled since June 5.

Argentina plans to increase payroll taxes, which help finance the state pension fund, of companies in the service industry, many now owned by foreign investors such as Telefonica SA and Repsol YPF SA. The government aims to lift the tax to 20 percent from 16 percent to help erase its budget deficit in the second half of the year.

Azurix said the government plan will boost its tax bill this year by 4 percent, or by US$1 million, and force it to scale back investment.

"That will definitely affect our ability to invest in projects like providing water to those areas that don't have it right now," said Gustavo Padace, a spokesman for Azurix, which was sold by the government in 1999 for US$439 million.

The government decided to raise company taxes as part of a compromise with legislators who wanted to limit the impact of across-the-board spending cuts on retirees and state workers. The government also has asked companies such as Repsol YPF SA to pre-pay corporate taxes due in the next three years.

"Companies are getting hit from all angles now," said Rafael Ber, an analyst at Argentine Research. "Ultimately it doesn't bode well for investment prospects if the government is hitting companies where they hurt." Telecom Argentina Stet-France Telecom SA, Argentina's second- biggest telephone company, will have to pay US$16.5 million more in taxes based on salaries and taxes during the past four months, said Eugenia Benitez, a company analyst at Allaria Ledesma & Cia in Buenos Aires.

Benitez said banks Grupo Financiero Galicia SA will pay US$7.6 million extra in taxes annually and BBVA Banco Frances SA faces US$10 million more in taxes. The companies weren't available for comment.

The decision to put a greater burden on companies through higher taxes counters Cavallo's pledge to help pull the economy out of recession and try to attract more investment, said Commerzbank's Stracke. Investment in Argentina sank to US$1.38 billion in the first quarter of the year from US$4.41 billion in the same period in 1999. "It's such a shame he's been forced into political deal-making," to get things through Congress, he said.

Edesur SA, a power distributor, is worried the government tax increase will curb profits.

"We've not worked out the cost yet, but we do know we can't pass it on to our customers," said Ignacio Uranga, finance director at Edesur, which employs 3,379 workers and had revenue of US$889 million last year. "It will definitely mean a reduction in profits for us."
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