Bidding process for canceling federal taxes with public bonds

Resolutions No 7/2003 and No 13/2003 issued by the Finances Secretary implemented the bidding process that allows taxpayers to accede to the monthly quota of Argentine Pesos 80,000,000 that Decree No 2243/2002 established to pay federal taxes with public bonds.

This mechanism will be in force until the enactment of a law regulating the use of public bonds to pay taxes according to budget possibilities of each of the future fiscal years.

Successful bidders will be allowed to apply public bonds to the payment of federal taxes -except social security taxes- that become due during the month following the auction.

The public bonds that can be applied to pay federal taxes under this bidding process are the following: (i) Tax Option Exercise Certificates (known as “CEOI”) related to interest coupons from the securities denominated “Letras Externas de la República Argentina en Dólares Estadounidenses Encuesta + 4,95% 2001-2004” and “Letras Externas de la República Argentina en Dólares Estadounidenses Badlar + 2,98% 2001-2004” issued under Decree No 424/2001 as amended, when the maturity date of those coupons had already occurred or occur until the enactment of the law mentioned above; and (ii) Fiscal Credit Certificates (known as “CCF”) related to securities issued under Decrees No. 1005 and No. 1226/2001.

The main characteristics of the implemented process are as follows:

-    The bidding process shall take place one the day before the last business day of every month.

-    Bidders shall submit their offers before a financial entity or stock exchange broker through the offer system of the Mercado Abierto Electrónico (Open Electronic Market) known as “MAESOP”. At first, a bond was required to guarantee the offers’ maintenance, but this requirement was later eliminated.

-    Bidders shall specify in their offers, among other data, the tax payment offered and the amount to be paid with Argentine Pesos. Offers will be listed taking into account the ratio between Argentine Pesos vis-a-vis public bonds resulting from each offer.

-    The monthly quota of Argentine Pesos 80,000,000 will be allocated in two auction categories: “large taxpayers” (tax payers who submit tax payment offers higher than Argentine Pesos 100,000) and “small taxpayers” (tax payers who submit tax payment offers smaller than Argentine Pesos 100,000). Large taxpayers will bid for a quota of Argentina Pesos 64,000,000 and small taxpayers will bid for a quota of Argentine Pesos 16,000,000 (respectively, 80 and 20% of the whole quota of Argentine Pesos 80,000,000).

-    The quota will be auctioned under the rules of the Dutch system, uniform or single-rate auction, following these steps: (i) descending-list of the offers taking into account the ratio between Argentine Pesos vis-a-vis public bonds resulting from each offer; (ii) determination of a single ratio between Argentine Pesos vis-a-vis public bonds, which will be equal to the lowest preliminary successful bid; (iii) accumulation of the amount payable with public bonds resulting from all the bids; (iv) auction closing at the single ratio mentioned before (not at the individually offered ratio) until the quota is exhausted. If necessary, the Finances Secretary can adjust the tax payment offers under a pro-rata basis.

-    After the bidding process, the Finances Secretary will inform the data related with the final successful bidders to Caja de Valores S.A. (Register Agent in the stock exchange market). The report provided by the Finances Secretary will indicate the maximum and minimum assigned percentages (the maximum percentage results from the single ratio determined under the bidding process and the minimum percentage results from the ratio calculated upon individual offers). Thus, the single ratio resulting from the bidding process benefits successful bidders that offered a higher ratio, allowing them to apply public bonds before reaching such single ratio.

The first bidding process took place in the beginning of February 2003. The large taxpayers’ auction resulted in a 36% single ratio, and the small taxpayers’ auction resulted in an 80% single ratio. Such ratios determined the maximum percentages that the successful bidders were allowed to pay with public bonds.

The regulations do not require bidders to be public bond holders when submitting their offers as a precedent condition. Therefore, bidders may take part in the bidding process and may purchase the public bonds later, in order to cover the assigned quota portion.

The delay in the use of the tax credit that implies the bidding process it is debatable on constitutional grounds. In order to keep better their right to challenge this process, many taxpayers have participated in the bidding but making reservation of their rights through a formal presentation. The Finances Secretary, trying to avoid future challenges, enacted Resolution No 21/2003 whereby it established that offers made with reservations would be considered void. This Resolution was published in the Official Gazette after the expiration of the term to submit offers for the month of February.