EXCHANGE RATE FLUCTUATIONS AND THEIR IMPACT ON VAT AND FISCAL CREDIT IN ARGENTINA

A White Paper prepared by IT Convergence

Author

Florencia Truchi
Editor Keith Thomas Copyright

IT Convergence 2006

EXCHANGE RATE FLUCTUATIONS AND THEIR IMPACT ON VAT AND FISCAL CREDIT IN ARGENTINA

TABLE OF CONTENTS
Properly Documenting Exchange Rate Fluctuations ................................................................................................................. 3

Business Requirement .............................................................................................................................................................. 4

Oracle Payables Standard Features Capabilities and Limitations.......................................................................................... 5

Special Requirement Special Solution ................................................................................................................................... 5 1. Default the Invoice Exchange Rate in the Payment Creation ........................................................................................ 5 2. Identify Exchange Rate Fluctuation ............................................................................................................................... 6

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EXCHANGE RATE FLUCTUATIONS AND THEIR IMPACT ON VAT AND FISCAL CREDIT IN ARGENTINA

Properly Documenting Exchange Rate Fluctuations

The devaluation of the Argentine peso in 2002 forced local companies to develop new business processes to document the impact that exchange rate fluctuations have on value added tax payments, and fiscal credit. Between 1991 and 2002 the Argentine peso was pegged to the US dollar at a one-to-one rate. This one-to-one currency peg made it relatively simple for local companies to document the process of acquiring materials or services that were denominated in foreign currencies. Because of the devaluation, the exchange rate that is used to pay invoices for products or services denominated in foreign currencies has become an additional variable in the purchase process that has to be included in an agreement with a vendor. It is very important that businesses properly document this variable, because exchange rate fluctuations affect a companys ability to claim fiscal credit. While recording for exchange rate fluctuations might seem a straightforward task, businesses need to keep in mind that, according to Argentinas tax laws, a company must have legally issued invoices for fiscal credit purposes. Fiscal credit refers to the tax credit that a company can take for the purchase of goods and services to develop its commercial activities. Goods and services in Argentina may be taxed at 10.5%, 21% or 27% depending on the industry. The only way a company may use this fiscal credit is if it is backed by a legal document (invoices, credit notes, and debit notes.) In this context, if a very volatile foreign exchange scenario causes the exchange rate to undergo a significant positive fluctuation between the moment the transaction is recorded and the moment the payment is made, a company may experience a significant fiscal loss. This is so because, even if the amount of the payment a company is liable for doubles because of the fluctuation in the exchange rate, the company will only be able to claim the tax credit corresponding to the amount recorded in the original transaction document. The sample invoices below help illustrate the issue that businesses must resolve.

Invoice Information Vendor: Louis Vuitton Invoice Currency: USD Invoice Date: 1- AUG-2006 Invoice Registration Exchange Rate: 3.0

Concept Item Cost VAT Total Liability

Original Amounts (USD) Debit Credit 10000 2100 12100

Converted Amounts (ARS) Debit Credit 30000 6300 36300

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EXCHANGE RATE FLUCTUATIONS AND THEIR IMPACT ON VAT AND FISCAL CREDIT IN ARGENTINA

Payment Information Vendor: Louis Vuitton Payment Currency: USD Payment Date: 31- AUG-2006 Payment Registration Exchange Rate: 3.5

Concept Liability Exchange Rate Difference Total Payment Due

Original Amounts (USD) Debit Credit 12100 12100

Converted Amounts (ARS) Debit Credit 36300 6050 42350

In the scenario depicted above, remitting the invoice at the payment exchange rate generates an Exchange Rate Variance of ARS 6050. The vendor is supposed to invoice this difference, generating a new document (Debit Memo). According to Argentinas tax laws, the Debit Memo must specify not only the exchange rate fluctuation but also how this fluctuation affects the VAT. If a Debit Memo is issued, then the company can claim the additional amounts VAT paid as a tax credit. Although this may be an accepted procedure, some companies decide to avoid the risk of losing the VAT Credit by preserving the exchange rate listed on the purchase order and invoice registration to pay off their invoices with their suppliers. In that scenario, if the supplier wants to collect the difference between the invoice registration and the payment exchange rate, he has to present the additional document that will include the corresponding tax credit.

Business Requirement
In order to maximize the performance of accounts payable departments, companies operating in Argentina that conduct a significant number of transactions using foreign currency usually implement the following procedures: Pay using the same exchange rate that is listed on the original invoice to make payment. Keep the record of the difference between the exchange rate used for the transaction (the exchange rate used on the transaction document) and the exchange rate valid at the moment of payment. This allows the company to control the processing of the new document from the supplier that corresponds to the difference between both exchange rates. While both of these procedures are straightforward, they become more difficult to implement effectively as a business begins scaling up its operations. Businesses that are in this situation can configure Oracle Financials Accounts Payable to allow companies to effectively record and document exchange rate fluctuations.

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EXCHANGE RATE FLUCTUATIONS AND THEIR IMPACT ON VAT AND FISCAL CREDIT IN ARGENTINA

Oracle Payables Standard Features Capabilities and Limitations

Oracle Financials Accounts Payable allows a company to use different exchange rates for invoices and payments. In the event that Payables identifies an exchange rate difference between the invoice and payment exchange rate, the system will automatically calculate the difference and register it in an Exchange Rate Gain and Loss Account defined in the Payables Options. According to an organizations specific business requirement, if a company wants to use the invoice exchange rate to make a payment, it must manually enter the exchange rate. This process introduces additional complexity into the payment flow, especially in those cases where a company wants to cancel several invoices that have been registered at different exchange rates. On the other hand, if the exchange rate used to make a payment is the same used on the original invoice, Accounts Payable will not be able to identify the exchange rate fluctuation, and it will not be possible to register any exchange rate difference in the Exchange Rate Gain and Loss Account.

Special Requirement Special Solution

Fortunately, high performance solutions can be developed to compensate for Oracle Financials Accounts Payable limitations. Extensive experience configuring and supporting Oracle applications in Argentina has led to the development of two distinct configurations that extend Accounts Payables functionality to properly record the impact of exchange rate fluctuations on an organizations VAT tax payments. While these solutions are widely applicable to most Argentine business contexts, the specific configuration details of these solutions will obviously depend on a companys business requirements. Depending on an organizations business requirements, an optimal solution could include either the implementation of one of the configurations, or a combination of a strong business process enforced by either of the proposed developments.

1. DEFAULT THE INVOICE EXCHANGE RATE IN THE PAYMENT CREATION As previously mentioned, establishing an effective process flow hinges on the ability to assign the correct exchange rate when payment is issued. Although Accounts Payable users may guarantee that the exchange rate is accurate by manually assigning it to a payment, using an automated feature to define the payment exchange rate, based on the exchange rate used when the invoice was issued, it is recommended to avoid error. To automate this function, the exchange rate may be included as an additional invoice selection criterion in the Payment Batch standard functionality. This is done by including the additional invoice selection criteria as a Descriptive Flexfield.

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EXCHANGE RATE FLUCTUATIONS AND THEIR IMPACT ON VAT AND FISCAL CREDIT IN ARGENTINA

By introducing this new information into the payment selection criteria, Accounts Payable will select invoices and build the payments, combining this new information with preexisting standard criteria (due date, payment priority, payment group, etc.) This new feature will ensure that the payment creation flow is free of invoice selection errors, and will allow the company to take advantage of the strongest features of the Payments Workbench.

2. IDENTIFY EXCHANGE RATE FLUCTUATION The second critical business requirement is to identify the exchange rate fluctuation between the exchange rate that was used to issue the payment and the exchange rate that was valid on the payment date. This information is required in order to give the accounts payable department a reliable tool to keep track of the documents that the suppliers are required to present and to ensure that taxes are correctly calculated in the new document. A customized process must be developed to fulfill this requirement. The process will identify the exchange rate difference between the exchange rate used to issue the payment (the invoice exchange rate), and the exchange rate valid at the payment date. The exchange rate that was valid at the payment date will be defined as the Corporate Exchange Rate. This process will provide the payment information, the information related to the invoices included in the payment, and the tax calculation corresponding to the exchange rate fluctuation identified. Although this process will not create the new debit memo, the process will provide the accounts payable department with reliable information to administer this business flow. These configurations have been developed and implemented by IT Convergence for corporations that have operations in Argentina. Readers who need more information about configuring Oracle to record exchange rate fluctuations, VAT tax payments, or other issues related to doing business in Argentina may contact IT Convergence at 1-415-675-7935. Additional information about implementing Oracle in Latin America is also available in the IT Convergence white paper Rolling Out Oracle in Latin America: How to Meet the Challenge.

LEGAL DISCLAIMER:

The information contained herein should be deemed reliable but not guaranteed. The author has made every attempt to provide current and accurate information. If you have any comments or suggestions, please contact us: info@itconvergence.com.

IT Convergence White Paper: Exchange rate fluctuations and their impact on vat and fiscal credit in Argentina

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