{"id":10163,"date":"2023-06-14T08:35:48","date_gmt":"2023-06-14T11:35:48","guid":{"rendered":"http:\/\/fund.ar\/publicacion\/paper-2-reformulation-of-tierra-del-fuegos-industrial-sub-regime-proposal-and-simulation-of-expected-impacts\/"},"modified":"2024-04-23T11:36:17","modified_gmt":"2024-04-23T14:36:17","slug":"paper-2-reformulation-of-tierra-del-fuegos-industrial-sub-regime-proposal-and-simulation-of-expected-impacts","status":"publish","type":"publicacion","link":"https:\/\/fund.ar\/en\/publicacion\/paper-2-reformulation-of-tierra-del-fuegos-industrial-sub-regime-proposal-and-simulation-of-expected-impacts\/","title":{"rendered":"Paper 2 – Reformulation of Tierra del Fuego’s industrial sub-regime: proposal and simulation of expected impacts"},"content":{"rendered":"\t\t
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It has become a matter of public debate whether to maintain or revise Tierra del Fuego\u2019s Regime. Other than general references to a need for change and even calls for immediate termination, there are no concrete proposals or guidelines to facilitate the discussion and consensus necessary for any modifications. To address this need, this second paper in the series Towards a possible productive transformation in Tierra del Fuego puts forward a Proposal for the Reformulation of the industrial sub-regime and analyzes its impact on key economic and social factors, including production, employment, prices and fiscal costs.<\/strong><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Reformulating the Tierra del Fuego Regime<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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This paper proposes a reformulation of the Tierra del Fuego Regime that seeks to gradually reduce \u2014over eleven years\u2014 most of the tax sacrifice associated with the industrial sub-regime and overhaul tax incentives to foster innovation and enhance value creation. The proposal is supplemented by<\/span> Paper 3 in this series<\/span><\/a>, which addresses the construction of a more competitive productive base, less dependent on state support, with robust social protection mechanisms to encompass this transformation.<\/span><\/p>

Any proposed amendment to the industrial sub-regime would naturally raise concerns and reluctance due to the potential impact on employment, individuals\u2019s income and provincial government revenues, possibly amplified by an overall drop in economic activity. Therefore, this proposal includes a quantification of the <\/span>potential impact on a set of key variables through a simulation model. This quantification is the basis for a comprehensive transformation approach: the impact on employment and fiscal savings are in turn used to calculate investments in productive stimulus \u2014for new sectors of the economy\u2014 and social stimulus \u2014to support job retraining and assistance for affected workers\u2014 as presented in<\/span> Paper 3<\/span><\/a>.<\/span><\/p>

However, the availability of evidence does not make decisions self-evident: every decision implies a challenge to articulate conflicting interests. For this reason, we have created a flexible simulation model that allows the analysis of alternative scenarios other than those considered here, by modifying the input parameters or the sequence and the way in which each policy instrument is instrumented. The purpose of this series is to provide these key inputs to shed light on different public policy dilemmas and to enable the design of comprehensive solutions.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Proposal for the Reformulation of the industrial sub-regime<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Based on the diagnosis made in<\/span> Paper 1 of this series<\/span><\/a>, this paper presents a Reformulation Proposal that entails a profound revision of the tax incentive scheme established by the industrial sub-regime. Its ultimate purpose is to shift from rewarding companies for their sales to fostering local innovation and value creation initiatives, while seeking significant tax savings by eliminating benefits linked to foreign value added.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Generally speaking, the proposed amendment calls for the immediate removal of all non-tariff barriers and the elimination of the internal tax gap between domestic and imported electronics, establishing a common 6.55% tax rate (except for mobile phones, for which it will be gradually reduced until it is completely eliminated.) Then, from Year 2 to Year 6, imported inputs would gradually start paying VAT, in addition to import duties between Year 7 and Year 11. As a result, value added in Argentina would continue to be exempt from VAT while also benefiting from the effective protection provided by tariff escalation.<\/span><\/p>

The proposal lays down a gradual implementation over a period of 11 years, from 2024 to 2035. This phased approach seeks to mitigate the impact and essentially allows this alignment to be as synchronized as possible with the development of new production activities, while allowing companies to adapt to the new incentive scheme and offer a social and labor transformation plan for affected workers, as described in <\/span>Paper 3 of this series<\/span><\/a>.<\/span><\/p>

As for the legal device to implement this proposal, a law of the National Conference would be the preferred device, since it would better secure the funding required to carry out this productive transformation within the established time frame.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Simulating the impact of the Reformulation<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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We set to evaluate this Reformulation Proposal by forecasting price fluctuations \u2014both domestic and foreign\u2014 in response to tax and custom reforms, as well as the impact of such fluctuations on the competitiveness of the companies subject to the sub-regime compared to foreign producers, so as to assess the potential impact on production, employment and tax revenues.<\/span><\/p>\n

We created a simulation model of a possible scenario upon completion of the 11-year transformation. The model focuses on the three main products of the subregime: mobile phones, televisions and air conditioners; then, it extrapolates the results to the rest of the products. It focuses on these three products because they represent 77% of sales to the continent and 82% of the fiscal costs of the sub-regime. It runs independent simulations for each of the three products, based on the following sequence of expected impacts.<\/span><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Sequence of how the model accounts for the impact of new tax costs and tariff equivalents on the economy<\/span><\/p>\n

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  1. The model calculates the impact of the Proposed Reformulation on product prices (domestic and imported<\/span>)<\/span> and determines a relative price for each domestic product or import. <\/span><\/li>\n
  2. The relative price will determine production location decisions. The model assumes that if the domestic price remains the same or below the imported price, the decision to produce in Tierra del Fuego will remain unchanged. Conversely, if the domestic price exceeds the price of the alpha percentage threshold \u2014in this model alpha would be around 10%-14%, depending on the type of product\u2014 total relocation abroad will be promoted (for example to China, Vietnam or India), with increasing offshoring in the intermediate range between 0 and alpha.<\/span><\/li>\n
  3. New demand levels for domestic and imported goods are calculated based on the new prices and production location <\/span>decisions<\/span>. <\/span><\/li>\n
  4. Changes in demand will lead to changes in local production and imports; which will in turn impact local employment and the fiscal savings to the national government. <\/span><\/li>\n<\/ol>\n

    <\/p>\n

    As a final step, employment and tax savings results obtained for the three main products are extrapolated to the remaining products of the sub-regime.<\/span><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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    (Simulated) Impacts of the Reformulation Proposal<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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    The purpose of the simulation model is to predict and assess the results and impacts expected from the implementation of this proposal. Based on the model results, at the end of the implementation period (2035):<\/span><\/p>\n