Exchange Rate Fluctuations in Argentina

7/31/2019 Exchange Rate Fluctuations in Argentina

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EXCHANGE RATE FLUCTUATIONS AND THEIR IMPACT

ON VAT AND FISCAL CREDIT IN ARGENTINA

A White Paper prepared by IT Convergence

AuthorFlorencia Truchi

EditorKeith Thomas

Copyright

IT Convergence 2006


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

IT Convergence White Paper 2 / 6

TABLE OF CONTENTS

Properly Documenting Exchange Rate Fluctuations.................................................................................................................3Business 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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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

Original Amounts (USD) Converted Amounts (ARS)Concept

Debit Credit Debit Credit

Item Cost 10000 30000

VAT 2100 6300

Total Liability 12100 36300


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Payment Information

Vendor: Louis Vuitton

Payment Currency: USD

Payment Date: 31- AUG-2006

Payment Registration Exchange Rate: 3.5

Original Amounts (USD) Converted Amounts (ARS)Concept

Debit Credit Debit Credit

Liability 12100 36300

Exchange Rate Difference 6050Total Payment Due 12100 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 usedon the transaction document) and the exchange rate valid at the moment of payment. This allows the companyto 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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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 ratedifference 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 ofthese 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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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 thedocuments 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 operationsin 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: [email protected].

IT Convergence White Paper:

Exchange rate fluctuations and their

impact on vat and fiscal credit in

Argentina

IT Convergence World

Headquarters:

450 Sansome Street, 13th Floor,

San Francisco, CA 94111, USA

Worldwide Inquiries:

Tel: 1 (415) 675-7935

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www.itconvergence.com

Copyright 2006

IT Convergence.

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