Raises May Trigger Inflation. Published on Cronista.com
Pay raises under collective bargaining agreements are based on accrued or accumulated inflation, present and forecast rates, and other additional increases in new items, all of which is becoming a triggering effect that accelerates the inflation surge.
The legal opinion by the National Board of Taxes [Dirección Nacional de Impuestos] also deals with some items under collective bargaining agreements that are not subject to Income Tax, and therefore exempt from social security taxes. Collective bargaining agreements also contain salary review clauses for the short term.
In its early days it was called wage indexation, a term coined in Brazil to refer to automatic increase mechanisms based on inflation. It is now included in the negotiations before the Department of Labor, which may increase hyperinflation risks. From the start, indexation meant linking wages to an index representing the cost of living, so that they are automatically adjusted up as that rises. The aim was to protect the purchasing power and exchange rate of the Argentine peso.
Raises under collective bargaining agreements went from annual negotiations, when inflation did not exceed 50% per year, to the present situation where there is a wide range of options and alternatives based on the financial conditions in which each industry or sector does business.
In other words, the 2022 collective bargaining agreements increased salaries annually, with quarterly raises and a salary revision at the end of 12 months.
In 2023 there is no time to wait. Advanced payments or raises are based on INDEC CPI, forecasting possible increases in the next quarter. While the word «indexation» is not mentioned, the goal is to “keep up with» inflation, and not lag behind.
Somehow adjustments arise from the need to increase wages approximately every month based on the inflation rate, and also the pressure exercised by the grassroots to union leaders through dissident works councils, and the general dissatisfaction with the end of the cycle and utter failure of the ruling government with approaching elections where they do not have any chances of success.
A number of old instruments and aspirations are making a comeback as well. Compensation is not determined by productivity or achieved targets, like in core countries.
The National Board of Taxes has addressed the issue of Income Tax for certain items under collective bargaining agreements. In a non-binding legal opinion, it states that «… as long as the amounts paid as productivity bonuses, or similar whatever its name, are determined based on objective goals, as provided by law, and not on labor power, and cash indemnity allowances are calculated based on the parameters mentioned by the aforementioned legislation, only under these terms it can be interpreted that the exemption under the second paragraph of subparagraph x) of Section 26 is applicable».
Overtime may be exempt from Income Tax when it is worked on non-working public holidays or weekends, extra hours in rotating shifts, as well as per diem or traveling expenses or similar, under statutory conditions and up to the caps set forth in the law, as it was already established explicitly under certain collective bargaining agreements.
All these mechanisms may be questionable, sparking different opinions, and sometimes posing potential risk and exposure. However, if the enforcement authority ratifies its guideline in the aforementioned terms and within the scope described here, it is reasonable to say that the Tax Authority (AFIP) or its collecting agencies will not have a claim.
It is worth mentioning that the approval of collective bargaining agreements by the Department of Labor has “erga omnes” effects (i.e. enforceable against all) but does not cure any previous defects in the agreements. However, the enforcement authority may change its opinion in time, leading to individual or multi-party judicial claims.
Pay raises under collective bargaining agreements tend to accelerate because of needs, desires and expectations due to inflation. The all-encompassing evil is inflation, and its impact causes a rapid, excessive, and out-of-control price and cost increase, which together with other factors is putting Argentina on the brink of hyperinflation today.