Corporate Tax | Management

The Argentine tax authority is using its power to build government coffers.

Approximately 500 American companies operate in Argentina—but on November 3 that number abruptly decreased by one as the country’s tax authority, the Administración Federal de Ingresos Públicos (AFIP) revoked the company’s registration, accusing P&G of tax and accounting fraud.

The P&G episode marks the latest in AFIP’s attempts to increase government revenues. A report published in the Buenos Aires Herald a week before the P&G action said that tax revenues for October 2014 totaled 104.6 billion pesos ($12.3 billion), an increase of 40.8% over the same month in the previous year. AFIP has a target of a trillion pesos by the end of 2014. It has also banned 30 firms from sending currency out of the country, in effect freezing $145 million, according to another report in the Herald. Also in November, on one day alone, it raided 71 financial institutions suspected of money laundering and aiding clients in tax evasion, according to the online news agency MercoPress.

The incident telegraphs the government’s intention to increase revenues and minimize the damage caused by its debt default in July, suggests Richard Gula, president of Boston-based Argyle Investments and one who has observed Argentina’s financial situation as an analyst and fund manager since 1988. “This is the government trying to show that they’re not just trying to wriggle out of their debt crisis: They are doing other things to get revenue.”

Gula estimates that the government has more to lose than P&G in a protracted dispute. If P&G closes its operation permanently, it would add to Argentina’s unemployment. And to the extent that the problem discourages mergers and acquisitions and other companies venturing into the country, it could reduce the inward flow of much-needed cash. In contrast, P&G derives only about 1% of total revenues from Argentina. “We can assume that there will be a workout unless there is a wholesale recession,” he says.

Neither P&G nor AFIP responded to requests for comment.