Argentine Supreme Court Rules that Differential Tax Treatment in Turnover Tax is Unconstitutional

1. Background

Harriet & Donnelly S.A. and Bayer S.A. filed lawsuits against the Provinces of Chaco and Santa Fe, claiming that their regulations established a more burdensome treatment in Turnover Tax according to their location outside the territory of these provinces.  Both companies based their claims on the fact that local regulations arbitrarily establishing distinctions between local taxpayers and foreign taxpayers were invalid.

Bayer S.A. argued that local regulations infringed sections 9, 10, 11, 12 and 75 sub section 13 of the Argentine  Constitution.  Harriet & Donnelly S.A. broadened its claim, challenging local regulations based on their infringement of sections 4, 9, 10, 11, 12, 16, 17, 28, 31, 75 sub-paragraph 1, 10 and 13, and 126 of the Argentine Constitution.  The local regulations were challenged under the argument that they established a distinction based on the location of the taxpayers that may be deemed as an internal customs. This, in turn, affected interjurisdictional trade (comercio interjurisdiccional) and affected the distribution of competences set forth in the Argentine Constitution.

Both companies filed their claims directly before the Argentine Supreme Court (CJSN, after its Spanish acronym).  They considered their cases should be heard by the CJSN acting as a first and unique instance due to the nature of their claims, as well as the circumstance that the Provinces of Chaco and Santa Fe were being sued.

The CJSN  accepted its competence to hear and decide the cases. In the lawsuit filed by Harriet & Donnelly S.A. it also granted the injunction required by the company to guard itself against the potential damages that could result from an enforcement proceeding filed by the Province of Chaco.

A direct effect of this was that many other companies filed lawsuits in similar terms, requesting and obtaining injunctions in many of those cases.  Thus, there was a great expectation for a decision by the CJSN on the merits of all cases, especially taking into account appointments of new Justices  and the outcome of the 2015 elections.  The rulings commented in this article were given on October 31, 2017.    
 

2. The rulings of the Argentine Supreme Court

The CJSN allowed for the lawsuits filed by Bayer S.A. and Harriet & Donnelly S.A., declaring in both cases the unconstitutionality of the challenged local regulations.  The arguments supporting the  CJSN´s decision were extensively developed in the ruling given in the “Bayer” case.  The ruling given in the “Harriet & Donnelly” refers to these arguments.

We make reference to the “Harriet & Donnelly” case because the CJSN departed from the Attorney General’s non-binding opinion in which the rejection of the claim was recommended based on the grounds that the lawsuit’s admissibility requirements were not verified in the case.  In particular, the Attorney General understood that with respect to Harriet & Donnelly S.A. an “act in the making” (acto en ciernes) did not exist, and that consequently there was no case subject to judicial questioning.  On this point, we emphasize the broad approach adopted by the CJSN when analyzing the concurrence of the admissibility requirements for the unconstitutionality claim.

In the “Bayer” case, the criterion of the Attorney General had been favorable to the position of the company.  No challenge on whether the admissibility requirements for the chosen judicial proceedings were met had been made.

The CJSN, in its ruling, first analyzed if the unconstitutionality claim was formally admissible.  Second, the CJSN analyzed whether the differential treatment in Turnover Tax applied to Bayer S.A.  Once it had been established that the lawsuit was formally admissible and that Bayer S.A. was given a more burdensome treatment in Turnover Tax according to its location outside the province of Santa Fe, the CJSN analyzed the merits of the case.

The CJSN restated its authority as the ultimate interpreter of the Argentine Constitution so that the exercise of the national and provincial authority is rendered harmoniously, avoiding interferences or frictions susceptible to increasing the powers of the central government to the detriment of provincial competences and vice versa.  It then went on to review the historical precedents referred to the limitations to the provincial competences set forth in the Argentine Constitution and analyze the scope of the guarantee of equality (garantía de igualdad) established in section 16 of same and the principle of reasonableness (principio de razonabilidad), and its application to the case.  Namely, whether the establishment of a differential treatment in Turnover Tax based on the location of the taxpayers respects the guarantee of equality and constitutes a reasonable measure.  As stated, the answer given by the CJSN was negative.

The CJSN also analyzed the provincial regulations in the light of the distribution of competences between the national and provincial levels of government established in the Argentine Constitution.  On this point, it considered that the provincial regulations were incompatible with the economic system created by the Argentine Constitution which must be upheld by  Congress.

The CJSN understood these provincial regulations to be unconstitutional for the following three reasons:

i. they infringe the principle of equality (by establishing a subjective criterion such as the taxpayer's location as a parameter of distinction),

ii. they interrupt the natural flow of trade (by establishing hostile treatment for goods originating in other provincial jurisdictions) and,

iii. they entail the establishment of internal customs which harm foreign products for the benefit of those manufactured in its territory. 

For these reasons, the CJSN  declared  the claims made by the Provinces of Chaco and Santa Fe, as well as the legal regimes on which they are based to be unconstitutional.
 

3. Conclusions

The rulings given by the  CSJN in the “Bayer” and “Harriet & Donnelly” cases are important for a number of reasons:

First, they put an end to an uncertain state regarding similar local regulations in force in many Provinces and in the Autonomous City of Buenos Aires.

Second, they show that the CSJN today upholds traditional case law on the invalidity of differential treatments established by subjective parameters.

Third, they give an account of a position taken by the CSJN for the reduction of distorting mechanisms affecting the Argentine national economy.  The date of the ruling coincides with the presentation of the tax reform’s guidelines by the National Minister of Finance.  Hence, a first effect of these rulings seems to arise from the commitment assumed by the Provinces and the Autonomous City of Buenos Aires in point III, paragraph a, of the Fiscal Consensus (Consenso Fiscal), to immediately eliminate differential treatments based on the place of settlement or the location of the taxpayer's establishment or the place of production of the goods.

Fourth, the guidelines set forth in the 19th Whereas (Considerando) of the “Bayer” judgment distinguish whether local regulations establish hostile treatment that infringes the Argentine Constitution. A comparison of current local regulations with these parameters highlights their unconstitutionality.

Finally, and regarding the “Harriet & Donnelly” case, it is unusual that the CSJN departed from the Attorney General’s non-binding opinion, adopting a more flexible criterion to analyze the existence of a case subject to judicial review.