Rigorous criteria to allow deduction of expenses

The Federal Court of Appeals on Contentious and Administrative Matters (Cámara Nacional de Apelaciones en lo Contencioso Administrativo Federal) ruled in "J. Walter Thompson Argentina S.A."[1], a case related to the deductibility by a local company of certain expenses incurred abroad by its parent corporation.

In the case, the Court concluded that the documents issued by a company in favor of a related company for the purposes of assigning expenses might not be sufficient to prove that the expenses were related to the generation of Argentine-source income and consequently rejected their deduction.

In relation to the facts described in the Court of Appeal’s ruling, for the purposes of determining its income tax liability, the local tax payer had deducted certain expenses related to the provision of information and technical assistance concerning advertising and public relations. Following the internal group policies, the parent company had issued the so-called “advices” (sic), attaching copies of the original invoices.

Pursuant to the Argentine Income Tax law and its regulatory decree, foreign-source expenses are deemed to be related to the generation of foreign-source taxable income, but the tax authorities may allow their deduction to the extent that the tax payer is able to demonstrate that they are related to the generation of Argentine-source taxable income. In other words, their deduction depends on showing that they have been incurred to generate Argentine-source taxable income.

In the first instance, the National Tax Court (Tribunal Fiscal de la Nación) confirmed the tax authority’s notice of deficiency and the tax payer appealed.

The Court of Appeals confirmed the Tax Court’s decision. It focused its analysis on the need to show with substantial evidence the relationship between the expenses and the Argentine-source income. It stressed that the internally generated documents - the so-called “advices” - were not enough to prove such a relationship. It also stressed that the original invoices attached to the “advices” had not been issued in favor of the local company, but in favor of the parent company and that these original invoices were not kept by the local company, but by the parent company outside Argentina. Furthermore, it also highlighted that the deduction should correspond to the person named in the invoice and that these “advices” were internal documents, not formal invoices, and therefore did not suffice as evidence.

The case demonstrates the rigorous criteria of the Court of Appeals in analyzing the relationship between an expense incurred abroad and its deductibility for the purposes of determining Argentine income tax liability.