Province of Buenos Aires: Absence of Tax Liability of Companies’ Administrators without the Demonstration of Negligence or Fraud

1.  Background
The Province of Buenos Aires tax authority (the “Tax Authority”) initiated the legal proceedings for the collection of unpaid tax corresponding to “Raso Hermanos” (the “Company”) against its chairmen, as joint and several guarantors.
The Tax Code sets forth that the administrators of companies are obliged to pay their taxes in the same way and opportunity that companies are. In particular, Section No. 24 of the Tax Code (previously, Section No. 21) provides that administrators respond jointly and unlimitedly with the companies they represent for the payment of any taxes. However, this section sets forth that administrators will be exempted from their liability if they are able to prove that they required the provision of the funds necessary for the payment and that the respective company placed them in a situation where it was the impossible to comply in a straightforward and timely manner.
The Judge of the First Instance asserted that tax liability provided by Section No. 21 could only be extended to administrators if negligence or inadequate performance in their duties were proven and that the solution of such matter exceeded the framework of the proceeding. As a result, the Judge dismissed the claim filed by the Tax Authority.
The Tax Authority filed an appeal before the Court of Appeals in Civil and Commercial Matters of San Martín against the decision. The Court of Appeals declared for the unconstitutionally of Section No. 21 (at present, Section No. 24) of the Tax Code as it set forth an objective liability regime, inconsistent with the subjective liability regime provided by Sections No. 59 and 274 of the Argentine Corporations Law, which involves the demonstration of the presence of negligence or fraud of the administrator. Consequently, the Court of Appeals stated that Section No. 21 of the Tax Code violated Section No. 31 of the Argentine Constitution, which sets forth the preeminence of Argentine laws over any inconsistent provision contained in Provincial constitutions or laws and the obligation of the Provincial authorities of complying with the first.

2.  The decision of the Supreme Court of Buenos Aires
Against the decision of the Court of Appeals, the Tax Authority filed an “extraordinary motion for law inapplicability” before the Supreme Court of Buenos Aires (the “Supreme Court”), which confirmed the decision on the following grounds:

• The Tax Authority had not adequately refuted the arguments of the decision of the Court of Appeals, because their objections were exclusively limited to support the provincial faculty to legislate on tax matters at the expense of the rules of the Argentine Corporations Law, without allowing a demonstration of the error assigned to the sentence (majority vote).
• The declaration of unconstitutionality of a law should be done when the circumstances require adopting that alternative, before and beyond any proposal made by the parties (Judge Negri vote).
• While according to Argentine Corporations Law, in order to extend liability to administrators, the presence of negligence or fraud must be proven, the Tax Code sets forth in plain terms that administrators respond as joint and several guarantors, without making any reference to the negligent or fraudulent breach of the administrators‘ tax duties. Moreover, the liability of administrators, as an essential matter in the relation between debtors and creditors, must be regulated by the Argentine Congress and provinces are not allowed to issue inconsistent laws. (Judge Negri vote).
• In turn, Argentine Tax Procedural Law sets forth a subjective liability regime, in accordance with the one established by the Argentine Corporations Law. As a result, under its scope, in each case it has to be determined if a breach of the administrator duties does exist. Such subjective regime is consistent with the nature of this kind of liability for a third party debt, which is always a penalty, and as a consequence, it depends on the action of omission of each administrator (Judge Negri vote).

3.  Conclusion
According to the ruling of the Supreme Court, the Tax Authority cannot extend tax liability to companies’ administrators unless it is able to prove their negligence or fraud.
Although the declaration of unconstitutionality of a law causes only affects  the specific lawsuit in which the declaration was made, Section No. 12 of the Tax Code empowers the provincial Tax Court to apply Supreme Court of Justice of Buenos Aires and Argentine Supreme Court case-law that have declared the unconstitutionality of any tax rule. As a result, and regardless of the position that the Argentine Supreme Court may adopt in this matter, the declaration of unconstitutionality of Section No. 21 of the Tax Code is an important milestone that sets out the manner on which joint and several liability of administrators for tax debts should be understood in the jurisdiction of the Province of Buenos Aires.
For this reason, new interpretations made by taxpayers, administrators and the Tax Authority are expected, particularly in the latter case. The Tax Authority may face serious objections if it intends to extend the tax liability to administrators through a literal interpretation of Section No. 24 of the Tax Code, irrespective of the demonstration of the negligence or fraud of such administrators.