YPF v. Chubut: New Check to Arbitrary Tax Discrimination

The case

The case arose from a declaratory action filed by YPF SA against the Province of Chubut, challenging the interpretation adopted by the local tax authorities regarding the scope of the exclusion from the turnover tax base applicable to income derived from export transactions. As the core of its position, the Province of Chubut argued that YPF should have included in the turnover tax base the income arising from exports of hydrocarbon products extracted within its territory that were subsequently industrialized in another jurisdiction.

Although, during the relevant tax periods, the Provincial Tax Code expressly provided that income derived from exports was excluded from the tax base of the turnover tax, the Province of Chubut grounded its position on the first paragraph of article 13 of the Multilateral Agreement for the application of turnover tax. That provision refers to hydrocarbon products transferred outside the jurisdiction of origin without invoicing and establishes that, for such jurisdiction, the taxable amount is determined based on the wholesale, official or prevailing market price at the time and place of shipment.

The Supreme Court’s ruling

After confirming its original jurisdiction and the formal admissibility of the action, the Supreme Court held that, for the reasons set forth in the opinion of the Attorney General: YPF’s position should prevail since it contends that the actions of the Province of Chubut entail tax discrimination against interprovincial trade, and, consequently, violate articles 9–12 and 75(13) of the Argentine Constitution.

The Court recalled that “provinces may not invoke territorial ownership to impose any kind of restrictions on activities that are, in substance, linked to interprovincial and international trade.” It further noted that, to remain neutral with respect to interprovincial commerce, the exclusion from the taxable base provided under provincial law for income derived from exports should be indifferent to the fact that the exported product—whether crude or industrialized—may have been transported to another province at some stage of its processing. In other words, if oil that is extracted, industrialized and exported from the Province of Chubut is excluded from the turnover tax base, then oil extracted in Chubut, industrialized in whole or in part in another province and subsequently exported should likewise be excluded.

Finally, in light of the way the case is decided, the Court stated that it was unnecessary, for purposes of the controversy, to analyze the interpretation of article 13 of the Multilateral Agreement stated by the Province of Chubut.
 

Why is this ruling important?

The Supreme Court has a well-established line of case law declaring the unconstitutionality of differential tax rates that discriminate based on the location of the taxpayer’s establishment. The decision under review reaffirms and expands that line of precedent.

The court emphasizes that local tax authorities may not discriminate with respect to the taxable base of the turnover tax solely on the grounds that an activity is interjurisdictional. This criterion would apply to any provision, element of the taxable event or aspect of the tax obligation, whether arising from a local regulation or from the interpretation adopted by the local tax authorities.

The Court’s message is clear: local tax authorities may not seek to increase the tax burden in violation of the insurmountable barrier set by the constitutional principles governing interprovincial commerce and the prohibition of internal customs barriers.

Finally, the ruling shows that even when disputes involve provisions that the Supreme Court considers to be local law (Multilateral Agreement), the significance of the federal issues raised necessarily leads to such disputes being brought before federal courts.