Inflation-adjustment - The Supreme Court rejects a summary proceeding (“amparo”)

It should be borne in mind that with the purpose of avoiding distortions as a consequence of an inflationary or deflationary scenario, accounting and tax norms (especially Title VI of the Income Tax Law) set forth a special treatment for the assessment and presentation of assets and liabilities to reflect any inflationary effect.

The lack of inflation adjustment for tax purposes may cause distortions between the accounting and tax results, which may lead to the taxation of fictitious profits by the taxpayers. The current situation shows a conflict of law between the accounting and tax norms and Law No 25,561 of Public Emergency which forbids the application of any sort of indexation clauses on obligations.

Under this scenario, the Argentine Supreme Court ruled on the case “Dugan Trocello S.R.L.”. The case was about a summary proceeding to guarantee constitutional rights (“amparo”), requesting the declaration of unconstitutionality of the norms that prohibit the application of the inflation-adjustment method (Section 39 of Law No 24,073, Section 4 of Law No 25,561, and Section 5 of Executive Decree No 214/02) based on the force and effect of the mechanism of inflation adjustment and, on the grounds that if it was not allowed, property rights would be affected as nominal or fictitious income would be taxed.

Eventhough the Argentine Supreme Court rejected the summary proceeding, on the grounds that the proceeding chosen by the taxpayer was not adequate to prove the violation of the property right -which requires clear and indubitable proof of evidence- it did not rule on the question of law, therefore, such ruling does not imply the lack of legitimacy of the substantial claim, i.e. the unconstitutionality of the laws preventing the application of the inflation adjustment.

Even when the Court’s ruling confirms the restrictive doctrine regarding the declaration of unconstitutionality of a law under a summary proceeding, it also stated that if there is clear evidence, even under a summary proceeding, the non applicability of the inflation-adjustment method for income tax purposes may be challenged.

This clear evidence must irrefutably prove that if the adjustment method is not applied, the non-confiscation principle governing tax matters would be violated as the tax burden cannot take a substantial part of the income or the estate of the taxpayer. The Court highlighted that just comparing the results applying and not applying the adjustment would not be enough to rule in favor of the unconstitutionality. This is a factual issue which must be analyzed in each particular case.