There is still no definition on the impact of inflation in the determination of the income tax

During the 90´s, due to the stable value of the currency, tax law “deactivated” the rules of adjustment for inflation that had been issued in an earlier period of permanent devaluation of the currency.

It is reasonable to state that the rules of the adjustment for inflation were only “deactivated”, as the tax law still provides for rules related to updating of costs, amortization, excluded income and other issues, including the possibility of performing the adjustment for inflation to estimate the income subject to tax.

Those rules ceased to be operative when Law No 24,073 was passed. Such law sets forth that indexes issued by the Tax Authority must not register variations after March 1992 (Law No 24,073, Section 39).

The law in question, which would have been reasonable in a period of monetary stability, is absolutely inadequate for a fiscal year where wholesale prices have increased by over 100%.

Therefore, disregarding consideration of the devaluation of currency when estimating items as the deduction of amortization, the quantification of excluded income and the estimation of the results reflected in the balance sheet substantially distort results of corporations.

The Argentine Government admitted the existence of a distortion, but the bill sent to Congress in November 2002 only provides for a decrease in the tax rate and a special method of deduction applicable to recently acquired capital assets. (The rate of 35% applicable to the determination of the income tax liability of corporations decreases to 30%, only once).

The bill has not yet been analyzed by the Congress. Furthermore, corporations and other concerned groups took various measures to solve the issue more reasonably.

The Tax Authority states that taxpayers whose date to fulfill and pay the Income Tax return has expired, may pay 80% of the tax liability and defer the balance until the enactment of a law regulating this issue.

We must underline that most taxpayers affected by inflation during the first half of year 2002 closed their fiscal year in December 2002, and they will only have to file the income tax return and pay the tax liability in May 2003. Due to this, it is feasible that a law is enacted in the next 20 days, especially considering the imminent elections and change of government.

If the Law is not amended, most corporations will probably determine their tax liability and file their income tax returns applying the rules of the adjustment for inflation. In that case, the Tax Authority may assess corporations with income tax over the estimated amount and claim the payment of the difference. Therefore, the issue may be solved at court.