Taxability of the profit derived from the use of Consolidation Bonds (“Bonos de Consolidación”)for the payment of tax liabilities

Decree No 316/1995 (published in the Official Gazette of March 7, 1995) expressly provided that certain tax liabilities could be cancelled (up to a certain percentage) with Consolidation Bonds, and that such bonds had to be taken at their face value.

Pursuant to the facts and circumstances arising from the ruling, the tax-payer had paid income tax liability of $ 548,076.09 by paying $ 116,815.32 in cash and $ 467,200.77 with Consolidation Bonds acquired at $ 208,737.47.

In other words, the issue in question was the treatment applicable to the “profit” of the $ 258,463.33 arising from the spread between the Consolidation Bonds’ acquisition value ($ 208,737.47) and their settlement value ($ 467,200.77).

The tax-payer’s main reason for holding that this spread did not constitute a taxable income was that the economic reality showed that the possibility of paying tax liabilities with Consolidation Bonds implied a reduction of the tax liability, not a profit.

The Tax Court, the Court of Appeals for Litigious and Administrative Matters, and finally the Argentine Supreme Court agreed with the tax authorities in the sense that the difference between the Consolidation Bonds’ acquisition value and their settlement value constituted taxable income for the tax-payer.

The Supreme Court’s ruling was based on two main grounds:

In the first place, a reasonable interpretation of the Decree No 316/1995 could not lead to the conclusion that a reduction of the tax liability was made, but that it was restricted to establish different spontaneous presentation systems and payment plans, granting tax-payers the possibility of partially paying their liabilities with Consolidation Bonds at their face value.

In the second place, the benefit obtained by the tax-payer constituted a gain, in the sense of Section 2, subsection 2) of the Income Tax Law, because pursuant to the balance theory (“teoría del rédito ingreso”) any kind of income or enrichment obtained by a legal entity, such as the tax-payer, constitutes a taxable income.

We think that this ruling may be of interest because many tax-payers have been assessed by the tax authorities for similar reasons.