The Supreme Court Admits the Obsolescence Factor as Depreciation Criterion to Calculate Income Tax

In the “Telec. Int. Telintar S.A.” case the Federal Tax Authority had assessed the income tax obligation of the taxpayer in the understanding that for the purpose of computing the depreciation term of submarine optical fiber cables, a period of twenty years should be considered instead of a fifteen year term, as had been understood by the taxpayer.

The Federal Tax Court confirmed the Tax Authority’s criterion. To reach this decision, the Court considered that in order to determine the depreciation term, only “pure depreciation” must be considered, meaning the aging suffered by assets due to their normal use in the activity for which they are destined, pursuant to section 82, subsection f) of the Income Tax Law. On the contrary, the Court understood that the “obsolescence factor”, meaning the lost of utility of assets caused by technological progress, should not be computed because it is not explicitly provided for by the law.

The Court of Appeals, Room IV, revoked the decision of the Federal Tax Court based on the application of technical opinions issued by the Argentine Federation of Economic Science Professional Councils in which the obsolescence factor is considered relevant to determine an asset’s useful life.

On May 22, 2012 the Supreme Court of Justice ruled confirming this decision. To that purpose, the Court considered that neither the law nor the regulatory decree set forth the useful life term to be computable for each type of asset, nor did it provide the depreciation methods. Thus, the taxpayer’s reasonable estimation shall be applicable regardless of the Tax Authority’s challenging power. The Court understood that obsolescence is relevant to industry or services sectors where there is constant technological progress, and that the period of time that must be estimated is the one during which the use of the asset is efficient from an economic standpoint, i.e. the “useful economic life”.