The Controversial Relationship Between Accounts and Tax Assessments

In this particular case, the Federal Tax Authority assessed an income tax liability (hereinafter the “Tax”) on Inmobal Nutrer S.A. as a result of challenging a deduction for “bad debts” that the taxpayer computed for tax purposes.

According to the decision, Inmobal Nutrer S.A. had a credit against Indacor S.A., which had entered into a reorganization proceeding (“concurso preventivo”). In this context, 60% of the debt was forgiven by creditors and the remaining 40% would be paid in four installments, one per year. The taxpayer considered the 60% of the original debt as a bad debt for accounting purposes, while for tax purposes the taxpayer deducted 100% of such debt on the grounds that under the relevant tax legislation, the requirements for such deduction were met.

It must be noted that the Income Tax Law -before the amendments enacted in 2002- provided that taxpayers were allowed to deduct bad debts if a debtor was in default, which is one of the requirements for the initiation of a reorganization proceeding such as the one Indacor S.A. was going through.

The Tax Court considered inappropriate to deduct 100% of the amount owed by Indacor S.A. because it was not allowed such lack of consistency between the accounting and tax records, highlighting that the tax assessment derived from the accounting one. The Court quoted the “D'Accord Plastic Industries S.R.L.” decision (same room, 12/17/1997), in which it upheld the position that no differences should exist between the accounting and the tax assessments, except where the law expressly provides for such differences.

Additionally, the fact that the taxpayer continued making business with Indacor S.A. after the reorganization proceedings led to the conclusion that Inmobal Nutrer S.A. was not fully convinced that its credit had the features of a “Bad debt”.