Did the Federal Supreme Court Actually Interpret Section 35, paragraph 3, of the Multilateral Agreement?

On September 2, 2021, the Federal Supreme Court handed down its decision in Esso Petrolera Argentina SRL et al. v. Municipality of Quilmes on contentious-administrative claim. The question before the Court was whether a Municipality where a taxpayer owns premises or establishments can calculate the Safety and Hygiene Tax (“TISH,” for its acronym in Spanish) in such a way that it keeps 100% of the gross income attributable to the province to which the municipality belongs.

The discussion focused on the analysis, interpretation and constitutionality of the third paragraph of article 35 of the Multilateral Agreement (“CM”) that regulates the distribution of the taxable base of municipal taxes between municipalities and communes belonging to the same province, when the collection of this tax is contingent upon the taxpayer owning  authorized premises or establishments in that municipality.

The aforementioned third paragraph reads: “when the legal regulations in force in the municipalities, communes and other similar local entities of adhered jurisdictions only allow the collection of taxes in cases in which there are premises, establishments or offices where the taxed activity is performed, jurisdictions in which the taxpayer has the corresponding authorization may collect, as a whole, one hundred percent (100%) of the taxable amount attributable to the province.”

Based on this rule, the Municipality of Quilmes claimed from ESSO a TISH difference based on the gross income earned in other municipalities of the Province of Buenos Aires in which ESSO did not have a local or authorized establishment.

ESSO, on the contrary, understood the tax position as unreasonable and arbitrary and rejected the Municipality’s claim arguing that: (i) the interpretation of section 35 of the CM raises a federal issue; (ii) the judgment issued by the SCBA is arbitrary for departing from two analogous cases (YPF v. Municipality of Concepción del Uruguay and Helicópteros Marinos); (iii) the reasonable proportion requirement between the cost of the service and what the municipality collects in return; (iv) the unconstitutionality of section 35 of the CM for violating the principle of reasonableness (section 28); the federal regime and the distribution of tax powers (section 75 subsections 2 and 12) and for affecting the commercial clause (section 75 subsection 13).

The Court’s first conclusion was that the interpretation of section 35 of the CM does not constitute a federal issue that enables an extraordinary appeal, as the CM is local public law and, consequently, questions about its interpretation are reserved for provincial judges (Rulings: 331:2586).

Then, the Court rejected the position that the SCBA ruling is arbitrary on the grounds that the cases invoked by ESSO are not analogous to the case at issue.

Subsequently, the Court analyzed the claims of unconstitutionality and lack of proportionality between the TISH and its cost, concluding that:
- The claim that section 35 of the CM is unconstitutional is not acceptable as it was not properly substantiated and lacks a consistent factual and legal foundation.
- ESSO failed to demonstrate the unreasonableness or disproportionality of the TISH “quantum.”

In the case at law, the Court recognized the importance of the municipal tax called “tasa” (for its Spanish acronyms) to guarantee that the Municipality can secure means of subsistence and, consequently, autonomy. However, it also recognized that the “tasa” is subject to the limits and requirements of constitutional taxation principles.

These limits are summarized by the Court as follows:
a) The clear and precise definition of the taxable event and the individualization of the services or activities offered by the Municipality.
b) The organization and provision of the service to be provided to the taxpayer.
c) The adequate and precise quantification of the tax (taxable base, rate, exemptions and deductions), for which the tax authority must prudently weigh, among other parameters, the global cost of the service, or activity, concerned (Ruling 234: 663) and fiscal capacity (Ruling 343: 188, vote of Justices Maqueda and Rosatti).

Perhaps, the most relevant doctrine that can be extracted from the case is the one set forth in Recital 12 where the Court concludes that: “there are no constitutional objections to use the taxpayer's gross income as an indicator of fiscal capacity and factor it into the calculation of the tax base of a tax such as the one considered in the present proceedings, as long as it does not result in unreasonable, disproportionate and dissociated consequences from the direct and indirect benefits that the Municipality faces to organize and make the service available.”

In our view, the decision handed down by the Court relied heavily on the arguments and evidence provided by ESSO, but this does not preclude other taxpayers from adequately justifying the unconstitutionality of section 35 of the CM and, where appropriate, demonstrating the lack of proportionality of a TISH and its costs, always bearing in mind that the Municipality bears the burden of proving those costs (Ruling 319: 221) or, where appropriate, demonstrating the unreasonable, disproportionate and dissociated consequences from the benefits that the Municipality faces to organize and make the service available.