The Argentine Supreme Court issues decision on inflation adjustment for Income Tax

The case was heard by the Supreme Court after the Argentine tax collecting authority (AFIP) appealed the decision of the lower courts regarding a case where the legislation that prohibits taxpayers from calculating the Income Tax based on figures that were adjusted for inflation was considered to be unconstitutional. In addition, the AFIP was forced to accept the tax return filed by the taxpayer, in which all the figures were adjusted for inflation (“Candy S.A. c/ AFIP s/ acción de amparo”[1] – Court decision. July 3, 2006.) 

Since April 1, 1991 Argentine legislation neither foresees nor authorizes the adjustment of monetary debts in the event of monetary devaluation. Such regulation, in connection with the convertibility regime[2] prescribed by Law No 23,928 – by which the Argentine peso was pegged to the dollar –, was ratified by Law No 25,561 (“Ley de Emergencia Pública”), enacted in January 2002.

On the other hand, under section 39 of Law No 24,073, which was enacted in April 1992, the rates for all kinds of updates set forth under Argentine tax legislation must not vary after March 1992.

As a result of the above, even for those taxpayers mentioned under Title VI of the Argentine Income Tax Act, a tax rate of 35% must be applied to the net income. No adjustment that aims to neutralize the effects of the monetary devaluation which took place in the tax year in analysis is to be included.

In accordance with previous decisions (as in the “Dugan Trocello” case), the Supreme Court ruled that it is not its duty to analyze the convenience or fairness of the taxes imposed by Congress, nor to consider the advantages of the adopted tax system. In addition, the Court should not make any decisions regarding the election of the taxable object, or the relationship between the taxes and the principles of economic sciences which refer to them.

On grounds of this reasoning, the Supreme Court has reversed the decision of the lower courts, and has decided that the legislation that does not take into consideration mechanisms for inflation adjustments when calculating the tax base cannot be considered constitutionally invalid.

After pointing out that it is not its duty to consider such matters, the Supreme Court noted that, on the contrary, it is its duty to investigate and decide whether the existing tax legislation violates the constitutional rights of taxpayers. Consequently, the Supreme Court analyzed the arguments and evidence presented by the company in order to show the possible confiscation which might result from the tax so imposed. 

In its ruling, the Supreme Court mentioned that it never had the opportunity to set a limit on the Income Tax in order to avoid confiscation (as a matter of fact, the Court has not set a limit in the present case either). However, the Supreme Court implicitly stated that the adjusted financial statements are those which reflect the real income, enrichment or benefit on which the law intends to levy a tax. Therefore the Court held that, in this case, it would have been excessive to impose on the company an Income Tax calculated on non-adjusted financial statements. The main issue for the Court to decide on was whether the means of calculation of the taxable amount was meant to pay the local tax collector a sum equivalent to 62% of the tax gains adjusted to inflation and 55% of the utilities which result from an accountancy balance adjusted to inflation. 

In light of the above, the Supreme Court revoked the decision. Nevertheless, the Court supported the amparo in favor of the company and in consequence, ruled that -in this case- the application of the inflation adjustment for the tax year 2002 was admissible; otherwise, the company would have to pay a tax which had absorbed a substantial part of the income, affecting the principle of inviolability of property.

As the Supreme Court has several rulings in cases concerning this same matter pending, in which other arguments have been alleged and different evidence has been presented, it is advisable to wait for those future decisions for the Supreme Court to clarify its position.

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