Option for the Reduction of Advance Payments of Income Tax

For many years, Argentine tax authorities have been properly respecting the regime on advance payments of income tax (AFIP Resolution No. 327/99).

Pursuant to this regime -which is based on a presumed continuity of the level of income- taxpayers are required to perform advance payments on account of the annual tax return of the current fiscal year, calculated on the basis of the previous year's tax return. 

An alternative regime is available for situations under which taxpayers face a significant drop in level of income. Such alternative regime allows taxpayers to opt to make the advance payments based on their own estimation of tax to be paid.

In order to make use of this alternative regime, taxpayers must communicate the tax authorities of their decision to exercise the option of the advance payments’ reduction. This communication has full effect as from the first advance payment to be performed.

The applicable regulation does not contain rules concerning any sort of “approval” by the tax authorities. Nor is the possibility of the tax authorities reversing the effects of this alternative regime contemplated. Rather, such effects are to be produced in an automatic and definitive manner.

The automaticity of this alternative regime is reinforced by the application of compensatory interests when taxpayers unreasonably reduce the advance payments.

In fact, if the annual tax return of the current fiscal year states a higher profit than the one estimated for the advance payments’ reduction applied, taxpayers will be obliged to pay interest on the omitted amounts.

Normally the interest charge -at an annual rate of 36%- counteracts any possible financial benefit of unduly reduced advance payments.

It is likely though that, under the current inflationary scenario, this annual rate of 36% does not have such a discouraging effect.

This could be the reason why some divisions of the Argentine tax authorities have lately been resorting to a practice under which they notify taxpayers that their “request” for the reduction of advance payments will not produce any effects until it has been “approved”. Assuredly, this notification by the tax authorities is neither provided nor authorized by the applicable legislation.

This situation led to a recent ruling by the Federal Court of Appeals of La Plata (“POP Argentina S.A. c/ AFIP – DGI s/ Amparo Ley 16.986”, July 8, 2015). While confirming a judgment issued by a lower court, this Federal Court ordered the tax authorities to consider as fulfilled and valid the reduction of advance payments performed by taxpayers.

In this ruling, the Federal Court made clear that -pursuant to the applicable legislation- the option for the reduction of the advance payments does not require express (prior or subsequent) consent by the tax authorities.

The Federal Court concluded that the option for the reduction of advance payments set forth under Resolution No. 327/99 operates automatically and under taxpayers’ own responsibility.

This ruling is a positive step by the Federal Court of Appeals of La Plata towards reaffirming the rule of law.