Payments in Cash and Tax Effects

The decision was issued by the Argentine Supreme Court (hereinafter, the “Supreme Court”) on March 19, 2014, in the “Mera, Miguel Ángel vs DGI” case. The Argentine Tax Authority (the “AFIP”) issued two resolutions claiming the payment of certain amounts of Income Tax and Value Added Tax (the “Taxes”) for different periods of 2003 and 2004 from the taxpayer. For this purpose, the AFIP ignored payments made by the taxpayer to certain suppliers for amounts above Argentine Pesos 1,000. Thus, the AFIP rejected their deduction for Income Tax purposes, and their consideration as tax credit for Value Added Tax purposes. Section No. 1 of Law No. 25,345 (the “Law to Prevent Tax Evasion”) provides that payments above Argentine Pesos 1,000 (around US$ 125 at the current exchange rate) must be made through checks or wire transfers, among other means. In order to sustain its decision, the AFIP applied Section No. 2 of the Law to Prevent Tax Evasion, which provides that payments in excess of Argentine Pesos 1,000 made in cash are not computable as deductions for Income Tax purposes, and tax credits are not computable either for Value Added Tax purposes, even if the reality of the relevant transactions were proven.
The taxpayer challenged the resolutions issued by the AFIP before the National Tax Court (the “Tax Court”) and sustained that, by application of Section No. 8 of the General Resolution No. 151/98, which regulates Section No. 34 of the Tax Procedural Law (the “TPL”, and together with Section No. 2 of the Law to Prevent Tax Evasion, the “Conflictive Sections”), taxpayers who do not use the means of payment provided by the Law to Prevent Tax Evasion are allowed to prove the reality of the relevant transactions and compute the corresponding  deductions and tax credits.

The Tax Court Decision
The Tax Court revoked the resolutions issued by the AFIP. In order to decide in this way, the Tax Court upheld incompatibility between the Conflictive Sections and indicated that Section No. 34 of the TPL should prevail because it is included in a special law, which was protective of the taxpayers’ right to be heard by allowing them to prove the reality of the transactions made. Finally, the Tax Court pointed out the importance of the substance of the transaction over the form related to the payments.

The Decision of the Federal Court of Appeals in Administrative Matters (the “Court of Appeals”)
The AFIP appealed the decision of the Tax Court. The Court of Appeals confirmed the decision but on different grounds. The Court of Appeals asserted that simultaneous applicability of the Conflictive Sections was not possible and then held that whether or not Section No. 2 of the Law to Prevent Tax Evasion was in accordance with the Argentine Constitution had to be analyzed.
In this regard, the Court of Appeals asserted that if by the application of that Section, the AFIP does not allow taxpayers to compute deductions and tax credits, the tax events provided by the relevant laws would be altered. Since in the case under analysis there was no doubt about the reality of the transactions, the Court of Appeals concluded that the position assumed by the AFIP implied applying a tax without legal grounds based on the non-compliance of a formal duty, which affected the principle of reasonability of the law.

The Supreme Court’s Decision
The AFIP filed an extraordinary appeal before the Supreme Court, which confirmed the decision of the Court of Appeals.
The Supreme Court referred to its own decision in the leading case “Hermitage” (“Fallos” 333:993), in which it had sustained that legal presumptions –such as the one established by Section 2 of the Law to Prevent Tax Evasion– should be used in a wise, specific and rational way and limited to those cases in which there are very special circumstances to justify their use.
Afterwards, the members of the Supreme Court asserted that they agreed with the decision of the Court of Appeals as to the unconstitutionality of Section No. 2 of the Law to Prevent the Tax Evasion; in particular, because such provision does not allow for the computation of deductions and tax credits related to real transactions when the relevant payments were made by means different than those specifically provided. In that regard, the Supreme Court held that the law establishes a legal fiction that ignores or denies the consequences of transactions that are relevant for determining the amount of Taxes due, in a case where the reality of the transactions has already been proven.
Finally, the Supreme Court held that Section No. 2 of the Law to Prevent Tax Evasion was unreasonable and concluded that prohibiting the computation –for strictly formal reasons– of deductions and tax credits associated with payments that were effectively made, implied ignoring the real existence of the ability to pay of the taxpayer, which is a requirement of validity for any tax.