Stock option plans: omission to declare a benefit

On 29 July, 2005 the Argentine Economic Criminal Court of Appeals, Court room B, ruled on the “Almirón, Juan M.” case, and confirmed the prosecution for evasion issued against a taxpayer who omitted to consider as taxable income the benefit derived from an option plan to purchase shares of a company related to the company in which he worked (“stock option plan”).

The taxpayer had been an employee of The Coca-Cola Argentina S.A., and had received options to purchase shares from the foreign company, The Coca-Cola Company, at a determined price. In 1998, once his employment relationship with The Coca-Cola Argentina S.A. had ceased, he exercised his right and acquired shares from The Coca-Cola Company, but did not consider as an income subject to tax the difference between the acquisition cost of those shares and their market value at the moment of the exercise of such option.

In the first place, the prosecuted stated that the stock option agreement was not intrinsic to the employment relationship. Thus, it should not be understood that he had received a benefit. However, the Court of Appeals rejected this position and affirmed that it was a benefit granted by the company to certain senior employees of the company, by virtue of its employment relationship. Also, the Court considered it irrelevant that the exercise of the option had been made once the employment relationship had ceased.

The taxpayer stated that given that he exercised his option on March 1998, article 110 of Decree No 1344/98, published in the Official Gazette on November 1998, is not applicable. Such decree establishes that compensations consisting of the purchase of stock under stock option plans derived from an employment relationship, imply a taxed benefit for the employee in the amount of the difference between the acquisition cost and the market value of the acquired shares, taxable at the moment of the exercise of the option. Moreover, the taxpayer considered that the mentioned rule was violating tax and criminal legal principles, because: (i) the Executive Power is not able to regulate on tax issues by means of decrees of need and urgency; (ii) the Decree was issued after the exercise of the purchase option. Therefore, it would be applied in a retroactive way; (iii) the concept of income of the fourth category was extended and, (iv) the criminal type foreseen in criminal tax law was extended.

The Court of Appeals pointed out that article 110 of Decree No 1344/98 was not incorporated by means of a decree of need and urgency, but was issued by the Executive Power based on its regulating powers. Also, it stated that it was not applied in a retroactive way, given that the Income Tax is a tax assessed on a yearly basis, whose taxable event is formed at the last instant of the tax year, without prejudice that the economic fact (purchase option exercise) was produced prior to the issuance of the Decree. The same argument was used to reject the question of the violation of the principle that states that criminal law cannot be applied in a retroactive way. Moreover, the Court of Appeals stated that article 110 of Decree No 1344/98 did not extend the concept of taxable event of Income Tax Law, given that it was possible to consider the stock option agreement as a specific case of compensation in species, foreseen in article 79 of Income Tax Law.

The taxpayer considered that there was no fraud, which is a necessary requisite to form the crime of evasion, on the grounds that the value of the shares was declared in his sworn statement of Personal Assets Tax, and that the tax authority could acknowledge the existence of the transaction. However, the Court of Appeals understood that the taxpayer omitted to declare the benefit in the Income Tax sworn statement, and that the information given at the Tax on Personal Assets, does not necessary allow the tax authority to acknowledge the transaction under analysis. This is supported by the fact that the omission could only be assessed once an audit had been started.

The Court of Appeals also rejected the taxpayer’s “mistake” argument. In this sense, the taxpayer argued that he acted mistakenly, without knowing the regulations, and guided by the advice of his accountant. The Court of Appeals considered that this supposed mistake was not duly proved.