Tax Aspects of Negotiable Obligations

On October 27, 2008, Tribunal “B” of the Federal Tax Court revoked the tax assessment where the Federal Tax Authorities deny the benefits established by Section 36 bis of the Negotiable Obligations Law regarding an issuance of negotiable obligations made in July 1999.

The Federal Tax Authority assessed the fiscal obligations of Supermercados Norte S.A. regarding the Income Tax –non resident withholdings- and the Value Aggregate Tax because they considered that the firm had not demonstrated that the negotiable obligations had effectively been publicly tendered. In consequence, they considered that all interests paid for those titles, as established in Section 38, Law No 23,576 and its amendments, were taxable by Income Tax and Value Aggregate Tax.

The Federal Tax Court started analyzing Section 16, Law No 17,811, as it refers to the regulation of valuable titles publicly tendered and, it reminded that in order to consider an invitation as a “public tender”, it has to comply with three requirements: (i) be directed to the general public or individuals or determined groups; (ii) carried out by the issuer of the valuable titles or by intermediaries that exclusively or partially intervene in the commercialization of the valuable titles; and (iii) be publicized by any means.

From the analysis of said legislation, the Tax Court concluded that “negotiable obligations are publicly tendered as soon as the issuer has made effective efforts to that effect, whether the results are relevant or not”.

On these grounds, the Tax Court analyzed the evidence presented and produced by Supermercados Norte S.A. To this effect, it took into account that:

a.    The authorization from the Comisión Nacional de Valores (“CNV”) had been obtained in order to proceed with the public tender.

b.    A series of publicized methods of the negotiable obligations to a number of persons was proved: prospectuses were delivered; road shows were offered; the Issuance Global Program was published in the Official Gazette and in the Daily Gazette of the Commerce Market; the Commerce Market pointed that “the present issuance has been largely published in the Associations media channels”; the delivered prospectuses contained all the information regarding the Company and the titles; etc.

Likewise, the Tax Court pointed out the relevance of the CNV’s opinion, the enforcement authority of Law No 17,811, regarding the questioned issuance: “the issuance of the negotiable values is made by the issuer within the public tender procedure” and “the placing has been made within the terms provided by Law 17811 by the invitation to make a legal act with negotiable values by giving out a prospectus that is considered by CNVs Rules as “the basic document through which the public tender of the negotiable values is made”.

The Tax Court indicated that “we can conclude that the reality of the operation demonstrates the subject’s effort to place its negotiable obligations within the public tender procedure” and that “the Federal Tax Authority has a thesis which is flawless of factual and legal support”.

The Court also considered that its conclusions do not seem to be altered by the fact that the public offer of the negotiable obligations has been made outside of the country.

This resolution puts an end to the discussion between the Tax Authority and the contributors regarding the necessity of placing the negotiable obligations by public tender or, on the contrary, if the demonstration that effective effort have been made by the issuer, is sufficient.