Inflation Adjustment for Tax Purposes

The Supreme Court of Justice (“SCJ”) in case “RECURSO QUEJA N° 1 – TELEFONICA DE ARGENTINA SA y OTRO C/ EN – AFIP DGI s/ Dirección General Impositiva” confirmed the decision of the Chamber appealed in which the constitutionality of the application of inflationary adjustments with respect to several influential items in the calculation of income tax was discussed, being at stake the confiscatory nature of the payment of income tax.

The case arose from a company’s claim against an administrative resolution that rejected the request for a reimbursement of certain payments made for income tax. At the time of payment, the law in question (Law 20,628) did not allow the application of adjustments for inflation of certain expenses and tax losses. Thus, relying on the precedent of the SCJ in the “Candy” decision, the unconstitutionality of the law was challenged due to its confiscatory effect on property.

The claim was upheld both in the first instance and before the Federal Administrative Court. The tax authorities filed an extraordinary appeal, which was rejected by the latter, until it finally reached the Court of Appeals.

Once it reached the Court, the latter referred to the opinion of the Attorney General’s Office, in which all the arguments made by the tax authorities were rejected. The following points were highlighted:

-In the first place, the constitutionality of the rule itself is not being discussed, but whether its application results in a confiscatory tax.
-Secondly, that the updating of the items that influence the calculation of the tax, still suspended by the regulation, could be included for the purpose of proving confiscation.
-Thirdly, inflation is a cumulative phenomenon, and the indexes are only intended to reflect the real economic value, so the tax authorities’ argument of applying the adjustment only in individual periods on the nominal amount is rejected.
-Finally, the tax authorities argue that losses can only be restated if there is tax payable in the period in question. It cannot do so otherwise.

This ruling, therefore, admits that adjustments may also be applied on; depreciation of personal property, real estate and intangible assets, tax costs thereof at the time of their sale, in addition to the losses, which is the most relevant.

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