The European Union (EU), as well as the Organisation for Economic Cooperation and Development (OECD), have been cracking down on concepts such as ‘tax abuse’ and ‘aggressive tax planning’. Tax abuse is normally referred as to the achievement of improper tax benefits circumventing the ‘spirit of the law’ by using a structure absent of valid commercial reasons. The concept of tax abuse likely stems from the concept of abuse de droit or abuse of rights that came about in France in the famous case of the French chimneys in the 19th century. It is a derivation of the principle of good faith.
The concept of aggressive tax planning is more recent and perhaps more difficult to grasp. The OECD refers to it profusely but does not provide a definition. Perhaps one definition could be “the exploitation of the difference resulting from the concurrent exercise of two tax jurisdictions in order to achieve either no single taxation (double non-taxation) or negative taxation”.
In Argentina, a country that once was seventh in the world in terms of gross domestic product (GDP) per head, tax authorities have managed to implement the highest tax burden in the world. In this context, we refer to a new mechanism by which tax authorities have managed to tax income tax on non-existing income via the application of an inflation adjustment mechanism to adjust financial statements, but which is not applicable to income tax calculation. We consider this strategy to be an abusive or aggressive tax collection mechanism imposed by the Argentine government and tax authorities.
The strategy has been attributed to Jean-Baptiste Colbert, who served as France’s minister of finance during the reign of King Louis XIV and coined the phrase: “the art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing” – meaning that the key to a successful abusive tax collection is to have many different taxes and ensure that none of them surpasses the constitutional thresholds for violating private property, thus making it burdensome for taxpayers to contest the relevant tax.
The inflation adjustment and the taxation of inexistent profits are slowly, but steadily, eating the capital of companies.
Inflation adjustment in Argentina
Since the creation of the Argentine Central Bank in May 1935, the average yearly inflation rate has been approximately 200 percent, the exception being from 1991 to 2001 when the Argentine peso was pegged to the dollar and the average inflation rate was 9 percent. Moreover, the vast majority was concentrated in the first year, with rates of 1 percent or even deflation from 1992 to 2002.
As part of a ‘convertibility’ plan, by which each peso was ‘convertible’ into a dollar by law, convertibility law (Law 23,928) forbade any form of indexation of financial statements.
After the massive financial crisis of December 2001 in Argentina, some articles of the convertibly law were repealed; however, the articles that forbade any form of indexation or adjustment by the application of inflation were not repealed. Therefore, companies could not adjust their financial statements by inflation.
Why is this unfair? As a very simple example, let us imagine a restaurant purchases a bottle of wine for AR$10 in January. The price to the consumer of the bottle of wine in January is AR$20, so the profit of the restaurant would be AR$10. Now, if the restaurant has the bottle of wine in stock for 11 months, and then sells it in December of the same fiscal year, with a 40 percent inflation, the reposition cost of such bottle would be AR$14, so if the restaurant sells the bottle in December the profit would be AR$6 instead of AR$10. Tax authorities collect income tax on the AR$10, regardless of the fact that AR$4 of the AR$10 is inflation created by the government.
The situation described above was the status quo from 2002. When president Macri won the presidential election in 2015, everyone thought he would address situations such as the previously outlined inflation scenario, which made Argentina uncompetitive in attracting foreign investment.
President Macri has said that in order to tackle issues in the fiscal reform enacted on December 2017 (law 27, 430), which is applicable to financial statements commencing on 1 January 2018, a promise needed to be made – a promise that if the official index of prices exceeded 100 percent in the aggregate of the preceding 36 months, then the tax inflation adjustment system would become applicable. The idea at that time was that inflation would go down (in 2017 it was 25 percent).
Unfortunately, in 2018, the inflation rate in Argentina was 47.6 percent, so the government had to do something. It therefore increased the threshold. Law 27,468 of December 2018 modified the threshold, clarifying that the limit would be 55 percent for the first year, 30 percent the following year and 15 percent the year after.
Depending on when the fiscal year ends for a company, an inflation adjustment may be applicable (because the rate is more than 55 percent). Fiscal years ending January, February, March, July and August 2019 cannot apply the inflation adjustment whereas April (55.8 percent), May (57.30 percent) and June 2019 (55.8 percent) will be able to apply the adjustment.
Possible course of action
Because companies now need to adjust their financial statements (for generally accepted accounting principles purposes) due to inflation, many are now realising that they may have to pay income tax as if they had generated profits.
Many companies are reluctant to file claims because of possible retaliation from the government. Fortunately, there are currently 97 rulings of the Supreme Court that have declared that the lack of application of inflation adjustment for tax purposes is confiscatory and a violation of private property.
There are three ways in which a company can make a claim: (i) by means of an ‘amparo’, which is a constitutional expedited procedure when there is a clear and imminent violation of a constitutional right; (ii) before the actual tax is due by means of a declaratory (certiorari) procedure asking the court to declare that tax inflation adjustment is applicable; and (iii) the famous ‘solve et repete’, the possibility to repeat or request the devolution of the tax illegally paid. In this last case, other issues related to the applicable interest rate to the devolution are noteworthy.
Finally, it is fundamental to have an expert witness accountant to prove the confiscatory nature of this system.
There is never a dull moment in Argentina and there will always be plenty of work for lawyers. The world has learnt how to deal with the problem of inflation. Milton Friedman explained this very simply, noting that “inflation is always and everywhere a monetary phenomenon”, adding that the excess of supply of money produces a reduction in its price and therefore a general increase in prices, hence inflation.
In Argentina, inflation has been the tool preferred by politicians to tax citizens without creating a specific tax. The problem is that this tax affects the poor most, as they cannot access protection instruments such as foreign hard currency. The solution to these problems is not political or economic, it is philosophical.
The ideas that came about in the Constitution of 1853 have been slowly disregarded since 1930. This creates a big government where the end justifies the means. The government has one face when it is a creditor (rushed to collect and very harsh) and another when it is a debtor (Argentina has again selectively defaulted on its public debt, reluctant to pay its debts). In any case, it is always acting aggressively and abusively. The power of the individual vis-à-vis the government is negligible.