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Argentine Supreme Court deems tax on presumed minimum income unconstitutional

The Argentine Supreme Court of Justice ruled in Hermitage v Ministry of Economy that Law no. 25,063, which establishes a tax on presumed minimum income (TPMI), or impuesto a la ganancia minima presunta, is unconstitutional.

The Argentine Supreme Court of Justice ruled in Hermitage v Ministry of Economy that Law no. 25,063, which establishes a tax on presumed minimum income (TPMI), or impuesto a la ganancia minima presunta, is unconstitutional. The Supreme Court declared TPMI unconstitutional in Hermitage because the five-star hotel in Mar del Plata successfully proved they could not produce income and subsequently, was unable to pay the TPMI.

TPMI, enacted on December 7 1998, established that Argentine companies, branches, trusts, partnerships and other select entities are subject to a 1% tax at the end of each fiscal year. This 1% tax applies to the company's or entity's worldwide assets, the total assessed tax value of which must be more than $50,700. TPMI will only be owed if the income tax for any fiscal year does not meet or is not more than the amount due under the TPMI. If this is the case, the only difference between the TPMI and the income tax determined for the same fiscal year should be paid. Though this is the default position, exemptions and exceptions exist.

Paid TPMI can be used as credit toward income tax owed for the following 10 years. Financial analysis made by an in-house accountant appointed by Hermitage and the Supreme Court, for reasonsnot addressed in the ruling, only took into account the previous four years. The analysis in Hermitage's case established that the company accumulated a significant amount of loss carry forward during the four-year span. Moreover, the accountant and the Supreme Court agreed that Hermitage did not have the ability to pay the TPMI.

Tomás Balzano, of Estudio Beccar Varela, a law firm in Buenos Aires, explained "the tax is imposed whenever a company has a loss and as such does not have to pay income tax in a given fiscal period, or at least income tax paid does not equal the TPMI – 1% over the worldwide assets . However, it could be construed from the Hermitage case that if a company proves the business isn't going to generate the presumed income established by Law 25,063, the TPMI should not apply. The company effectively lost more than it gained."

In Hermitage, the Supreme Court looked at fiscal years for 1995 through 1998. Hermitage proved that during 1995, 1996 and 1999 the company generated tax losses and did not pay income tax. The Argentine hotel successfully escaped paying TPMI. "This is almost a punishment for non-productivity of assets in Argentina," said Balzano. Having proventhe existence of large losses carry forward, Hermitage now questions if TPMI is truly a tax on assets.

Despite the opinion, which tax professionals did not predict, similar cases in lower level courts in the past have resulted in unfavourable decisions for taxpayers. For example, Lindberg Argentina SA in September 2001 and Georgalos vs. Ministry of Economy in February 2001 ended in adverse decisions for corporate taxpayers because of insufficient proof of tax loss.

The ruling in Hermitage, while innovative, is limited to the facts in the case. "Lower level courts are not obliged to follow precedent," said Ezequiel Lipovetzky of Bruchou, Fernández Madero & Lombardi - Taxand.

Hermitage "cannot be used in principle in all cases," said Balzano.

One practitioner believes that this will not deter companies from pursuing this and other related issues in court .

"In the near future we are going to have many discussions related to this case law. Before the year ends, taxpayers will somehow start some actions in order to protect their rights," said Andrés Edelstein of PricewaterhouseCoopers.

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