Arecent Supreme Court decision represents a serious reverse for Argentine taxpayers that have been claiming during the last three years for the re-enactment of the inflation adjustment for income tax purposes.
The claim was due to the inflationary environment under which business has been operating from January 6 2002, when the Argentine government decided to leave the convertibility system (Ps1 = $1) that had been introduced by Law 23928 in early 1991. Until then, taxpayers had been allowed to determine their income tax liabilities, segregating fictitious gains by applying the statutory adjustment method based on the inflation index.
The inflation adjustment method provided by the Income Tax Law was never abrogated, but further to the launch of the convertibility system, taxpayers were forbidden by Law 24073 from considering inflation indices as from April 1992. Although this restriction made the adjustment method virtually useless ever since, the measure did not affect taxpayers by virtue of the stability of the currency achieved during the nineties.
But the above situation changed after the devaluation of the Argentine peso in 2002. The underlying trend of inflation provoked taxpayers to appeal to the courts, arguing the unconstitutionality of the prohibition against the recognition of inflation for tax purposes because such restraint damaged their constitutional property rights. As a result of this initiative, some companies were granted provisional injunctions from federal courts that allowed them to apply the inflation adjustment to assess their income tax liabilities.
Even though certain ordinary and appeal courts were favourable to taxpayers concerning this matter, the Argentine Supreme Court ruled in Santiago Dugan Trocello S R L c/Poder Ejecutivo Nacional on June 30 this year that there were no grounds to allege an impairment of property rights. As a consequence of this decision, the plaintiff was not able to recognize the inflation effects in its income tax assessment.
It must be noticed that this Supreme Court's decision attacked the particular legal procedure followed by the taxpayer (recurso de amparo), which is intended to preserve constitutional rights that are being manifestly infringed. In the opinion of the court, the legal action brought by the taxpayer was not admissible because of a lack of evidence to demonstrate that the prohibition against the use of the inflation index for income tax purposes violates the Argentine Constitution.
Although it remains to be seen how the Supreme Court will rule in cases where taxpayers followed a different approach, this decision indubitably plays a significant role in the dispute over this issue.
Andrés Edelstein (andres.m.edelstein@ar.pwc.com) and Gustavo Wunder (gustavo.wunder@ar.pwc.com), Buenos Aires
