The laws superimposed methods of adjustment for inflation complicating the task and the application of Income Tax, creating a real labyrinth
Despite the fact that the Income Tax Law (LIG) includes among its rules of application of the comprehensive adjustment for inflation of tax results, the situation of taxpayers in this regard today is chaotic.
This adjustment of results is the means chosen by the Law to maintain the capital of companies with equivalent purchasing power in terms of inflation, explained Raúl Sanguinetti, Tax partner at Bakertilly Argentina.
But parameters set in 2017 they attempt against the application in practice of Inflation adjustment, while there is a lack of updating of the legislation to take into account the world income criterion.
And the Candy case, of the Supreme Court of Justice recognized that the lack of application of the inflation adjustment implies reaching the capital tax, deteriorating it, added Sanguinetti.
This is that the non-application of Inflation adjustment, both in accounting and tax terms, impacts on the capital of companies reducing it.
This occurs via the determination of fictitious dividends in the accounting case and due to the excessive tax in the tax case.
This phenomenon generates a quiet divestment effect, with a devastating effect on productivity in the long term, Sanguinetti said.
For that reason, in the last Tax Symposium, organized by the Buenos Aires Professional Council of Economic Sciences (Cpcecaba), Sanguinetti presented a work in the Commission of Tax Incentives to Increase Investment, in which he highlighted the importance of enabling the adjustment for inflation comprehensive tax.
This is because its mere existence allows the investment to be maintained in terms of equivalent purchasing power, even more so considering that trade balances already include it in a comprehensive manner, emphasized Sanguinetti.
In the LIG, the adjustment for integral inflation is achieved by making three basic adjustments:
-Applying the method established by the same standard.
-Adjusting accumulated losses from previous years.
-Adjusting the amortizations and the residual value of the goods sold.
If these three methods don’t work, there is no comprehensive tax adjustment. And unfortunately in the three pillars there are currently application problems, Sanguinete warned.
The method of the law
In relation to the adjustment following the LIG method, two types of problems are observed, Sanguinetti listed:
-Parameters: The deferral in 3 or 6 years of the result of the adjustment to nominal value, at the current inflation rate, results in only approximately 25% being computable, in real terms of current value.
The same negative effect has that, for the application of the adjustment, an inflation greater than 100% has to be verified in the last 3 years.
While this is a standard used by international accounting standardsIn our case, we are talking about taxing the capital of the companies or not, assured Sanguinetiti.
-Technical: the inflation adjustment was introduced in the LIG in 1978, recognizing the effect only of the so-called static adjustment.
In 1985 the system was improved by incorporating the so-called dynamic adjustment. In those years, the LIG taxed only Argentine source earnings.
In 1992, two substantial events occurred: the application of the inflation adjustment was suspended and the Income Tax began to tax world income.
With the 2017 reform, applicable to the years beginning in 2018, the suspension of the application of the inflation adjustment is lifted, subject to deferral since 100% inflation is verified.
But the inflation adjustment scheme remains the same as in 1992, without adapting it to the changes in the law, especially with what has to do with unlimited tax liability or world income, Sanguinetti warned.
Sanguinetti emphasized those situations where the LIG allows deferring the computation of Exchange differences due to holding foreign currency abroad and that only receive the correction for the year in the dynamic adjustment.
And also in those investment situations that could generate income from a foreign source, whose assets must be excluded from the calculation of the static adjustment.
The specific cases can be very diverse, the only certain thing is that the world income principle is not synchronized with the inflation adjustment mechanism, which can lead to situations of true inequity, said Sanguinetti.
Harm for SMEs
Until the years beginning in 2018, member retirements were excluded from the generation of presumed interestsIn contrast, the withdrawals of the shareholders were not.
This treatment had an impact on the inflation adjustment, since for member withdrawals, whatever the concept, a positive dynamic adjustment was generated from the date of each withdrawal, which did not apply if they were “shareholders”.
However, with the reform, partners have the same treatment as shareholders, in that their withdrawals generate dividends or presumed interest, however the treatment for the inflation adjustment has not changed, thus generating a significant distortion that normally has a greater impact on SMEs.
Accumulated tax losses
To take the accumulated tax losses from previous years, meanwhile, Sanguinetti pointed out that the life of human and legal persons is continuous, with successes and failures and in economic terms gains and losses.
In tax terms, this situation is defined as “income irregularity,” which is a relevant issue since the criteria for assigning income is annuity, therefore the treatment assigned to losses is substantial, said Sanguinetti.
The doctrine provides that in order to lessen the rigidity of the autonomy of the balance sheet and bring the taxation closer to the economic reality, the laws adopt the system of transfer of losses.
Any limitation to the computation of losses in full and in constant currency implies an increase in the real tax rate, said Sanguinetti.
The contributory capacity must be measured in its entirety and not for stagnant periods, nor discriminating the origin of the losses, he expressed.
This situation is well considered by investors who are aware of business risk in general and, especially, farmers, who are aware of the effects of climate change, droughts and hail, exemplified Sanguinetti.
Losses must be able to be carried over for several years
But the period of use is 5 years into the future and its update is a controversial issue. There are specific losses that can only be computed against earnings from the same type of operations, Sanguinetti warned, and listed the following:
1. Those coming from the sale of shares, social participation quotas, including the quotas of the common investment funds.
2. Those from operations whose results should not be considered from Argentine sources.
3. Those originated by rights and obligations arising from derivative instruments and / or contracts, except for hedging operations.
4. Failure of operations on the continental shelf.
5. The cedular tax on financial income.
Argentina is one of the countries that most limits the transfer of lossesSanguinetti assured.
Historically, one of the most important reasons to justify the existence of some of the specific losses was the lack of transparency of the markets where the operations that generated them were carried out.
But today many of those markets are transparent and should, in that case, lose the limitation, said Sanguinetti.
Amortizations and residual value
Regarding the adjustment of amortizations and the residual value of assets, the situation is chaotic, said Sanguinetti.
Especially, for those who followed the system provided by a law that made it possible to carry out the tax revaluation of certain assets, in order to update their value.
This updating system was optional and required the payment of a special tax whose rates were from 8% to 15%.
It was a perverse system, since for a long time the taxpayers were paying an additional rate of the Income Tax, by not allowing them the deduction of the updated amortization, and in order to correct this lag they were asked for an additional payment, to get out of that situation.
As all the additions of goods are adjusted for inflation from the years started in 2018, in those cases there is parity.
But these taxpayers adjust the amortizations and residual values of the goods acquired before 2018 and the rest do not.
That is, Today there is a universe of companies that continue to pay a tax surcharge for amortizing their assets over historical values as if they sell them.