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The Government’s Voracity for Tax Collection and a Series of Mistakes
The voracity for tax collection has led the National Government to determine that executive directors must pay income tax on the portion exceeding the minimum amount set forth in the Employment Contract Act [Ley de Contrato de Trabajo].
Published in El Cronista on November 6, 2018
The amendment to the Income Tax Act [Ley de Impuesto a las Ganancias] and now Executive Order 976/2018 are contrary to the “Negri” precedent, whereby based on the same special law the Supreme Court of Justice of Argentina has ruled that severance pay is not taxable income because the source from where income derives is terminated and it is not a regular payment, as per the definition under Section 2 of the Income Tax Act. Furthermore, we all know that severance pay is a sort of protection for a job loss, among other features and functions.
As a matter of fact, the first mistake was made when the Income Tax Act [Ley de Impuesto a las Ganancias] was amended in December 2017. Section 79 stated that those who hold managerial and executive positions at public and private companies, as specified in the respective regulation, are included in this section as taxable income exclusively arising out of employment termination, whichever its name, and on the portion that exceeds the statutory minimum severance pay under the applicable labor law.
In turn, whenever these amounts derive from an agreement (by mutual consent or voluntary retirement, among others), they will pay taxes when they exceed the statutory minimum severance pay under the applicable labor law for employment termination without cause (Second paragraph included by Section 47 of Act No. 27430, Official Gazette of December 29, 2017).
The second mistake was made in the latest Executive Order 976/2018, establishing that the provisions of the second paragraph of Section 79 of Income Tax Act apply to the amounts derived from the employment termination of those who have actually held any position at the board of directors, councils, boards, executive or steering committees, or similar corporate governing bodies or managerial positions, continuously or intermittently in the twelve (12) months immediately before the date of employment separation. Such positions should entail decision-taking or the enforcement of policies and directives given by shareholders, partners or the abovementioned boards, and the gross monthly compensation taken to calculate executives’ severance pay as provided by the applicable employment and labor law should exceed at least FIFTEEN (15) times the Adjustable Minimum Living Wage currently in place at the date of termination.
These rules run against the very substantive law and also breach the principles of fair taxation, equality and non-discrimination, and affect the right to property when confiscating assets through an unfounded tax.
Lawmakers fail to discover another mistake: Section 2 of the Income Tax Act is still currently in force, establishing that for the purposes of this Act “income” means earnings, profits or yield on a regular basis implying a continuous source from which they derive.
With these rules we are standing at a crossroads because if the tax is not withheld based on the abovementioned arguments, employers may be fined by AFIP [Tax Authority], and obliged to get a judicial decision in their favor. If they withhold the tax, employees are forced to file a claim seeking reimbursement. However, if employers pay the net amount and decide to gross up the severance pay, they must ask employees to claim reimbursement and then refund them.
Finally, there is also another mistake: AFIP has failed to observe the “Negri” precedent whereby in line with previous rulings the Supreme Court found that severance pay is not subject to Income Tax under the terms of Subsection 10 of Section 20 of the Income Tax Act because the source of income is not regular or permanent. (Supreme Court of Justice of Argentina, July 15, 2014, Negri, Fernando Horacio v EN AFIP-DGI, LA LEY August 12, 2014, 8 LA LEY August 28, 2014, 4 with a note by Julián A. de Diego, LA LEY 2014-, 136 IMP 20149, 225 DT 2014 September) 2412, 36 DJ October 22, 2014 33 ● AR/JUR/32382/2014).
AFIP should accept that mistakes have been made and avoid a great deal of effort at Courts that unnecessarily affects the Tax Authority, companies and the executives who are terminated alike.
By Julian A. de Diego
Director of the postgraduate course on Human Resources at the School of Business at UCA.