The Unconstitutionality of Income Tax on Pensions

The Supreme Court has issued an emblematic decision declaring the unconstitutionality of income tax on pensions in re “García, María Isabel v AFIP [Tax Authority] on declaratory action of unconstitutionality” (Supreme Court of Justice of Argentina, March 25, 2019).

As a matter of fact, the Federal Court of Appeals in Paraná confirmed the Lower Court decision upholding the complaint and therefore declaring the unconstitutionality of subsection c) of Section 79 of the Income Tax Act No. 20628.

Published in El Cronista on April 03, 2019
Consequently, the Court ordered the Defendant to 1) reimburse the Plaintiff for any income tax withholdings from the moment the complaint was filed until actual payment; and 2) not to apply income tax on pensions in the future; and in turn, extended the scope of this decision until Congress resolves accordingly, and in an indirect message, according to final ruling.

This decision has effects on an individual basis, even though it may be cited as a precedent in similar cases.

Actually, it is not a claim for double taxation but a social offense against a retiree who is defenseless and constrained by old age, and whose income is a pension benefit.

It is also argued that the income tax withholding on pensions breaches the constitutional principle of the integral nature of the pension benefit, and its reduction through taxation. Considering that the retiree during her years of active employment has been paying the respective income tax, this is a clear case of double taxation if the same tax is imposed on her pension later on.

The Court of Appeals found that pensions are not gains or income but society’s debt to retirees who have contributed to social progress at their time and place. In Argentina the State-run pension system implies that every retiree –with a few exceptions- has already made his/her contribution to fund the scheme in real time.

The Court declared the unconstitutionality of subsection c) of Section 79 of Income Tax Act because it affects the integral nature of the pension benefit under Article 14bis of the National Constitution and goes against Articles 16, 17 and 31, subsection 22 of Article 72 of our Magna Carta, and Article 26 of the American Convention on Human Rights, Article XVI of the Declaration of the Rights and Duties of Man, Articles 22 and 25 of the Universal Declaration of Human Rights, and Article 9 of the International Covenant on Economic, Social and Cultural Rights. Under our National Constitution the State must ensure the integral and inalienable benefit of social security (Article 14 bis). Now this right is equally dependent on other duties under the National Constitution requiring taxation and allocation of resources for different individuals and sectors of society.

Then the duty to ensure social security benefits cannot be met in isolation. On the contrary, it can only be fulfilled thanks to distributive justice and social justice to tie such duty to other requirements to be met in accordance with the Constitution.

In fact, the Court ruled that social justice is what allows us to organize the subjective activities of the members of the community and the resources it has so that each and every member could share in the material and spiritual goods of civilization. (Judgments: 289:430; 327:3753; among others).

Distributive or social justice is a concept included in our Constitution as an imperative duty for the State branches. For instance, according to our Constitution, Congress must impose direct, distributive taxation to be shared among the different entities at the federal level.

To this end “objective sharing criteria” should be taken into account “giving priority to the achievement of a similar degree of development, of living standards and equal opportunities throughout the national territory” and based on principles of “equality and solidarity” (subsection 2 of Section 75 of the National Constitution).

Congress should provide for the “prosperity of the country, for the development and welfare of all the Provinces” (subsection 18 of Section 75 of the National Constitution) and specially for everything relevant to “human development, economic progress with social justice” with the aim of providing for the “harmonious growth of the Nation” and promoting “differential policies that lead to balancing the irregular development of Provinces and regions” (subsection 19 of Section 75 of the National Constitution).

Based on the dissident vote by Carlos Fernando ROSENKRANTZ, income tax is only applicable to the so-called privileged pensions like that of the Claimant, and in fact the message is forwarded to Congress where the law should be adjusted in accordance with this ruling.

By Julian A. de Diego
Director of the postgraduate course on Human Resources at the School of Business at UCA.