Introduction

Income tax has been the subject of popular debate in recent months in Argentina and is a sensitive topic of conversation. In the context of increasing inflation and the decreasing value of the Argentine peso over the past decade, income tax has had a marked impact on the salaries of workers, as the scales for calculating tax rates were last updated in 2000. There is much concern among blue-collar workers and pensioners about how much tax is deducted from their income.

In this context the new government enacted Decree 394/16, which increases the tax-free minimum salary, favouring pensioners and unionised employees. The decree was published in the Official Gazette on February 23 2016. It raised the tax-free minimum salary to Ps245,444 (approximately $16,000) for unmarried employees and Ps325,000 (approximately $21,700) for married employees with two children. However, the decree did not change the tax rate for other taxpayers and added new taxpayers to the scope of income tax. Approximately 220,000 workers had been exempt from paying income tax under Decree 1,242/13, which stated that individuals whose monthly salary by 2013 was less than Ps15,000 paid no income tax, notwithstanding future salary increases. As a result, numerous employees with lower salaries ultimately had higher earnings after tax than their superiors. The repeal of this rule has increased the minimum tax-free salary for the majority of workers and means that an additional 220,000 workers and 110,000 pensioners now pay income tax.

The government wants to delay the introduction of a revised tax rate until 2017 in an attempt to provide relief to the highly-indebted treasury and reduce government spending.

Income tax

Income tax was first established in 1932 as an emergency tax that was meant to last one year and affect high-income workers only under a progressive tax system. However, it was extended annually under different conditions and names. Due to inflation, the majority of employees have been included in the scope of income tax during the last decade.

Unions strongly oppose income tax on the salaries of low-paid employees, such as blue-collar workers, arguing that salaries are the product of an employee's work rather than profits earned and therefore income tax on the salaries of low-paid workers is unlawful. Strike action has been threatened if union demands in this regard are not satisfied.

Severance payments

Income tax on labour credits has been the subject of litigation for some time. The taxation of severance payments in cases of dismissal without cause is a contentious issue for the Tax Authority and taxpayers. Based on Supreme Court of Justice precedents, there has been significant growth in claims for income tax withheld from employees on the termination of employment. While the rulings have progressively excluded labour credits from the taxation regime, until recently the Tax Authority was reluctant to accept these exemptions.

In De Lorenzo, Amelia Beatriz (CSJN, 17 June 2009), the Supreme Court of Justice analysed indemnities for termination during a maternity protection period. Pursuant to the prosecutor's decision, the court stated that:

"it cannot be held that the end of an employment relationship is the judicial cause of a severance payment and, therefore, it is not a regular or permanent payment. It is clear that an employment relationship ends first and as a result produces the right to severance."

The court based its decision on Section 2 of the Income Tax Law – which defines 'taxable income' as "periodic profits or earnings that imply the permanence of the source that produces them" – rather than on the exemption to income tax under Section 20(i), under which severance payments in case of dismissal are tax free. The court held that special indemnities for termination during the maternity protection period did not fulfil the requirements of Section 2.

In Cuevas, Luis Miguel (CSJN, November 30 2010), which concerned compensation for the termination of employment during a union protection period, the Supreme Court of Justice held that:

"the compensation under analysis lacks the regularity and permanence required for it to be taxable under Section 2 of the Income Tax Law, since it is a direct consequence of the termination of an employment relationship. In other words, from the logical order of events, the termination of the employment relationship occurs first and as a consequence the right to severance arises."

More recently in Negri, Fernando Horacio (CSJN, July 15 2014), the Supreme Court of Justice approved a reimbursement request by a taxpayer in connection with a withholding made when he received a bonus payment for voluntary retirement. The court concluded that the payment was a result of the termination of the employment relationship which ended the employee's relationship with the source of his taxable income (ie, his employer). Following the criteria in Cuevas and De Lorenzo, the court stated that early retirement payments were beyond the scope of income tax.

Given the decision in Negri, it is unclear whether the Tax Authority will modify the criteria established in Regulation 4/2012 and cease collecting income tax on special indemnifications and severance payments provided to employees on the termination of employment relationships.

In the past, the Tax Authority has adopted the criteria used in Negri regarding the taxation of severance packages. In this context, the minister for the treasury recently stated that the public administration must adopt the guidelines established by the Supreme Court of Justice when there is clear evidence that they should be applied in similar cases (Decisions 53/05 (252:209) and 188/11 (279:75)).

Comment

Based on the Supreme Court of Justice decisions, employment case law will more frequently examine whether compensation that employees receive following the termination of their employment is taxable. While income tax remains a heavy burden for employment in Argentina, legislative amendments and case law are moving towards reducing its impact on labour credits.

For further information on this topic please contact Javier E Patrón or Enrique M Stile at Marval O'Farrell & Mairal by telephone (+54 11 4310 0100) or email (jep@marval.com.ar orems@marval.com.ar). The Marval O'Farrell & Mairal website can be accessed at www.marval.com.ar.

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