Seniority Pay, calculated pursuant to the guidelines of the "Vizzotti" precedent or to the legal cap of Section 245 of the Employment Contract Law (whichever be the best for the employee), is exempt from income tax (“IT”), as shown by Communication 4/2012 of the Federal Tax Authority (“FTA”), issued some time after said "Vizzotti" precedent was rendered by the Argentine Supreme Court (“SC”). The question was what happened with the amounts paid by employers in excess of the Seniority Pay so determined, by allocating such excess in certain cases to the Seniority Pay itself or to any other item (e.g., special termination bonus).
The position of the FTA then was that any payment made in excess of the Seniority Pay calculated in either way explained above, would be subject to IT. In other words, the tax exemption provided for in Section 20.(i) of the Income Tax Law ("ITL") applies only up to the limit set by either the “Vizzoti” or the legal cap ways, thus being the employer required to withhold the IT from any sum exceeding such thresholds.
We understand that the FTA’s criteria is debatable in light of several precedents about this matter.
In fact, the SC had "indirectly" opined about this matter when it decided cases "De Lorenzo" and "Cuevas", where the SC ruled that items paid in addition to the Seniority Pay were exempted from the IT. Those additional items were special severances triggered due to termination during employee’s pregnancy (De Lorenzo), and during the union protection term (Cuevas). The SC considered in both precedents that in those additional severance items there were no periodicity and permanence of the income source, as required by Section 2 of the ITL to make them IT-levied. As a result of these precedents, the FTA followed the SC’s criteria via Communication 3/2012.
Although they were extremely relevant, the SC´s decisions in these cases had not been, up until now, part of a similar ruling from the SC when it came to payments in excess of Seniority Pay above the caps, despite the SC had had the opportunity to decide on the matter (in the"Ediciones B" case), but omitted to do it because of procedural issues.
Until now, there have been different rulings from lower courts according to which the total amount of severance for termination was not reached by the IT. There were also cases that even considered such payments directly as IT exempt, pursuant to Section 20.(i) of the ITL, even when calculated in excess of the legal cap or of the cap set by the “Vizzotti” precedent, whichever may correspond.
Therefore, from a tax standpoint and in our opinion, everything seemed to indicate that any sum paid beyond the caps should not be subject to IT, and that sooner or later case law would lead the FTA to change its position and reduce the employers’ exposure to inspections and a tax assessment for failure to withhold the IT.
In this scenario, on 7/15/2014 the SC issued final judgment in re. "Negri, Fernando Horacio v. AFIP-DGI EN", where the SC finally analyzed the merits of the matter and conducted the analysis that had been pending so far.
Mr. Negri filed a complaint against the FTA seeking to recover the amounts withheld by his employer as IT, after having received a termination package for a mutual termination agreement with the employer, and which Mr. Negri received as a “special termination bonus”.
The Attorney General (“Procurador Fiscal”) was inclined in favor of Mr. Negri, and the SC confirmed that position in its final judgment, where it construed that the amount agreed upon and paid with Mr. Negri’s termination was triggered because employment had ceased. In the SC’s view, payment of the amount was caused by termination and, further, such termination implied the disappearance of the employee’s source of taxable income (which was in line with the criteria established in "De Lorenzo" and "Cuevas"). The "special termination bonus" thus lacked the periodicity and permanence of the income source required for the applicability of the IT under Section 20.(i) of the ITL.
Despite the significance of the ruling, we stress that it only has effects on this particular case, and that it is not binding upon lower courts. However, we should expect that lower courts follow the SC´s position in future decisions and even that the FTA do the same. In effect, legal opinions 53/2005 and 188/2011 of the Treasury’s Attorney Office have established that the Government to which the FTA belongs shall embrace the instructive guidelines of the SC, as long as they evidence their applicability to the particular case at stake.