About the proration of interest in Income Tax, according to the rulings

The purpose of the original standards and their virtual disappearance.

The doctrine differentiates generic “expenses” that require the condition of “necessary to obtain, maintain and preserve taxable profits”, with respect to “deductions themselves” that do not demand that requirement.

Thus, the LIG and its predecessor, law 11,682 on income tax (and its inspirations in Anglo-Saxon legislation) enabled certain deductions (whether or not they were expenses) such as interest that was initially deductible without limitations even without relation to causality with a deliberate extra-fiscal purpose (in the USA, the original legislation is still maintained).

What happened before the inflation adjustment was implemented through Law 21,894)? Initially, restatements (updates, certain interest on financial placements and income from securities, among other items) were exempt while deductions were deducted from the taxable matter.

To avoid this imbalance, a series of limitations were implemented such as: a) “generic” expenses had to be assigned directly to each production source (and in exceptional cases, prorated); b) interest (which finances the application of funds) almost always had to be prorated according to the principle of universality of liabilities; c) the financial entities, by an internal rule of the former DGI, “challenged” 3.88% of the exempt income as non-deductible interest plus 1% as expenses; d) active and passive updates (including exchange differences) compensated each other: if the result was positive, it was exempt while if it was negative it was deductible (art. 20, subsection z) sec. Law 21,286).

But since the proportional allocation based on liabilities that financed taxable operations without distinction from those that were not, was not contained in the law itself but in the regulatory decree (ex. art. 120 DR) it was possible to maintain that with respect to the “ deductions” it was not appropriate to prorate the computable loss – in the case, interest – between taxed and exempt income (Jarach); while another current of opinion was in the opposite direction (Reig) considering that if the allowed deductions also qualified as expenses, it was appropriate to limit them in the corresponding proportion (that controversy ended in the current wording of the then art. 81 of the LIG). . (3)

There is a conceptual error in prorations based on income: the eventual “universal” indebtedness not only “finances” exempt income but also the acquisition of goods or payment of dividends.(4) Additionally, there was never a very good distinction between implicit or explicit interests and updates (indexations, exchange differences, etc. .) that were economically and financially analogous but had different tax treatment.

The obligation to carry out those calculations to limit deductions disappeared with the inflation adjustment mechanism of Law 21,894, which annulled almost all deductibles (which in practice, were mere restatements of values) by replacing it with the loss suffered by the exposed monetary capital. at the beginning of the exercise (5); The few liberalities that remained (export refunds, or subjective exemptions such as development loans, originating in Tierra del Fuego, etc.) did not merit a specific challenge due to the absence of ad hoc indebtedness. (6)

From universality to direct allocation of liabilities

In the new context after the AxI, that implicit theoretical principle that required weighing the supposed universality of the liability was no longer considered effectively and gave rise to the direct allocation of interest in specific cases; For example: a) the “thin capitalization” principle was applied; b) the deduction of interest for retroactive tax adjustments was prevented (as a result of the “Scania” case); c) certain presumed interests were taxed on advances of dividends (and similar concepts) or on the financial income of certain loans between related companies, and d) debts were attributed directly linked to the purchase of fixed assets (art. 6, law 21,894) or either they were linked to financing through negotiable obligations (laws 23,576 and 23,962), etc. In other words, the supposed “universality” (which we never really knew what it was) disappeared. (7)

The case of dividends is special: they were never computable beyond what is provided in the LIG (see Schindel and Fernández already cited); This is because any impact, even indirect, in a possible chain of shareholdings would lead to multiple taxation. (8)

Consequently, in the financial statements (now generically called “financial statements”), dividends are subsumed within the proportional equity valuation rules of the shares (and their counterpart is attributable to net equity); Therefore, to segregate them, everything would have to be taken back to a new “historical” balance (that is, without any type of reexpression), which seems as complicated as it is useless.

From a tax point of view, eliminating dividends for the purposes of any apportionment is also a rational requirement: for example, if a company went into debt to acquire shares that paid dividends every several years, it would only be obliged to dispute interest in the periods that will receive income. (9)

Summary

Regarding deductions linked to taxed, non-taxed and exempt income, everything seemed to be said, even with the important terminological disagreements opportunely exposed by Jarach. (10)

The interest prorations made based on a supposed universality of debts lost their reason for being since law 21,894 on adjustment for inflation eliminated the exemptions (which in reality, in these cases were mere recalculations) for the 3rd category. As described above, direct allocations of liabilities or deductions now prevail.

Even those original prorations were questioned in doctrine due to their lack of representativeness in assigning the debt (and its deductible financial burden) to the different income-producing sources.

Despite this conceptual fragility, the determination mechanisms used there were technically superior to those currently applied, which are based on a literality that is removed from the purposes for which the rules were established (preventing the deductibility of losses linked to exempt income). For its part, the most recent jurisprudence has dismissed those valuable antecedents.

In the case of dividends, beyond the fiction used to limit the deduction of interest, for the reasons mentioned above, The eventual challenge of part of the global financial burden that requires the reversal of losses arising from prorations is different from the financing method exposed in the Cash Flow Statements of the financial statements..

Public accountant. Tributary

(1) In jurisprudence both for and against taxpayers: Banco Hipotecario; BBVA (2023); Breuer SC (2024); Citibank (2024); HSBC (Chamber V against); Supermercados Norte (later INC SA), Swift (debt for bailouts) and Swiss Medical (2020) and for the doctrine: Fernández, LO and Schindel A.; Gadea, M. de los Á. (2021 and 2023); Malvestitti, D. (2024).; Martín, J. (AAEF, 2022); Skiarski, E. (2021), and Ziccardi, H. and Calello, C. (among others).

(2) For all: CA De la Vega, O. López Grillo and D. Albarellos. The universality of the passive. A critical rethinking. Tax Law: essential doctrines 1936-2000; Ed. The Law; Director: SC Navarrine and GE Etman; Interest Deduction; in Commented usual legislation; Tax law; Ed. The law; Volume II; Tax legislation; Chap. XI; The latter author promotes deductibility for each source and proration on a subsidiary basis.

(3) Jarach, D.; The deduction of interest in determining net profit. The Information; Volume XXXVII; Page 167; against, Reig, EJ; Tax Law Magazine; Deduction of interest in income tax; Volume XXVIII, Page 97.

(4) The issue was considered in Alto Paraná SA (National Tax Court, Room A, 11/3/99).

(5) Subsequently, Law 23,260 established an additional mechanism of “dynamic adjustments” resulting from reversing the initial effect of converting exposed assets into non-monetary assets and vice versa.

(6) Lamagrande, A.; Income Tax; Ed. The Law mentions the prorations with respect to taxed, exempt and non-countable income from foreign sources. Also Reig, E., Gebhardt, J. and Malvitano, R. (Ed. Errepar).

(7) The sources of financing of the entities (income, contributions and debts) and their destination (expenses or assets) can be viewed in the Cash Flow Statement (previously called Statement of Origin and Application of Funds) of the EECC; This observation deserves a qualm: the EFE (without too many technical reasons to justify it) is presented in constant currency while tax determinations are made in historical currency, which makes their reconciliation not easy.

(8) As the consolidation of balance sheets is only carried out for accounting and information purposes, if dividends were taxed – even indirectly -, the results obtained by an operating company would be achieved by the LIG headed by each of the shareholders that make up the eventual chain of investors. Hence its exclusion for all tax purposes (prorations, AxI, etc.) although “dynamic adjustments” maintain certain asymmetries that are difficult to justify.

(9) In order to simplify the analysis, the possible taxability with the LIG of the result from the sale of the shares originating from non-countable dividends has not been considered here.

(10) The simplified interpretation according to which the distinction between “exemption” and “exclusion” lies in their prior understanding within the taxable event can be overcome with the interpretation according to which the aforementioned difference has no practical effects. (Jarach, D.; The difference between exemptions and exclusions of object. Rentas Magazine; Provincial Directorate of Revenue of the Province of Buenos Aires; Year recorded. The Information; Volume LVIII, Page 15).