Tax Court Ruled Over the Deduction of Losses Resulting from the Trading of Securities under a Blue-Chip Swap Transaction

1. Background

In 2015, Exterran Argentina S.R.L. ("Exterran") purchased certain Argentine Republic sovereign bonds with a market value in local currency of approximately ARS 165 million. Subsequently, Exterran sold those bonds in foreign currency for USD 13,337,950.62. This sale, considering the official exchange rate in the Argentine Republic at such time, resulted in a loss for the company of ARS 44,308,526.66.

 

According to the foreign exchange regulations applicable in Argentina at that time (many of which are still in place today), there were several restrictions that prevented the acquisition of foreign currency in the official foreign exchange market or limited such acquisition to a great extent.

 

Consequently, a legitimate way of obtaining foreign currency was through a blue-chip swap transaction, as the one carried out by Exterran, whereby the person acquires in Argentine pesos certain securities denominated in US Dollars (usually, Argentine Government bonds), which are traded both in the Argentine and foreign market, and then sells such securities against US dollars. As a result of this transaction, the person trading the securities has the possibility of acquiring foreign currency in those cases in which the Central Bank of the Argentine Republic has not authorized its sale through the official foreign exchange market, even though the implicit exchange rate under this kind of transactions is significantly higher than the official foreign exchange rate. In Argentina, blue chip swap transactions are colloquially referred to as acquisition of "Dolar MEP" (from the acronym in Spanish, “Mercado Electrónico de Pagos”) or acquisition of “Dolar Contado con Liquidación.”

 

Since the acquisition price of the securities in Argentine pesos is substantially higher than the sale price of the same securities in US dollars (considering such sale price at the official exchange rate), its sale usually results in an accounting loss in Argentine pesos. 

 

In this context, on November 19, 2014, the Argentine Tax Authority (“AFIP” from its acronym in Spanish)  issued “Circular No. 5/2014,” concluding that losses derived from “negative exchange differences” in blue-chip swap transactions are not deductible for income tax purposes, to the extent that: (i) they cannot be characterized as regular deductible losses, since they are not related to the obtaining, maintenance or conservation of taxable income, and (ii) they do not comply with the legal requirements to be considered as extraordinary losses arising from a force majeure or fortuitous event. Moreover, in said Circular 5/2014, AFIP held that this type of transactions has the "sole purpose" of generating an accounting and tax loss in order to avoid the payment of income tax, and, consequently, are not deductible for tax purposes.

 

It should be noted that “circulares” issued by AFIP are internal administrative acts issued by the Argentine Federal Administrator directed to the employees and other officials of AFIP, in which the Federal Administrator clarifies what should be the general criteria to interpret or apply certain regulations or how to proceed in certain situations. Hence, “circulares” are internal administrative acts binding only for the officers and employees of the AFIP, but not for taxpayers or other third parties outside the sphere of that agency.

 

In the case under analysis, Exterran did not deduct the loss resulting from the blue-chip swap transaction for purposes of assessing its taxable income for the 2015 tax period.

 

However, on December 30, 2016, the taxpayer filed a legal claim with the Argentine Tax Court, requesting the refund of the tax paid in excess, considering that the loss resulting from such transaction was indeed deductible for tax purposes.

 

In this regard, when filing the action, Exterran rejected the fiscal criterion exposed in Circular 5/2014 and its application to its case, on the following grounds:

• In a first place, it argued that the loss was the result of a transaction of purchase and sale of securities and not a loss derived from a negative exchange difference to the extent that such loss resulted from the different value of the bonds in each moment (purchase and sale) and in different markets (local market and foreign market).
• In a second place, it argued that the motivation for executing the bluechip transaction was merely economic and not for the purpose of obtaining a tax advantage. Accordingly, Exterran sustained that the transaction was carried out with the sole purpose of preserving company’s equity, in an economic context of high currency depreciation, strong devaluation of the Argentine peso and the strong restrictions for companies to acquire foreign currency in the official foreign exchange market, with the aim of being able to comply with certain obligations assumed in foreign currency and mitigate the harmful effects of inflation.

 

On the other hand, AFIP, at the time of answering the action filed by the taxpayer, stated that the operation carried out effectively produces a non-deductible loss for income tax purposes, since it is not related to the obtaining, maintenance or conservation of the taxable income and it does not meet the requirements to qualify as an extraordinary loss.

 

Likewise, AFIP argued that the transaction had been carried out with the purpose of generating an accounting and tax loss to avoid the payment of the applicable income tax, and therefore it should not be an admissible deduction. By and large, AFIP’s position is based on the conclusions of Circular 5/2014 mentioned above.

 

2. The ruling of the Argentine Tax Court

In the first place, the Argentine Tax Court stated that the issue to be solved was determining whether, as stated by AFIP, the purpose of the blue-chip swap transaction carried over by Exterran was generating an accounting and tax loss in order to evade the payment of income tax, or whether, as the taxpayer argued, the loss took place within a legitimate economic operation, with the purpose of preserving its equity, which would make it legally deductible for income tax purposes.

 

Finally, the court decided to uphold the reimbursement action filed by Exterran, on the following grounds:

1. Regarding the application of Circular 5/2014, the Tax Court emphasized that “circulares” are binding only within the sphere of the tax administration, to the extent that their purpose is instructing the AFIP’s employees and officers. Consequently, the court stated that “circulares”  "do not have a normative status for taxpayers, thus being non-binding for the resolution of this case.”
2. Then, the Court argued that AFIP could not substantiate or demonstrate the reasons why it considers that the transaction carried out by Exterran  was the result of a harmful tax planning with the purpose of evading income tax, considering that AFIP’s position was just a “dogmatic assertion without any legal ground."
3. After that, the Court indicated that the loss was caused by the difference between the acquisition and sale prices of the securities involved. Therefore, the possibility of its deduction would depend on whether the results arising from those kinds of transactions are under the scope of the tax or not. Since in the case of Argentine companies, the results arising from transactions with securities are computable under the provisions of section 2 of the income tax law, the conclusion then is that all the losses resulting from this kinds of transactions are computable as deductible for tax purposes.
4. Furthermore, the court stated that "the opposite criterion would constitute an absurd unequal treatment on the gains with respect to the losses, since, if the same taxpayer carried out the reverse operation (i.e., purchase of securities with foreign currency and sale of the same against Argentine pesos), it would obtain a taxable gain in all cases; hence, if he obtains a gain it would have to pay the tax, but if he obtains a loss, such loss would not be computable."

 

3. Closing Remarks

The relevance of this ruling lies in the endorsement by the Argentine Tax Court of the deduction of losses resulting from blue-chip swap transactions with the purpose of acquiring the so-called "Dolar MEP " or "Dolar Contado con Liquidación," leaving aside the criterion expressed by the Argentine Tax Authority in Circular No. 5/2014. The ruling, although not final, is of great value due to the several blue-chip swap transactions that took (and still take) place in Argentina, because it clarifies to some extent the tax treatment that losses resulting from those operations should receive.

 

Nevertheless, it is important to note that the tax period under analysis in this ruling was 2015, when there was no express regulation in relation to losses arising from the purchase and sale of securities. As of the tax reform carried under Law 27,430 (published in the Official Gazette on December 29, 2017), Article 25 of the Income Tax Law establishes that, for Argentine resident entities, losses arising from the sale of securities have a specific nature and can only be offset against gains of the same nature (i.e., gains resulting from the sale of securities). In this regard, the effects of this ruling under the current tax regulations will have to be further analyzed.