Failure to Practice Taxes Withholding Can Have More Burdensome Consequences, as a Result of a Recent Ruling by the Supreme Court

One of the most notable features in the current tax system is the existence of numerous withholding systems which are applied to most of the payments performed by taxpayers to their employees and suppliers.

In general, violation of the withholding obligation can lead the Tax Authority to impose fines between 50 and 100 percent of the amount that the taxpayer omitted to withhold (Section 45 of the Tax Procedural Law).

When the omitted withholding is regarding Income Tax, the case can also be framed under an Income Tax Law provision, according to which the Tax Authority can challenge the computation of the expense in the tax balance. This faculty, contained in Section 40 of Income Tax Law, is rarely used by the Tax Authority. However, this may change after the issuance by the Supreme Court of a recent ruling in the "San Juan S.A. c/ DGI" case (October 27, 2015).

In this ruling, the Supreme Court argues that the mentioned provision implies a repressive measure; it points out that legislation allows the Tax Authority to challenge the computation of the expense in the tax balance, thus penalizing the behavior of whosoever fails to perform the withholding.

The High Court adds that this mechanism is also applicable to punish the lack of withholding of the tax on payments due to purchases of merchandise and supplies, even though such payments do not result in deductible expenses, but in computable costs.

The objection made to considering the expense for the determination of the Income Tax to be paid by the company that failed to perform the withholding, appears to have more of a punitive quality than the application of a fine equal to the amount of the omitted withholding. This occurs, in the first place, since the withholding tax rate is always lower than the Income Tax rate. Thus, the tax difference resulting from the objection to the expenditure is always higher than the omitted withholding amount.

Furthermore, accrued interest should be added to the amount of the greater tax to be paid as referred. This interest is to be accrued as from the date of the filing of the tax return and payment of the Income Tax for the relevant fiscal year. At this point, the resulting difference turns out to be very significant, since fines, up to the moment that they become firm and enforceable, are canceled by paying the original amount, without interest.

Only one aspect of the Supreme Court’s ruling is favorable to the taxpayer who failed to withhold. That is the possibility that the Supreme Court recognizes the taxpayer to "be dispensed" from the application of this provision, if he/she can prove that the payments regarding which withholding was omitted, were computed by the beneficiaries of the payments as taxed income.

The manner in which the Supreme Court has interpreted this provision should be noted as it enables the Tax Authority to apply a particularly severe penalty system when tax-withholding obligations are not met.