Debt Reductions in a Reorganization Proceeding Are Not Subject to VAT

On March 3, 2015, the Supreme Court of Justice overruled what the Court of Appeals had said and concluded that debt reductions in a reorganization proceeding[1] are not subject to Value Added Tax (VAT).[2]

The Supreme Court analyzed section 11 of VAT Law (Law No. 23,349), which determines how VAT tax debit is defined. In that order, section 11 first establishes that the tax rate must be applied on the total amounts of “net prices” levied over the sales and the rendering of services. Once the tax is so obtained, section 11 states that the tax resulting from applying the tax rate to “refunds, terminations, discounts, bonuses or reductions, which regarding their net value, are obtained” must be added.

The Supreme Court considered that when the term “reductions” is followed by the indication “which, regarding their net value, are obtained…” it means that tax debit is increased only by reductions on the “levied net price”, i.e. the one contemplated in the invoice.

Accordingly, the Supreme Court considered that debt reductions in reorganization proceedings do not increase the taxpayer’s tax debit because those reductions are not related to the “net price” billed.

Finally, the Supreme Court rejected the alleged impact on the neutrality of the tax that would take place if reorganization proceeding debt reductions were not taxed, on the grounds that it would not affect this conclusion because the extension by analogy of the taxable base stipulated in the law is inadmissible because taxes can only be created by law.

Thus, the Court put an end to the discussion carried out in previous instances: if a debt reduction in a reorganization proceeding is or is not to be taxable in a manner similar to a reduction in a commercial context (i.e. those agreed between the parties when setting the price and closing the deal). The conclusion is that, unlike reductions in a commercial deal, debt reductions in a reorganization proceeding are not subject to VAT.

[1] Argentine Bankruptcy Law No. 24,522 contemplates two main insolvency proceedings: reorganization and bankruptcy proper. The general provisions of the Bankruptcy Law apply to companies and individuals, with certain exceptions applicable to financial institutions, public utilities, pension funds and insurance companies.

[2] Case “Celulosa Campana S.A. (TF 29.047-I) c/ DGI” (Supreme Court of Justice, CSJ 226/2013 (49-c) /CS1).