Argentine Supreme Court rules against Molinos in tax treaty abuse case

By Hernán Ubertazzi, partner, 3D Asesores, Buenos Aires

The Supreme Court of Justice of the Nation on September 2 endorsed the position of the Argentine Tax Authority regarding the abuse by Molinos Río de La Plata of the Argentina-Chile double taxation agreement signed in 1976 in a case involving an amount of more than 65 million pesos (USD 650,000) during fiscal years 2004–2009.

The case related to dividends from the company’s subsidiaries located in Chile, Peru, and Uruguay, which Molinos considered to be covered by the Argentina-Chile tax agreement.

In 2011, after several audits, the tax authority concluded that Molinos had abused the agreement by using the Chilean holding company – the controlling company of the Peruvian and Uruguayan subsidiaries – as a “conduit company.” Accordingly, the tax authority resolved to adjust the income tax from Molinos corresponding to fiscal years 2004–2009, as the group had not paid income tax in Chile either.

Molinos appealed the matter to the National Tax Court, the National Chamber of Appeals in Federal Administrative Litigation, and finally to the Supreme Court of Justice of the Nation. In all instances, the courts ruled in favor of the Treasury.

The Supreme Court’s ruling indicates that “By citing the principles of public law to which treaties must conform, especially good faith and reasonableness, it is resolved that the plaintiff’s conduct is not protected by the rules of the Convention of Double taxation.”

In addition, the court held – based on constitutional foundations and international law (OECD instruments and Chilean standards) – that the position taken by the company was “abusive and unreasonable,” since the company did not rely in good faith on the Argentina-Chile treaty to avoid double taxation but rather to avoid paying income tax in either country.

This ruling strengthens the powers of the tax administration to analyze and question aggressive tax planning, and it adds to the historical rulings on “economic reality” that, giving full meaning to Article 2 of the Tax Procedure Law as an anti-avoidance rule, prioritize economic reality over legal forms.

—Hernán Ubertazzi is a partner with 3D Asesores, Buenos Aires.