Difficulties Inherent in Indexation
In the midst of an economic crisis that was wreaking havoc on the Argentine peso, Law 23,905 was enacted in 1991, whereby duties and other taxes levied on imports and exports were to be determined in US dollars.
As this measure had to be established by law, what was originally intended to be an emergency solution was effectively given permanency (without limiting its validity to the duration of the emergency).
A month after its entry into force, within the framework of a plan to curb inflation, the government issued Law 23,928, which engendered the convertibility plan whereby 10,000 Australes (then equivalent to 1 peso) were equal to one US dollar.
This law repealed all legal rules or regulations that had established or authorized price indexation, monetary updates, variation of costs or any other form for updating debts, taxes, prices or utility rates.
Thus, all rules provided under the Customs Code for updating taxes, export refunds, return of wrongly collected taxes, proportionality in the level of penalties and fixed caps to determine the competence of Argentine Customs were struck down.
Turning a Deaf Ear
All attempts to convince authorities that such rules (embedded in substantive law) should be subject to “suspension” but not “elimination” were of no use, even though their future application could not be ignored, as it later turned out. This led to the distortion that we are dealing with here.
For a full decade, the convertibility plan proved effective in holding back a hidden phenomenon that broke out in late 2001 when there was a violent devaluation.
Unlike the one-to-one parity of the peso with the U.S. dollar under the convertibility plan, the devaluation unleashed a dollar that soared threefold. In light of this, the administration, under the favor debitoris principle (more usual in debtors undergoing a bankruptcy, where there is an attempt to obtain reductions and time extensions from creditors, than in a government agency), did not cease to make use of the enormous advantage it had in setting the law at its convenience in all cases in which it was involved.
Although the government did provide some relief to taxpayers who were indebted in U.S. dollars, it kept the ban on updating under Law 25,561 (as if the peso were still stabilized by the one-to-one parity requirement, which by that time had been repealed by the Central Bank).
Thus, credit on customs duties continued to be rated in U.S. dollars, not only for the “original” customs determination (established before Customs clearance to the domestic or foreign market, as applicable), but also for “supplementary” determination, i.e., upon subsequent reviews, perhaps months or years after clearance.
Although the “dollar clause” (like the gold standard before it) is a well-known means for updating monetary debts (Argentine Supreme Court Rulings 333: 447) and, therefore, article 20 of Law 23,905 was inapplicable for indexation purposes because of the mandate established under the subsequent Law 23,928, both the Executive and the Judiciary turned their backs on these hard facts and opted to consider that article 20 was not in itself an indexation or reassessment of the monetary debt (Argentine Supreme Court, “Volkswagen”, August 23, 2011, case file V.312.XLV).
The Turning Point
Had it been accepted that Law 23,905 had indexation effects, conversion of the U.S. dollar to the peso should have occurred at the time of making the original determination (upon filing the customs declaration) in order to unify the various different currencies reflected in the costs that likely make up the tax base, but never to keep the debt in U.S. dollars for computing the supplementary determination. It just so happens that in this way Customs implicitly computes indexation since a much earlier point in time than the one in which the alleged debtor is notified of the outstanding debt being claimed, thus violating the rule by which indexation and interest require prior delinquency.
This is all the worse when dealing with a monetary debt, and not an adaptable debt (i.e., debt of value).
The rule that “there is no indexation of the debt without prior default” is provided in all past laws on updating (ranging from the original Law 21,281 and Law 21,369 to the passage of the Argentine Customs Code, and specifically under article 799 regarding customs credit as well as article 813 related to repeat taxation), except in cases of set deadlines, in which default arises from the lapse of time in complying. This only proved to be consistent with the principle established by legal opinion and case law on the matter.
To prevent an assault on the very nature of foreign trade, Customs should streamline customs processing and tax collection prior to clearance (article 789 of the Argentine Customs Code). As a way of counterbalancing prior collection, Customs clearance provides importers and exporters a presumption of conformity regarding the legitimacy of the whole procedure.
Otherwise, businesses would be unable to carry on. Importers and exporters would be treading at all times on a minefield ridden with contingent liabilities of unpredictable magnitudes (where goods are no longer in their possession and it is not possible to transfer new costs to prices). However, this does not prevent authorities from reviewing customs clearances in the remaining period of limitation and claiming additional charges. If such claims are eventually filed, Customs will actually be initiating a new claim and a new procedure thereof. Thus, Customs will have to notify the pertinent importer or exporter about the reasons and motives underlying this new claim and the liquid amount thereof, and it will give the importer or exporter a chance to be heard before executing this claim.
Under these conditions, the consequences of any delays by Customs in reviewing declarations that have been already cleared or in notifying new tax claims should not be borne on the importer or exporter, who should only have to respond for any updates and interest if the importer or exporter were to unreasonably desist in complying with the new claim; in other words, since defaulting on the liquid and enforceable debt.
This is sheer justice, since the differences giving rise to customs tax charges are mostly due to errors or diverging interpretations on complex customs issues (especially regarding tariff classification and customs valuation) or to the struggle between different opposing criteria or, sometimes, to the demands of reaching a higher tax collection by order of the incumbent administration.
Stark Contrast
The 36% interest rate on behalf of the federal government is a stark contrast to the 6% rate on behalf of the taxpayer (when the federal authorities have to pay) that clashes with the principle of proportionality, which is provided under articles 812 and 838 of the Argentine Customs Code.
However, the Supreme Court ruling in “Goodyear Tires” on November 9, 2000 validated this difference, transferring to the customs sphere conclusions reached in the tax sphere in the “Arcana” case (Ruling 308:283). The Arcana case was based on legal opinion as to privileging credits aimed at satisfying public services, despite the different nature and destination of customs duties in relation to domestic taxes and although such duties are not taken into account when planning the national budget.
The difference between the interest rate charged by tax authorities and the one actually applied when paying the tax payer for returning an amount unduly collected has produced negative effects, both direct and indirect.
When the taxpayer challenges procedures, any delays by Customs in processing and issuing the final resolution (almost always for the negative) essentially erode the taxpayer’s pocketbook and end up benefiting the Treasury.
This is why authorities had no interest in avoiding delays in this kind of proceedings, where thousands of files have piled up because of a shortage of personnel, in addition to a lack of judges in the Tax Court.
Taxpayers have warned about this for many years; yet the situation has not been remedied, suggesting the possibility of “deviations from power”, i.e., when a government agency strays away from the competencies assigned by law.
The mere fact of leaving challenges unresolved increases accrual of the dollar-based update (plus interest) at extraordinary rates to amounts unbeknownst to any investor in the global market: a 36% dollar-based annual rate when the prime rate on the dollar (higher than LIBOR) is not more than 5% per year.
Usurious Collection
In comparing what the federal government pays (at a 6% peso-based annual rate, when inflation exceeds this rate fourfold at the time of writing this paper) with what that same government receives at a 36% dollar-based annual rate, one can only say that there is an usurious collection of funds that lacks reasonableness, to put it mildly.
A 6% annual interest rate (equivalent to 0.5% per month) is what the government pays for not returning the money paid by the taxpayer, while the government itself, with its fiscal deficit, is generating inflation this year at an average rate of roughly 27% at the time of this writing, which is 9 points less in pesos from what the government charges its taxpayers and 21 points higher than what the government pays them in pesos.
There are several cases in our courts that ratify what we have described above. Let us take an example that allows us to simplify unnecessary technicalities.
Suppose there is a challenge against a supplementary determination made in U.S. dollars with a 9-year delay in the processing (unfortunately, the routine timeframe): a supplementary charge has been notified amounting to USD 10,000 at a $3,33 exchange rate (November 2008). The initial amount was $33,300.
After 9 years of proceedings that have gone through Customs, the Tax Court, a Federal Appelate Chamber and, eventually, the Argentine Supreme Court (with differing luck in the different courts), a negative ruling means the taxpayer should pay as computed on November 2017, at a $17.50 exchange rate. The annual 36% interest rate is applied to a capital of USD10,000. To compute interest, the default payment date is considered (article 794 of the Argentine Customs Code).
Supposing that the new charges were notified two years after the import operation and clearance of the goods had taken place (i.e., 7 years before notifying the final settlement), at a 36% annual rate for a 7-year period, interest yields 252%, which amounts to USD 25,000. This interest, at a $17.50 exchange rate, amounts to $441,000. How can this be read as a regular debt in pesos and with peso-based rates? Based on an original debt of $33,300 pesos, an interest amounting to $441,000 (at an annual average of $63,000) was generated over a 7-year period. This means there was an annual rate of 189.19% (15.76% per month).
Compare this interest rate with the 4% monthly rate that courts routinely reduce when referring to nullity as provided under article 771 of the Civil and Commercial Code on grounds of bordering usury.
Some customs officials in the administrative area have complained that fixed amounts for fines are not included under dollarization as provided in Law 23,905 because, in the case of a penalty, this type of update should be made by law, with an implicit complaint toward the Argentine Customs Code’s current wording (even though this viewpoint fails to pay any attention to the effect of dollarization on tax matters, which is even more serious because it is not even criminal in nature). The complaint does not seem fair to us; on the contrary, failure to maintain the system that the Customs Code had originally provided to prevent such distorsions is what is actually wrong.
AFIP, the Argentine tax agency, should provide relief to the current situation while putting into effect the rules that will restore the system that was abandoned with the repeal of Law 23,928.
Consensus
There is consensus that the interest rate in U.S. dollars cannot be the same as the one applicable for the Argentine peso. This was decided by the Supreme Court when adhering to the opinion of the Attorney General (paragraph IV) in the case file “Algodonera Lavallol” (Argentine Supreme Court, April 20, 2010, Ruling 333:394), by stating that the interest rate applied to operations carried out in foreign currency and the interest rate applied to operations carried out in pesos are substantially different (and that the latter cannot be applied to debts in foreign currency).
Based on these facts, in a 2014 meeting with the head of the tax agency, we requested, on behalf of CIARA-CEC, that a differential interest rate be established for debts in U.S. dollars at a considerably lower rate, as Customs had already done years ago. The head of the tax agency said that he would study the matter, yet there has been no response to date.
As there has been a change of authorities, we believe that, notwithstanding the need to work on substantive rules to restore the rule of law in this matter, it would be advisable to issue a general resolution establishing differentiated interest rates according to the currency in which taxes are computed under article 20 of Law 23,905 (whether in U.S. dollar or pesos), relating them to the usual market rates.
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