Non-application of presumptive VAT in joint venture accounts

The jurisprudence of the Constitutional Court has been clear in establishing that when there are differences between the provisions of a rule of derived supranational law (such as a rule established in a Decision of the Andean Community of Nations -CAN-) and another of domestic law, the former shall be applied in preference without the latter ceasing to exist. Thus, the Constitutional Court established in Decision C-256 of 1998 that, although they are not part of the block of constitutionality (because they do not refer to human rights), the decisions of the CAN are of immediate and preferential application, so that they temporarily "displace" the application of the domestic law rules that are contrary to them.

Likewise, the First and Fourth Sections of the Council of State have developed a joint jurisprudential line in which not only has it admitted the non-application of general administrative acts for contravening the norms on which they should be based (for thereby transgressing the principle of legality and hierarchy of norms), but such non-application has also been extended to administrative acts of a particular nature. Nevertheless, it has been indicated that the exception of illegality -which must be made by the operator of the rule (judge or public official in charge of applying it)- does not replace or conflict with its own judgment of validity, so that such inapplication does not have a definitive character or erga omnes effects.

Likewise, the Constitutional Court has reiterated that the contradictions between the derived community law and the national law do not generate the unenforceability of the local rule that transgresses the community law (and therefore it is not the Court the competent to know and settle such conflicts) but these must be resolved by the operators of the rule through the non-application of the same in each specific case.

Following the issuance of Law 1819 of 2016, with the adoption of the tax regime for business collaboration contracts, a presumption of law was created according to which "the commercial relationships that the parties to the business collaboration contract have with the business collaboration contract (sic) that have a guaranteed return, will be treated for all tax purposes as relationships between independent parties. Consequently, it will be understood that there is no contribution to the business collaboration contract but a disposal or a rendering of services, between the business collaboration contract and the part of the same that is entitled to the guaranteed return."

Although the rule is not very well drafted, it is possible to understand that when there is a guaranteed return for any of the parties to the contract, the contribution of goods or services to the contract will be considered as a sale or a rendering of services, which will generate direct consequences in terms of VAT, income tax or occasional profits and industry and commerce tax. Guaranteed performance, according to Dian Concept 007397 of 2017, should be understood as "the fixed payment received by any of the parties in the development of the collaboration contract regardless of the profits or losses generated in the development of the same".

Now, when issuing the aforementioned rule, the legislator forgot that Colombia, as a member country of the CAN, is obliged to issue its internal rules in harmony with those of the derived community law.

Thus, according to Article 7 paragraph e) of Decision 599/2004 "Value added taxes shall not be generated (...) [in the] temporary contributions of goods to consortiums, joint ventures and other business figures or similar economic entities and their return to the contributing entities". As a transitory provision, this article establishes the stipulation that "the Member Countries that at the date of entry into force of this Decision tax some of the operations provided for in this article may continue to do so".

It is worth remembering that at the entry into force of this Decision, Dian Concepts 041483 of July 8, 2004 and 015941 of March 17, 2004 were also in force, according to which "the contributions between collaborators for the development of the object of the contract do not generate VAT" and if the performance of the managing partner within the participation has "unity of purpose" with the object of the contract itself, it is not legally feasible to consider that the managing partner is rendering any service to the inactive participants.

In this sense, since there is a clear contradiction between the provisions of the Community regulation and the current Colombian regulation (at least with respect to the possibility of taxing with VAT the transfer of goods or services made as a contribution to a collaboration contract when this has a guaranteed return), the public official, exercising the exception of illegality, must proceed to inapply the same. Likewise, the general concepts issued by the administration that directly contravene the provisions of the Community regulations will be inapplicable (and will not be binding for the Dian officials).