The "commercial criterion" according to the Council of State

During 2017 multiple jurisprudential trends were consolidated in the Council of State; some good, others not so good. Among the not so positive ones, several pronouncements can be highlighted regarding the commercial criterion that should be used to determine the applicability of Article 107 of the Tax Statute.

The analysis of three rulings in particular shows that the concept of "commercial criterion" used by the Council of State to apply the aforementioned rules is far from what is the commercial criterion in business practice.

These rulings are those dated March 9, 2017 (Rad. 20391, DCP Auditores y Revisores Fiscales), March 9, 2017 (Rad. 20636, Eduardo Botero Soto y Cía.), and August 2, 2017 (Rad. 20701, DCP Auditores y Revisores Fiscales). In the process of DCP Auditores (Rad. 20701) the Dian rejects the expense of participating in a tax planning seminar by some officials of an auditing and tax auditing firm.

The taxpayer states that it is an "incentive (...) to the work developed in the company by these persons that result in the good operation and continuity of the business". The Council of State confirms such rejection, considering that such expense was not "normally customary" in this activity and that the assistants, being members of the board of directors of the company, did not participate directly in the income generating activity of the company.

In the process of Botero Soto y Cía. the Council of State confirmed the rejection of the deduction taken by the taxpayer for the investment in real productive fixed assets of a piece of furniture acquired for its business, since it did not demonstrate which part of it was used for services directly related to the generation of income and which part of it was used for administrative services.

This position deviates from that adopted in the judgment of August 1, 2016 (Exp. 19276) where the Council of State admitted the deduction for investment in real productive fixed assets made by a financial entity in the furniture required for the adequacy of its offices since it considered that such furniture was directly related to the generation of income.

In the process DCP Auditores (Rad. 20391) the Chamber, among other things, confirmed the thesis of the judgment of March 1, 2012 (Petrobras Colombia Ltd.) in which it affirmed that the expenses of restaurant and lodging of traveling officials are not deductible to the extent that they are not necessary expenses for the income generating activity.

In order for a business to maintain its income generating capacity, it is essential to train its employees, pay for the travel expenses and food they require to serve customers and obtain new business, and purchase adequate furniture so that they are comfortable and can work and produce. In these pronouncements, the Council of State approaches the commercial criterion under a wrong perspective; it carefully reviews the corporate purpose of the companies as evidenced in the certificate of existence and legal representation to conclude whether or not there is -according to it- a commercial justification for incurring in a certain expense.

Such review should not be based on the corporate purpose but on the commercial activity and the real dynamics of business in a competitive environment.