Colombia’s approach to the ‘unification’ of tax rulings
Margarita Salas of EY Colombia and Mexico explains the lengthy legal process to resolve tax conflict in Colombia.
The Colombian Constitutional Court states that judges base their decisions on the law. Colombian case law is an auxiliary means for the interpretation of the law. However, rulings from Colombian high courts must be observed by the judge when taking a decision.
If the judge does not follow the ruling from the high court, it will be necessary to clearly justify such a decision. In particular, Congress has created mechanisms that are meant to speed the resolution of tax conflicts for taxpayers.
In Colombia, the discussion process starts before the tax authorities itself and unfortunately, there are very few cases where the tax administration decrease in tax due and/or the application of penalties at the administrative stage.
Historically, it has been claimed that this is due to the lack of impartiality from the tax officers that resolve the appeals, which is further evidenced by the rulings that approve the nullity requested before the tribunals.
Procedural regulation is not based on a simplified system, the penalties regime is done on a case-by-case basis, there are various formal obligations and there is a high risk associated to compliance.
Likewise, interpreting the law provides many difficulties, and the tax administration (in charge of official interpretation) usually takes the view of a tax collector, instead of being an objective interpreter. The above is then mixed with long statutes of limitations and this often results in significant legal uncertainties.
Notwithstanding the above, tax law interpretation is only binding for taxpayers when a decision has been made by the Judicial Tribunals in an administrative process (where it is also possible to request the temporary suspension of administrative acts). Regardless, this is not a short procedure, which further dilates the chance of having legal certainty on the application of a tax law.
Although efforts have been made to reduce the time it takes to solve tax conflicts, the Council of State has issued a ruling that unifies case law. This ‘unification’ mechanism was introduced in Colombian law in 2011, and it states that situations that have a legal, economic or social relevance may be ruled by the Council of State directly to unify case law and provide consistency to case law and guarantee equality and legal certainty in subsequent decisions.
These unification rulings are applicable to controversies at the administrative and the judicial states and are especially important since the taxpayer may request their extensive application at the administrative stage when the facts and law that generated the unification ruling are the same.
In case the extension is not accepted by the administrative authority, the taxpayer may directly appeal to the Council of State through a summarised process, providing relevant evidence that shows that the unified rulings should be extensively applied to the specific case.
As an example of this, ruling SUJ-4-003 will likely serve as a legal mechanism to stop common discussions where the tax administration rejected the deductibility of general expenditures for the determination of income tax, arguing that expenditures are not deductible unless directly associated, needed, or inevitably linked to ‘income’ items.
This particular ruling states that deductibility of general expenditures does not depend on having to produce an income item, but merely being directly or indirectly associated to the income producing activities. Furthermore, this ruling also unified the scope of the general deducibility requires (i.e. necessity, proportionality and cause-effect relation).
Taxpayers that intend to use the extension of said unification ruling may request the application by proving that without the expenditure it would not be possible or it would be difficult to execute the income generating activity, expenditure was based on commercial criteria and these are normal for the corresponding activity, or that these allow the taxpayer to develop, keep or improve the income producing activity, and that the amount is reasonable in the market.
There is no doubt that unification rulings may become an instrument to promote equality, by guaranteeing that decisions are the same when the circumstances are equivalent. However, this may also become an instrument to avoid lengthy debates at the administrative stage.
On the other hand, if a unification ruling differs from previous case law, it would be necessary to thoroughly explain the arguments why such a deviation would be necessary. Additionally, it would be necessary for the ruling to clearly state the effects that such a decision would have.
The application of such prospective rulings that differ from case law is very relevant from a tax perspective, since taxpayers have already made decisions based on the previous interpretation of the law and they should not be negatively impacted for doing so.
It is necessary for the Council of State to clearly state the way in which good faith, legitimate trust and equality of the taxpayers is protected, when there is a change in the applicable case law.
Not doing so creates a scenario with extreme and permanent uncertainty, where the tax administrations attempt to apply new case law to previous taxable years during which other interpretations were widely accepted by taxpayers. This will impact the constitutional principles generally protected in Colombian by the Acción de Tutela (particularly fast mechanism where the affected party may request the protection of fundamental rights before a judge and get a decision within 10 calendar days).