In general, the vast majority of those obliged to file their returns today do so correctly and on time, as it is supposed to be and in application of the principle of continuity of the system that assumes that the vast majority of economic agents will subject their behavior to what is expected, in this case, what the law defines as mandatory. This is an important day for the Treasury, which is responsible for at least 36% of its tax revenues in this tax.
And in general, emphasis is made on the importance of declaring the tax on profits correctly, adhering to declare all income that is qualified as subject, and only deducting expenses that have a relationship with the generation of income and that are authorized by the law itself. This is what article 7 of Law 7092 establishes: (...) Net Income. Net income is the result of deducting costs and expenses from gross income useful, necessary and pertinent to produce the profit or benefit, and the other disbursements expressly authorized by this law, duly supported by vouchers and recorded in the accounting....."
Thus, we usually put emphasis on the documentary support of the expenses, to ensure that when they are reviewed within the framework of an audit, they are not rejected for not having the formal support. But we also take care of the material aspect, that is, that the expense has not only the invoice, the payment, the contract that supports the contracted service, but that such service has a connection with the taxable income. In other words, that the expense can be related to the income on which we are to be taxed.
That said, and no matter how much you have followed to the letter what your accountant and advisor have advised you, it is a fact that "(...) The deductibility of an expense is not going to depend on whether its origin is in the business, but on its link with the obtaining of taxable income or with the productive activity." And in a recent case regarding a company's year-end holiday expenses, the authorities said that " Finally, subsection e) of Article 9 of the Tax The Income Tax Law is clear in stating that expenses on luxury or personal recreation investments are not deductible from income.
Under the aforementioned normative framework, we are not in the assumption of useful, necessary and pertinent expenses, to produce the utility or benefit (...)" Contentious Court Administrative and Civil Finance. Ruling n.°2024000753 of 2024. Are luxury expenses those that a company invests to celebrate with the community of its employees, the achievements of the year, or to generate more community and sense of belonging to avoid resignations? I would have interpreted that they are not luxury expenses and therefore they are deductible.
In the same sense, in a recent case, after a taxpayer had been audited for 4 years, the DGT stated that "It is worth mentioning that as a result of the different verifications made, as evidenced in the previously mentioned Acts of Facts, although this office verified the existence of vouchers of the payments made, incorporated within the mentioned reclassification for the amount of ...., there is no evidence that such payments have produced Taxable Income in the 2020 tax period. there is no evidence that such payments have produced Taxable Income in the fiscal period 2020. "(...) it was evidenced that, the amount reclassified and deducted from the Gross Income in the profit tax of such period, ...corresponds to the expenses incurred by the auditee in order to promote and manage the project or initiative presented before the State, as of the date of the last mentioned act of facts 11/28/2024, that is more than 3 years after having declared and deducted from the Gross Income the indicated services, ... continues to be pending before the State and, the information provided evidences that these disbursements are not associated with the generation of taxable income in the Income Tax."
And this was decided by the Tax Authorities because even though it does not depend on the taxpayer to initiate the work, the expenses are clearly necessary to generate income, whether actual or potential. And this, because this is what our Income Tax Law correctly admits and foresees in its eighth article: "The The Tax Administration will accept all the deductions considered in this article, except that of subsection q) provided that, as a whole, the following requirements are met:....- That they are necessary expenses to obtain income, actual or potential, taxed by this Law."
Thus, we will have to wait for the interpretation that you have made to declare today to be shared by the authorities, which, as we have seen, will not necessarily be the case and is unfortunate but normal in this matter. What is not right, however, is to disapply the rule having as a corollary, the interpretation of the same. The principle is this: a given qualification or interpretation cannot lead to a situation of disapplication of the rule (making the administrative act that does so illegal). It cannot be interpreted, for example, that if there is no connection between the expense and the income in the same tax period, the expense is not deductible, which would deny the deductible quality to the expenses that we make to achieve potential income (such as marketing, or feasibility studies) and that are clearly necessary for the companies.
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