Colombia: Transfer Pricing Tax Audit

March 20, 2024

In recent years, the Transfer Pricing audit in Colombia has undergone a significant evolution from focusing mainly on formal aspects to investigating more deeply into the transactions of taxpayers. This change has increased large adjustments in tax returns, considerably affecting the financial situation of companies. Herein, we will address the main challenges faced by Colombian taxpayers regarding Transfer Pricing audits, as well as some key recommendations to mitigate risks and strengthen their position before the DIAN (Dirección de Impuestos y Aduanas Nacionales – Directorate of National Taxes and Customs). 

Transfer Pricing Audit Challenges

  • Payments for services with no apparent substance: The DIAN focuses on business transactions, especially if they involve services. Therefore, the detailed documentation supporting the actual rendering of the service, the need for contracting it, and the determination of the agreed consideration must be available. 
  • Losses not consistent with the functional profile: When a company has constant losses with a low-risk profile, the DIAN investigates whether this result is related to related party transactions. Therefore, Transfer Pricing policies are recommended to avoid adjustments by the Tax Administration. 
  • Payments for royalties: The DIAN closely examines the payments for using intangibles, especially since this requires verifying the relation between the assumed expense and the income generation. In this regard, the received profit and the reasonableness of the agreed consideration must be justified. 

Recommendations for Taxpayers

Due to these challenges, Colombian taxpayers must adopt a proactive approach to Transfer Pricing. Some key recommendations include: 

  • Building consistent defense files supporting the Transfer Pricing policies and justifying any controversial positions.  
  • Maintaining detailed documentation of all intra-group transactions, including the agreement terms, rendered services, and generated profits.  
  • Periodically reviewing and adjusting Transfer Pricing policies to avoid tax contingencies.  
  • Timely and complete answering to any request for information by the DIAN, demonstrating transparency and cooperation during the audit process. 

In conclusion, Transfer Pricing audits in Colombia present several challenges for taxpayers, but risks can be mitigated, and the position before the Tax Administration can be strengthened with adequate preparation and documentation.