The Article 260-3 of the Colombian Tax Code establishes specific rules for determining the arm’s-length price in commodity transactions subject to the Transfer Pricing Regime.
For these transactions, the Comparable Uncontrolled Price (CUP) method is usually the most appropriate method. It can be applied by referring to comparable uncontrolled transactions or quoted prices. Another method may be used only in exceptional cases, provided that the conditions set forth in the regulations are met and documented.
When the analysis is conducted with reference to quoted prices, one of the relevant elements is the specific date or period agreed upon by the parties to set the price of the commodity. This date must be supported by reliable documents, such as contracts, offers, acceptances, or other documents that reflect terms consistent with the actual conduct of the parties and with what independent companies would have agreed upon under comparable circumstances.
What does the regulation require to confirm the agreed-upon date?
When the transaction is analyzed with reference to quoted prices, the information regarding the agreement must be filed with the DIAN (The National Directorate of Taxes and Customs of Colombia), using the system provided for this specific purpose.
The article 1.2.2.2.4.1 of Decree 1625 of 2016 establishes that registration must be completed within the calendar month following the date the agreement was signed or before the first delivery of the commodity, whichever occurs first. This in order to reliably demonstrate the agreed-upon date for setting the price.
The registration must include relevant information about the transaction, such as the identification of the parties, the type and date of the agreement, its term, the price-setting date, the characteristics and quality of the commodity, volumes, delivery terms, the price or pricing formula, and the agreed-upon currency, among other elements.
The DIAN has specified that the pricing date or period is a fundamental element when the analysis is conducted with reference to quoted prices, and in such cases, the corresponding agreements must be registered in accordance with the terms established by the regulations.
What happens if the agreement is not registered on time?
When an agreement is not registered or is registered after the established deadline, the price-setting date stated in that agreement does not constitute reliable evidence on its own.
However, this does not mean that the DIAN can automatically apply the shipment date. The regulation, interpreted in light of the case law of the Council of State, allows the price-setting date to be substantiated through other appropriate means of evidence.
Only when the Authority is unable to determine the actual price-setting date by other reliable means may it consider as a reference the average price corresponding to the shipment date of the commodity as recorded in the bill of lading or equivalent document.
In highly volatile markets, this time delay can lead to significantly different results in the valuation of the transaction.
The analysis does not conclude with the formal filing
Timely filing is important, but it does not replace the economic analysis or the need to show that the agreed terms reflect the actual circumstances of the transaction.
The regulation itself establishes that, in addition to filing the agreement, the taxpayer must provide the economic analysis and the information corresponding to the Local File to support the correct application of the arm’s-length principle.
In addition, the case law of the Council of State has recognized that the absence or untimely filing of registration does not imply an absolute exclusion of other forms of evidence. Although the date stated in the agreement loses reliability on its own, the taxpayer can prove the effective date of pricing by using other sufficiently appropriate evidence.
Therefore, it is necessary to evaluate, in conjunction, the contracts, commercial communications, offers, acceptances, performance documentation, and other elements that make it possible to determine when and under what conditions the parties actually set the price.
What should a commodity trading company in Colombia review?
Companies subject to Colombia’s Transfer Pricing regime that analyze commodity transactions using the CUP method with reference to quoted prices should verify that the price-setting date or period is properly documented. They should also ensure that the corresponding agreements are filed with the DIAN within the established deadlines.
It is also important to ensure consistency between the recorded information, the contracts, the actual conduct of the parties, and the financial documentation used in the Transfer Pricing analysis.
Failure to register the agreement on time increases the risk that the agreed-upon date will be challenged, making it necessary to have other evidence to support it. If this evidence does not allow for a reliable determination of the price, the DIAN may, as a secondary measure, rely on the exchange rate corresponding to the date the commodity was shipped.
At TPC Group, we assist companies that export and import commodities in Colombia with document review, the registration of their agreements, and the analysis of their operations under the applicable Transfer Pricing regulations.