More Stringency with the Comparability Adjustments in Colombia

October 18, 2022

During this month, many taxpayers are preparing and filing the formal transfer pricing obligations for the taxable year 2021; however, due to socioeconomic, geopolitical, and business changes, the preparation of such reports according to the activity performed by the taxpayer has become more difficult. 

1. Does it reflect the economic reality?

The economic reality of the taxpayer reflected in the results has become of utmost importance. Each company is a different world, and although they can be classified into sectors or branches, the structure, assets, risks, and functions will be different, which complicates the process of verifying compliance with the “arm’s length” principle. 

2. Is there a universal formula?

The OECD and the adaptations in each country guide both taxpayers and tax authorities; however, it cannot be assured that there is a universal formula to be applied to all cases. It is due to different reactions of economic agents that will lead to different results in the same item. Thus, knowing if it complies with the arm’s length principle will require other elements with the consistent foundation and the principle of substance over form. 

3. Colombian case

Comparability adjustments can offer an alternative of dynamism and precision for the analysis. Thus, in the Colombian case, adjustments for working capital, accounting practices, country risk, idle capacity, etc, are allowed. In this regard, the matter becomes more tedious when extraordinary analyses are included, which require: documentation, technical support, due tax compliance, and consistency with the developed business. 

4. Adjustment problems

These adjustments, in many cases, may solve an upcoming extemporaneous modification of the income tax return, but they must be applied with due support. In Colombian law, Article 260-4 states that “… they are also comparable in cases where such differences can be eliminated by making sufficiently reliable adjustments to eliminate the effects of such differences in the comparison”

The Council of State indicates that enforcement is demanding through various pronouncements as it has accepted the application of these adjustments when the taxpayer has demonstrated the particularities of the related transactions, and the technical and operational substantiation of market situations, among others.  

In conclusion, comparability adjustments must have consistent numerical support to support formal transfer pricing compliance and support the taxpayer’s financial and tax management objectives. 

Source: Asuntos Legales 12/09/22