In a recent decision, the Colombian Council of State reaffirmed an important principle in international tax matters: transactions between related parties must be evaluated under the special Transfer Pricing regime, and not under the general limitations set forth in Article 90 of the Tax Code.
This ruling reinforces the application of the arm’s length principle as the technical standard for analyzing intra-group transactions.
The Case Reviewed by the Council of State
The dispute arose from sales transactions carried out by a Colombian company to its foreign affiliate, which accounted for more than 50% of its total production. Conditional discounts amounting to 52% of the invoiced value were applied in these transactions.
Upon reviewing the income tax return for the 2011 tax year, the DIAN rejected the reported net loss and assessed a higher tax liability, finding that the general limits of Article 90 of the Tax Statute had not been met.
However, the Council of State concluded that this type of transaction should be analyzed under the special Transfer Pricing regime, provided for in Articles 260 et seq. of the Tax Statute.
Prevalence of the Transfer Pricing Regime
The high court clarified that transactions between related parties subject to the Transfer Pricing regime are not subject to the general limits on prices, costs, or deductions established in Article 90 of the Tax Statute.
In this regard, when the taxpayer demonstrates that its transactions are conducted in accordance with the arm’s length principle, using technical comparability methods, the analysis specific to the Transfer Pricing regime must be applied exclusively.
Technical Approach to the Arm’s Length Principle
The decision reaffirms that the evaluation of intra-group transactions must be based on technical criteria, such as:
- comparability analysis
- functional studies
- profit margins
- Transfer Pricing documentation.
This approach reinforces the importance of having consistent and technically structured information to support transactions between related parties.
Implications for Multinational Groups
This ruling consolidates legal certainty in the application of the Transfer Pricing regime by clarifying its precedence over general rules of the Tax Code.
It also reinforces the need for adequate planning and documentation of intra-group transactions, aligned with international standards and the OECD Guidelines.
At TPC Group, we assist companies in structuring, analyzing, and defending their Transfer Pricing policies, ensuring regulatory compliance and adequate technical support before tax authorities.
Source: AmbitoJuridico