Transfer Pricing in Colombia

Transfer Pricing: a look at Colombian Legislation

The transfer pricing regulations in Colombia have been introduced more than 16 years ago, in this article you will be able to take a look at this regime, making known the main aspects, such as its scope of application, methodology, formal obligations such as the informative affidavit and the transfer pricing supporting documentation, as well as the penalties for non-compliance.

 

Transfer pricing in Colombia has as a regulatory background the tax reform implemented by Law 788 of 2002. However, it was not until the enactment of Decree No. 4349 in 2004, which introduced a whole legal framework on the subject.

Subsequently, in 2013 Decree No. 3030 incorporates substantial changes to the transfer pricing regime, one of the main ones being those related to formal obligations, such as the filing of the Transfer Pricing Information Affidavit and the respective supporting documentation.

Although the legislation mentioned above was already in place, Colombia, to adapt to the actions of the BEPS Plan (Base Erosion and Profit Shifting) of the Organization for Economic Cooperation and Development (OECD), establishes a new reform to its transfer pricing rules.

Thus, in December 2016, Law No. 1819 is published, which modifies its Tax Statute based on a focus on the fight against tax evasion or avoidance.

Transfer Pricing: Definition

Transfer prices can be defined as those prices or considerations agreed for transactions between related parties.

 

Principle of Full Competition

Also known as the “Arm’s Length” principle, it is based on the fact that prices agreed between related parties must be under the market value, that is, they must be consistent with what independent parties would have agreed.

This principle is regulated in Article 260-2 of the Tax Statute, which defines it as the principle that a transaction between related parties complies with the conditions that would have been used in comparable transactions with or between independent parties.

 

Scope of Application of Transfer Pricing in Colombia

The transfer pricing regime in Colombia regulates the transactions entered into with related parties abroad, according to Article 260-2 of the Tax Statute, or those related parties domiciled in free zones.

Likewise, according to the second paragraph of Article 260-7 of the referred Statute, those taxpayers that carry out transactions with entities resident or domiciled in non-cooperative jurisdictions, preferential regimes or countries with low or no taxation, also called tax havens, shall also be subject to this regime.

 

Article 260-1 of the Tax Statute, establishes the criteria for connection so that there will be a connection when the taxpayer is in any of the following situations:

 

1. Subordinate:

An entity is subordinated when its decision-making power depends on another person or entity, which will be called controlling or parent entity, either directly as in the case of an affiliate or indirectly through other subordinate entities, in the case of a subsidiary.

Likewise, an entity will be considered subordinate if it is in the following cases:

  • When more than 50% of the capital corresponds to the parent company, either directly or indirectly.
  • When the parent company, separately or jointly, has the right to cast the votes that constitute the minimum decision-making majority at the meeting of the shareholders or the assembly.
  • When the parent company, directly or through the intermediary or with the assistance of subordinates, due to an act or business with the controlled company or its partners, exercises a dominant influence on the decisions of the company’s administrative bodies.
  • Similarly, there will be subordination when the control according to the above is exercised by one or more natural or legal persons or entities or schemes of an unincorporated nature, either directly or through or with the assistance of entities in which the parent company holds more than fifty (50%) of the capital or forms the minimum majority for decision making or exercises dominant influence.
  • There will be subordination, when the same person, whether natural or legal or an unincorporated vehicle jointly or separately, is entitled to receive fifty percent of the profits of the subordinated corporation.
 

2. Branches.

3. Agencies, regarding the companies to which they belong.

4. Permanent establishments.

5. Other cases of economic linkage:

 
  1. When the operation takes place between two subordinates of the same parent company.
  2. When the operation takes place between two subordinates belonging directly or indirectly to the same natural or legal person or entities or schemes of a non-corporate nature.
  3. When the operation takes place between two companies in which the same natural or legal person participates directly or indirectly in the management, control or capital of both. A natural or juridical person may participate directly or indirectly in the administration, control or capital of another when:
  4. It owns, directly or indirectly, more than 50% of the capital of that company.
  5. Has the ability to control the business decisions of the company.
  6. When the operation takes place between two companies whose capital belongs directly or indirectly in more than fifty percent (50%) to spouses or relatives up to the second degree of consanguinity or affinity, or civil union.
  7. When the transaction is carried out between related parties through unrelated third parties.
  8. When more than 50% of the gross income comes individually or jointly from its partners or shareholders, community members, associates, subscribers or similar.
  9. When there are consortiums, temporary unions, joint accounts, other forms of association that do not give rise to legal persons and other business collaboration contracts.
 
It should be noted that the linkage is said of all the companies, vehicles or non-corporate entities that make up the group, even if their parent company is domiciled abroad.
 

Non-cooperative, Low or Null Taxation Jurisdictions and Preferential Tax Regimes in Colombia

According to Article 260-7 of the Tax Statute, the non-cooperating and low or null tax jurisdictions will be determined by the national government; however, they will meet certain criteria such as:
 
  • Non-existence of low tax rates or nominal rates compared to those of Colombia.
  • Lack of exchange of information on tax matters.
  • Lack of transparency at the legal level.
  • Non-existence of substantive local presence.
 
Also, preferential tax regimes will be considered when at least two of the criteria mentioned above are met.
 

Transfer Pricing Methods in Colombia

There are six methods in the Colombian legislation of transfer pricing, which according to Article 260-3 of its Tax Statute, are the following:

 
  1. Non-Controlled Comparable Price Method (MPCNC).
  2. Resale Price Method (MPR).
  3. Added Cost Method (ACM).
  4. Transactional Margin Method of Operating Profit (MTU).
  5. Profit-Sharing Method (MPU).
 
In addition, the taxpayer will choose the most appropriate method for each transaction.
 

Comparability Criteria in Colombia

According to Article 260-4 of the Tax Statute, the following criteria must be taken into consideration to determine whether a transaction is comparable:

 
  • The characteristics of the operations.
  • The functions, assets and risks assumed in the operations.
  • The contractual terms evidencing the economic reality.
  • The economic circumstances of the market.
  • The business strategies.
 
It should be noted that the last paragraph of the aforementioned standard indicates that in case there are internal comparables, these should be taken into account as a priority.
 

Informative Affidavit in Colombia

According to Article 260-9 of the Tax Statute, those taxpayers who carry out operations with related parties and whose equity or gross income has been equal to or higher than the equivalent of 100,000 or 61,000 UVT, respectively, are obliged to file an Informative Affidavit.

As to the filing, it must be done virtually through Form 120 established by the National Tax and Customs Directorate (DIAN).

Regarding the deadline, the terms indicated by DIAN must be observed, taking into consideration the last digit of the NIT.

 

Transfer Pricing Documentation in Colombia

As mentioned above, Colombia, with its 2016 reform, has brought its transfer pricing regulations into line with OECD parameters.

Specifically, with regard to transfer pricing documentation, it has been aligned with the provisions of Action 13 of the BEPS, for which it has incorporated three levels of documentation.

Thus, Article 260-5 of the Tax Statute indicates that taxpayers who carry out transactions with related parties abroad or with subjects domiciled in tax havens must submit a Local File, Master File and/or Country by Country Report, if applicable.

Local File

This report must contain documentation, analysis and support from the taxpayer to demonstrate that its operations under the scope of the transfer pricing rules were under the arm’s length principle.
 

Master File

The relevant global information of the Multinational Group is presented, such as its structure, financial activities, transfer pricing policies, among others.

 

Obligated to Present Local and Master File

Income taxpayers whose gross equity on the last day of the year or taxable period are equal to or greater than the equivalent of one hundred thousand (100,000) U.V.T.’s or whose gross income of the respective year is equal to or greater than the equivalent of sixty-one thousand (61,000) U.V.T.’s, who enter into transactions with related parties.

Country by Country Report

This report contains information relating to the global allocation of income and taxes paid by the multinational group together with certain indicators relating to its economic activity at a global level.
 

Country by Country Report Required

Income tax and supplementary taxpayers who are located in any of the following cases are obliged to submit this report:

  • Controlling or parent Entities of Multinational Groups, which are residents in Colombia, have affiliates, subsidiaries, branches or permanent establishments, which reside or are located abroad, as the case may be, are not subsidiaries of another company resident abroad, are obliged to prepare, present and disclose consolidated financial statements and have obtained during the immediately preceding taxable period consolidated income for accounting purposes equal to or exceeding eighty-one million (81,000,000) UVT.
  • Resident entities in the national territory or foreign residents with a permanent establishment in the country, which have been designated by the controlling entity of the multinational group for the presentation of the report.
  • One or more entities or permanent establishments residing or located in the national territory that belong to the same Multinational Group, whose parent or controlling entity resides or is located abroad, and that meet the following requirements:
    1. That together they have a share in the consolidated income of the multinational group equal to or greater than twenty percent.
    2. That the parent company has not submitted in its country of residence the country-by-country report referred to in this section.
    3. That the multinational group has obtained in the immediately preceding year or taxable period consolidated revenues for accounting purposes equal to or greater than eighty-one million (81,000,000) UVT.
 

Likewise, it is worth mentioning that in case of operations carried out with subjects domiciled in non-cooperative jurisdictions, of low or null taxing or preferential regimes, both the evidentiary documentation and the indicated informative declaration must be presented, regardless of whether their gross equity on the last day of the year or taxable period or their gross income of the respective year is lower than the indicated ceilings.

 

Sanctions for Non-Compliance

According to Article 260-11 of the Tax Statute, specific sanctions are established for failure to comply with transfer pricing documentation and declarations.

As for the documentation, the penalty will depend on the infraction, as indicated below:

 

Penalty for Untimeliness

Depending on whether it is presented within 5 working days after the expiration or after, in the first case the penalty will be (0.05%) of the total value of the operations subject to documentation.

In the second case, a penalty of (0.2%) of the total value of the transactions subject to documentation will be applied for each month or a fraction of a calendar month of delay in the presentation of the documentation.

 

The sanction for Inconsistencies in Documentation

The penalty for this infraction corresponds to (1%) of the value of the operation for which the inconsistent information was provided.

In case it is not possible to establish the basis, the penalty will correspond to (0.5%) of the total value of the operations consigned in the informative declaration.

 

Penalty for Failure to submit Supporting Documentation

The penalty for this infraction will depend on whether the documentation not submitted is related to a related-party transaction or a tax haven. In the first case, the penalty will be 0.4% of the total value of the undocumented transactions, and in the second case, 0.6%.

If it is not possible to establish the basis, the penalty will correspond to (0.2%) of the total value of the operations stated in the information return.

 

Penalty for the Omission of Documentation

When transactions with related parties are partially or completely omitted, the penalty will be 2% of the sum of which the information was omitted.

In case the omission does not correspond to the amount, but to the other information, the penalty will be 2% of the value of the transaction for which the information was not provided.

 

Penalty for the Omission of Information relating to Persons Resident in Tax Havens

When information is omitted on transactions carried out with resident persons in non-cooperative, low-tax or non-existent jurisdictions or preferential regimes, the penalty shall amount to 4% of the sum in respect of which full or partial information was omitted.

 

Penalty for Correction of Documentation

For this infraction, there will be a penalty of one percent (1%) of the total value of the corrected operations, without such penalty exceeding the equivalent of five thousand (5,000) UVT.

In the case of the transfer pricing information statement, the assumptions of the infractions and penalties are the same as those indicated above for the supporting documentation, varying only the percentages indicated above.

Likewise, in both cases, the taxpayer may count on a reduction of fines up to 50% in case they are corrected before the notification of the statement of objections or the special requirement of the DIAN.

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