Transfer Pricing in Colombia

Tax Regime and Transfer Pricing Regulations in Colombia

What Are the Transfer Pricing Regulations in Colombia?

Transfer Pricing in Colombia arose with Law No. 788 of 2002. Conversely, its legal framework was introduced by Decree No. 4349. Years later, in 2013, Transfer Pricing regulations were significantly amended, for example, those related to formal obligations, such as the filing of the Informative Affidavit and the preservation of the proper supporting documentation.

Subsequently, Colombia continued amending the aforementioned Transfer Pricing regime to align with the BEPS (Base Erosion and Profit Shifting) plan of the Organization for Economic Cooperation and Development (OECD), focusing through the publication of Law No. 1819, on combating tax elusion or evasion.

In 2015, the DIAN published the “Guide for the Transfer Pricing Regime Availability,” which summarizes the legislation applicable to Transfer Pricing in three chapters.

As a result of the adoption of the recommendations of the OECD BEPS 13 Action Report, incorporated in the OECD Transfer Pricing Guidelines, published in 2017, multinational companies must file the Supporting Documentation: The I Master File – Transfer Pricing.

As a result of the adoption of the recommendations of the OECD BEPS 13 Action Report, incorporated in the OECD Transfer Pricing Guidelines, published in 2017, multinational companies must file the Supporting Documentation: The Master File – Transfer Pricing.

Additionally, multinationals whose ultimate controlling company is a tax resident in Colombia and have global revenues of UVT 81 million or more must file the Country-by-Country Report.

Arm’s Length Principle

The Arm’s Length Principle is based on prices agreed upon between related parties and considered at market value. Thus, these must be at the values agreed upon between independent parties and/or independent third parties.

Consequently, the Arm’s Length Principle is set forth in Article 260-2 of the Tax Statute, defining it as the principle complied with in related party transactions similarly to those agreed upon in independent party transactions.

Transfer Pricing Application Situations in Colombia

Through Article 260-2 of the Tax Statute, Colombia regulates transactions carried out by individuals, companies, or entities located or resident in the Colombian territory with foreign related parties or those related parties domiciled in a free trade zone. In addition, not only the aforementioned parties will be subject to compliance with the Transfer Pricing regime, but also the transactions carried out by taxpayers from, to, or through tax havens and/or territories of low or null taxation.

Related Parties: Transfer Pricing Relationship Criteria

The tax regulations indicate several criteria to consider related parties. Concerning the income tax and complementary taxes, the relationship criteria can be found below:

• Subordinated Parties

1. An entity will be subordinated or controlled when its decision-making power depends on the criterion of another person(s) or entity(ies) being its parent or controlling company, either directly, in which this will be considered a branch, either with the assistance or through the subordinates of the parent company, in which case this will be considered a subsidiary;
2. A company shall be subordinated when it is in one or more of the following cases:
   1. i) When more than 50% of its capital belongs to the parent companydirectly, through, or with the assistance of its subordinates or theirs. Therefore, shares with preferential dividends and without voting rights shall not be included in the calculation;
   2. ii) When the parent company and the subordinated parties jointly or separately are entitled to cast the votes constituting the minimum decision majority in the shareholders’ meeting or the assembly or have the number of votes required to choose the majority of the members of the board of directors, if any;
   3. iii) When the parent company directly, through, or with the assistance of its subordinated parties, due to an act or business with the controlled company or its partners, influences the decision-making of the administrative bodies of the enterprise dominantly;
   4. iv) There shall also be subordination when the control under the assumptions set forth herein is exercised by one or several individuals, legal entities, entities, or schemes of a non-corporate nature, either directly, through, or with the assistance of entities holding over fifty (50%) of the capital, constituting the minimum majority for decision-making, or influencing the management or decision-making of the entity dominantly;
   5. v) There will also be subordination when the same individual(s), legal entity(ies), or the same non-corporate vehicle(s) is (are) jointly or severally entitled to receive fifty percent of the profits of the subordinated company.

• Branches regarding their main offices
• Agencies regarding the corporations they belong to.
• Permanent Establishments regarding the company whose activity they carry out entirely or partially.
• Other cases of Economic Relationship

• a)When the transaction is carried out between two subordinated parties of the same parent company;
• b) When the transaction is carried out between two subordinated parties directly or indirectly belonging to the same individual, legal entity(ies), or schemes of a non-corporate nature;
• c) When the transaction is carried out between two companies in which the same individual or legal entity directly or indirectly participates in the management, control, or capital of both. An individual or legal entity may directly or indirectly participate in the management, control, or capital of another one when this
  • i)Directly or indirectly owns more than 50% of the capital of that company, or,
  • ii) Can control the business decision-making of the company;
• d) When the transaction is carried out between two companies whose capital is owned directly or indirectly in more than fifty percent (50%) by persons related to each other by marriage, kinship up to the second degree of consanguinity or affinity, or civil relationship;
• e) When the transaction is carried out between related parties through unrelated third parties;
• f) When more than 50% of the gross income individually or jointly comes from its partners or shareholders, co-owners, associates, subscribers, or similar;
• g) When there are consortiums, temporary unions, joint accounts, other forms of association not involving legal entities and other business collaboration contracts.

The relationship applies to all the companies and vehicles or non-corporate entities comprising the group, even if their parent company is domiciled abroad.

• Related parties in free zones
• Transactions with non-cooperating, low, or no tax jurisdictions.
• Preferential tax regimes

Non-Cooperating, Low, or Non-Existent Tax Jurisdictions and Preferential Tax Regimes in Colombia

The tax regulations refer to the Non-Cooperating, Low, or No Taxation Jurisdictions, assigning them special treatment for taxpayers performing business transactions in those territories. Thus, these will be given under certain aspects:

• Compared to the tax rates in Colombia, these are almost null.
• A total lack of exchange of information on tax matters, in addition to a lack of legal transparency.

Likewise, compliance with two of the aforementioned criteria will be decisive in discussing preferential tax regimes.

Transfer Pricing Methods in Colombia

The Colombian legislation, in Article 630-3 of the Tax Statute, establishes a total of 6 Transfer Pricing methods:

• Comparable Uncontrolled Price (CUP) Method
• – Resale Price (RP) Method
• – Cost Plus Cost (CP) Method
• – Profit Split (PS) Method
• – Transaction Net Margin Method (TNMM)

The taxpayer will be able to voluntarily choose the most suitable method for each transaction according to its interests.

• Breakdown of Transfer Pricing Methods

Comparability Criteria in Colombia

It is given when facing a comparable operation. In these cases, the following aspects must be considered:

• Details of the transactions.
• The functions, pros, and cons assumed in the transactions.
• The conditions of the agreements reflecting well the economic reality.
• The economic context of the market.
• Business alternatives.

It should be noted that, for internal comparables, these should be immediately processed.

Documentation for Transfer Pricing Statements in Colombia

According to the Colombian DIAN (Dirección de Impuestos y Aduanas Nacionales – National Tax and Customs Directorate), the following are the types of Transfer Pricing reports:

Information Statement (Form 120)

Local Report

Master File

Country by Country Report

Information Statement (Form 120)

Definition

According to the Guide for the Transfer Pricing Regime Availability of the DIAN_404, issued by the DIAN:

An information statement is that through which the taxpayers of income tax and complementary taxes obliged to apply the rules regulating the Transfer Pricing regime and meeting the conditions to be declarants, notify the DIAN of the transactions they carried out during the taxable year with foreign-related parties, related parties located in Free Trade Zones, or with persons, corporations, entities, or companies located, resident, or domiciled in Tax Havens.

This is not a statement entailing the payment of any tax. However, its late or inaccurate filing or its non-filing may lead to the payment of the penalties associated therewith.

Obligated Parties to File Form 120

The companies obligated to file the information statement are those meeting the following requirements:

1. To be an income tax taxpayer during the fiscal period.
2. To have entered into transactions with related companies, companies located in free zones, tax havens, or countries considered non-cooperating.
3. To have a gross equity exceeding 100,000 Tax Value Units or gross income during the period exceeding 61,000 Tax Value Units.

These aforementioned requirements are established in articles 260-9, 260-1, and 260-2 of the Tax Statute.

• Main information to be contained in the statement
• Information necessary to identify the taxpayer
• Information to identify related parties
• Information on the types of transactions with their respective amounts.
• Information on the methodology employed for each transaction.
• Financial information of the tested company with its profitability indicator.
• Information on the quartile found in the analysis.
• Information on the adjustments made.

Information Statement Filing

The information statement must be filed through the 1125 format, also referred to as Prevalidator, which will generate a file in XML format. This file will be uploaded through the DIAN, and then the second part of Form 120 will be completed, in which the additional data requested will be filled in.

Non-Compliance Penalties

1. Supporting Documentation Penalties

According to literal a) of Article 260-11 of the ET, among the penalties applicable to the supporting documentation are:

• Late Filing Penalty

The late filing penalty will be applied when the supporting documentation is filed after the expiration of the deadlines decreed by the National Government, which will be determined according to the following criteria:

Filing within 5 working days following the expiration of the deadline for filing the supporting documentation shall result in a penalty of 0.05% of the total value of the transactions subject to be documented.

Filing after the 5 working days following the expiration of the deadline for filing the documentation shall result in a penalty of 0.2% of the total value of the transactions subject to be documented for each month or fraction of a calendar month of delay.

• Inconsistency Penalty

This penalty applies for misinformation in the supporting documentation, non-correspondence of the information content with the requested, or the information does not allow verifying compliance with the Transfer Pricing regime. This penalty is equivalent to 1% of the value of the transaction for which the inconsistent information was provided.

2. Information Statement Penalties

Literal b) of Article 260-11 of the ET specifies each type of penalty applicable to the information Transfer Pricing statement. Among them, we emphasize:

Omission Penalty

This penalty arises from the omission of information regarding transactions subject to the Transfer Pricing regime. The amount of the penalty and the limit depend on the type of transaction carried out. Let us see:

• • In transactions with economic-related parties: If the information statement totally or partially omits information related to transactions with economic-related parties, the penalty shall be 1.3% of the amount regarding which the information was omitted.
  • In transactions with individuals, corporations, entities, or companies located, resident, or domiciled in tax havens: If the information statement omits information related to transactions with individuals, corporations, entities, or companies located, resident, or domiciled in tax havens, the penalty shall be 2.6% of the amount regarding which total or partial information was omitted in the information statement, in addition to the disregard of the costs and deductions derived from such transactions.