Colombia’s transfer pricing laws align with the OECD Transfer Pricing Guidelines (OECD Guidelines) and currently, are incorporated within Article 260-2 of the Colombian Tax Code.
Arm’s Length Principle
In Colombia, the Arm’s Length Principle requires that transactions between related parties (such as affiliated companies) follow the same conditions as transactions between independent parties. This way, income, expenses, and credits are reported fairly for tax purposes. The government tax office can look at these transactions and adjust them if they don’t follow standards. The principle applies to:
- Transactions with foreign affiliates.
- Transactions between permanent establishments in Colombia and related foreign entities.
- Transactions between Colombian taxpayers and their affiliates in free zones.
Related Party Definition
In Colombia, related parties are entities or individuals with a financial or decision-making connection. This includes:
- Parent companies and their subsidiaries.
- Branches and agencies in relation to their main office.
- Companies under common control or influence.
- Businesses are linked through ownership, management, or family ties.
- These relationships affect tax obligations and must follow fair market conditions.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Colombia are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
In Colombia, the transfer pricing method used depends on the nature of the transaction and the availability of comparable data. The Comparable Uncontrolled Price method is preferred, especially for commodities, while the Transactional Operating Profit Margin Method is often used when comparability data is limited. The choice depends on the transaction type and data reliability.
Comparability Analysis
In Colombia, two transactions are considered comparable for transfer pricing if no major differences affect their conditions or if any differences can be adjusted reliably. To determine comparability, the following factors are considered:
- Transaction characteristics: Includes financing terms, service nature, asset quality, or intangible value.
- Functions and risks: Each party’s role, assets used, and risks taken.
- Contract terms must reflect the true economic reality.
- Market conditions: Factors like location, competition, demand, and regulations.
- Business strategies: Plans for market entry, growth, or expansion.
While there is no preference for domestic comparables against foreign ones, the law mandates that internal comparables (within the same company) should be prioritized when available. Also, Colombia does not allow for the usage of secret comparables during the auditing process.
Documentation Requirements
Transfer pricing documentation requirements in Colombia are based on the three-layer approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Colombian tax authorities:
- Master File;
- Local File, and
- Country-by-Country (CbC) report
Master and Local File
Businesses with related-party transactions and gross sales over 61,000 Tax Value Units (UVT) or net worth over 100,000 UVT must prepare transfer pricing documentation. The UVT is a tax value unit used in Colombia to determine thresholds, and it is convertible in Colombian pesos, annually. The documentation is composed of:
Master file: Covers the multinational group’s structure, operations, and transfer pricing policies.
Local file: Details the taxpayer’s specific transactions and compliance with transfer pricing rules.
The local file is due in September, based on the taxpayer’s tax ID number, while the master file is due in December of the following year. A legal representative and a public accountant or auditor must sign the financial data.
Country-by-Country Reporting
Colombian companies that control multinational groups and have revenue over 81,000,000 UVT, as well as entities designated by a foreign parent company, must submit a Country-by-Country (CbC) report. If multiple entities in Colombia qualify, the one with the largest assets must file unless another is designated. Companies must also inform the tax authority about the filing entity’s identity and tax residence.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Advance Pricing Agreements (APA)
Colombian law allows the tax authority to make pricing agreements (APAs) with both local and foreign taxpayers. Unilateral APAs apply from the signing year and for up to three more years, while the timing for bilateral and multilateral APAs is set by the tax authorities involved. If a taxpayer provides false information at any stage, the agreement is canceled from the start. Taxpayers must also submit an annual report on the covered transactions as required by regulations.
Mutual Agreement Program (MAP)
The Mutual Agreement Procedure (MAP) in Colombia is governed by tax treaties based on the OECD Model Tax Convention and is handled by the national tax authority – the National Directorate of Taxes and Customs (DIAN). It helps resolve double taxation disputes related to transfer pricing, permanent establishments, and treaty interpretation. Taxpayers must submit a request to DIAN within the treaty’s deadline, providing details and supporting documents. DIAN then negotiates with the tax authority of the other country, but the resolution is not guaranteed. If an agreement is reached, it is implemented as both parties decide. Taxpayers can also pursue domestic legal remedies, but they may need to withdraw them if the MAP resolves the issue.
Approach to Transfer Pricing Audits
Colombian tax authorities regularly check transfer pricing compliance and audit taxpayers if they spot issues in their reports. If problems are found, fines may be applied. Taxpayers must provide transfer pricing documents within 15 days when requested. If there are disputes, they can be resolved through appeals or legal action.
Penalties
Penalties related to transfer pricing documentation (local and master file) and the transfer pricing return in Colombia are imposed for issues like late submission, inconsistencies, missing or omitted information, failure to file, and in the case of documentation, also for amendments.
Late submission within five business days results in a penalty of 0.05% of the total value of operations, up to 417 UVT, while delays beyond this period incur a 0.2% monthly penalty, capped at 1,667 UVT per month, with a maximum of 20,000 UVT. Inconsistencies in supporting documentation are penalized at 1% of the transaction value or 0.5% of total transactions, net income, or gross assets if the base is undeterminable, with a maximum of 5,000 UVT. Failure to submit supporting documentation leads to a 4% penalty on the total transaction value, or 1% if the base is undeterminable, with a maximum of 25,000 UVT, and undocumented transactions will not be recognized for costs and deductions. If the transactions involve tax havens, the penalty increases to 6%, or 2% if the base cannot be determined, with a maximum of 30,000 UVT.
Omissions in supporting documentation result in a 2% penalty on the omitted sum, or 2% of the transaction value if no amounts are involved; if the base is undeterminable, 1% of total transactions, net income, or gross assets applies, with a maximum of 5,000 UVT, or 1,400 UVT for transactions below 80,000 UVT, and costs and deductions will not be recognized. When omissions involve transactions with tax havens, the penalty increases to 4% of the omitted sum or transaction value, or 2% if the base cannot be determined, with a maximum of 10,000 UVT. However, a 50% reduction applies if the supporting documentation is corrected before the penalty resolution. If corrections are made, a 1% penalty applies to corrected transactions, up to 5,000 UVT, increasing to 4%, up to 20,000 UVT, if corrected after an official request.
Taxation at a Glance
The tax system in Colombia includes national, regional, and municipal taxes. The main national taxes are the income tax, the value-added tax (VAT), the consumption tax, and the financial transactions tax. The main municipal and regional taxes include the industry and trade tax, the real estate tax, and the registration tax.
The official name of the Colombian tax authority is the National Directorate of Taxes and Customs (DIAN) and it is responsible for the administration, enforcement, and collection of taxes in Colombia.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 35% |
VAT | 19% |
Withholding tax on dividends to non-residents | 20/35% |
Withholding tax on interest to non-residents | 15/20% |
Withholding tax on royalties to non-residents | 20% |
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