Global Tax Alert (News from Transfer Pricing and Americas Tax Center) | 03 March 2014

Colombia modifies transfer pricing regulations

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Colombia has modified its transfer pricing regulations1 in accordance with Law 1607 enacted in December 2012, which included reforms to the transfer pricing rules.

Economic link

Under the Decree, the following transactions will be treated as creating an economic link:

  • Transactions between branches and their home offices
  • Transactions in which a permanent establishment (PE) participates
  • Transactions between related parties made through third parties
  • Transactions between related parties executed through joint venture type agreements and other collaborative agreements
  • Transactions between a taxpayer and companies located in a free trade zone in Colombia

Transfer pricing obligation compliance

The Decree also established the following conditions for determining whether a taxpayer must comply with the transfer pricing obligations in Colombia:

  • Income taxpayers that engage in transactions with residents or those domiciled in tax havens are obliged to fulfil transfer pricing requirements even when not exceeding the established caps of gross equity equal to or higher than 100,000 taxable units2 (TU) or gross income equal to or higher than 61,000 TU.
  • For supporting documentation purposes, those transactions exceeding 32,000 TU by type of transaction are subject to transfer pricing analysis, only if the total amount of the transactions exceeds 61,000 TU. For financing transactions with related parties, the amount of the debt must be considered when determining the total amount of the transactions.
  • Transactions with residents or those domiciled in tax havens are subject to transfer pricing analysis only if the total amount of the transactions exceeds 10,000 TU.

Financing transactions

Colombian resident companies must comply with a 3:1 debt-to-equity ratio in order to deduct interest accrued on any type of loan, whether foreign or domestic, and with related or unrelated parties.

In addition, financing transactions with related parties must consider market terms and conditions, otherwise, those financing transactions will be deemed to be capital contributions, and interest will be regarded as dividends.

Acquisitions

When acquiring used fixed assets from a related party, the comparable uncontrolled price (CUP) method may be applied by providing the invoice with the cost of the new asset at the time of the original purchase from the third party and applying the corresponding depreciation after its acquisition. When this information is either not available or the assets have been built or assembled from several components, an asset valuation performed by a third party can be used.

The equity value cannot be used to analyze the purchase/sale of stocks that are not publicly traded on the stock market or those transactions that involve the transfer of other assets that have difficulties when being compared. Instead, financial valuation methods must be used, particularly those that calculate the market value through the discounted cash flow method.

Transfer pricing analysis

For transfer pricing analysis purposes, only the financial information for the income year under review should be used. An explanation must be included in the supporting documentation if other financial information is used.

When internal comparables are available, they take priority when carrying out the transfer pricing analysis.

When taxpayers pay related parties resident or domiciled in a low tax jurisdiction, those taxpayers must document and demonstrate the details of the functions performed, assets used, risks assumed and all costs and expenses incurred by the related party for the performance of the activities that generated those payments. With regard to the payment for services abroad, the taxpayer must demonstrate the services were in fact received and there is a benefit for the Colombian entity. Moreover, it is necessary to prove the fee paid complies with the arm’s length principle.

Additionally, cost contributions or cost sharing payments must comply with the arm’s length principle in order to demonstrate the benefit for the Colombian entity. Business restructuring where functions, assets or risks of the Colombian entity are assigned or transferred to a foreign related party must be compensated in compliance with the arm’s length principle.

The Decree allows taxpayers to use other statistical measures, instead of the interquartile range, including the total range, to determine if a transaction complies with the arm’s length principle. If the interquartile range is used, the taxpayer must justify its use in the supporting documentation.

Segmented financial information used for the preparation of the transfer pricing documentation must be certified by a public accountant, independent auditor, or its counterpart.

The tested party may be either the Colombian party or the one abroad, based on which party’s functions are less complex, more information is available and fewer adjustments are required. When using a tested party from abroad, all supporting documentation must be provided and financials used must be certified by a public accountant, independent auditor, or similar.

The non-monetary and industrial contributions to capital the Colombian entity makes to foreign related entities must be subject to transfer pricing rules. Intangible contributions made by Colombian entities to foreign related entities abroad, must be reported in the transfer pricing return, regardless of amount.

Advanced Pricing Agreements (APA) may be signed with the tax authorities, for a five-year term (including a one-year rollback).

When the taxpayer amends its transfer pricing documentation and transfer pricing return for inconsistencies or omissions, before the tax authority issues its penalty order, a non-deductible penalty will be applied. Also, the penalties for inconsistencies or omissions are reduced to 50% of the amount determined in the official assessment. The transfer pricing return can be voluntarily amended for two years from the original date of filing.

Endnotes

1. Decree 3030 of 2013 (the Decree).

2. A taxable unit is a reference point for calculations done by the local authorities in order to take into account the frequent currency fluctuations of the Colombian pesos.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Ltda., Bogotá, Colombia
  • Andrés Parra
    +57 1 484 7600
    andres.parra@co.ey.com
  • Mónica Piedrahita
    +57 1 484 7319
    monica.piedrahita@co.ey.com

EYG no. CM4217