Taxing authority and tax law
Tax authority: Dirección de Impuestos y Aduanas Nacionales (DIAN)
Tax law:
- Law 788 enacted in 2002 and Law 863 enacted in December 2003 established transfer pricing rules; articles 260-1 to 260-10 of the Tax Code
- The definition of related parties is found in Articles 450 and 452 of the Tax Code; Articles 260, 261, 263 and 264 of the Commercial Code; and article 28 of Law 222 of 1995
Relevant regulations and rulings
Regulatory Decree 4349 published in December 2004 provides the Transfer Pricing Guidelines applicable in Colombia, including the contents of the transfer pricing documentation and return, use of financial data and APA programs.
Resolution 11188 published on 29 October 2010 provides the content and technical characteristics of information to be provided to tax authorities in the transfer pricing return.
OECD guidelines treatment
Although Colombia is not a member of the OECD, its guidelines are generally followed in the local regulations. According to Sentence C-460 of the Colombian Constitutional Court issued on 16 June 2010, OECD comments and guidelines are an auxiliary criterion for interpretation, but they are not mandatory for the tax authorities, that may or may not take them into account. However, OECD guidelines have been mentioned and have been used as a reference in recent audits.
Priorities/pricing methods
The law establishes six methods: CUP, Resale Price, Cost Plus, Profit Split, Residual Profit Split and TNMM. The selection of the method should be based on the characteristics of the transaction under analysis. The selected method should be the one that better reflects the economic reality of the transaction, and one that provides the best information and requires fewer adjustments. Local companies’ information is available and should be used for benchmark analyses when applicable. Since the transfer pricing regime is quite new in Colombia, it is advisable to analyze transactions under two methods, if applicable.
Transfer pricing penalties
The Colombian transfer pricing regime penalizes faults in both the supporting documentation and the return, as follows:
A. Transfer pricing documentation
In the case of lateness, errors, inaccuracy or information that does not allow to verify the application of transfer pricing, taxpayers bear penalties of 1% of the total value of transactions with foreign related parties during the relevant tax year or 0.5% of the taxpayer’s net income or gross capital reported in the income tax return of the same tax year or in the last tax return filed. Penalties cannot exceed 28,000 UVT (Tax Value Unit).
Additionally, when the taxpayer does not provide the required documentation, the penalties are calculated in the same way as in partial noncompliance, which means that 1% of the total value of transactions with foreign relates parties or 0.5% of the taxpayer’s net income or gross capital reported in the income tax return of the same tax year or in the last tax return filed. These penalties cannot exceed 39,000 UVT. Moreover, the costs derived from intercompany transactions about which information was not provided, will be disregarded.
Regarding transfer pricing documentation, penalties are reduced by 50% if the omission, mistake or inconsistency is corrected before penalty notification or reduced by 25% if corrected within two months after penalty notification.
B. Transfer pricing return
As per the transfer pricing return, penalties for late filing and amendments are calculated in the same manner as penalties for noncompliance with documentation requirements, which means, 1% of value of the total intercompany transactions with related parties during the relevant fiscal year, but it increases on a monthly basis and cannot exceed 39,000 UVT If it is not possible to establish the base for the penalty, it will be calculated as 0.5% of the taxpayer’s net income or gross capital reported in the income tax return of the same tax year or in the last tax return filed.
If the transfer pricing return is submitted after is has been required by the tax authorities, the penalty will be doubled. If the return is not filed during the term provided by the tax authorities’ request, the penalty will be 20% of total intercompany transactions during the fiscal year. Additionally, if it is not possible to determine the value of the transactions with foreign related parties, the default fine is 10% of the taxpayer’s net income or gross capital reported in the income tax return of the same tax year or in the last tax return filed. The penalties cannot exceed 39,000 UVT.
Once the taxpayer becomes liable for penalties for not filing the return form, such penalties can be reduced by 25% if the taxpayer files the return before the new deadline.
Regarding transfer pricing adjustments, when a taxpayer does not comply with the arm’s length principle, the tax authorities administer an additional penalty of 160% of the unpaid income tax.
C. Tax bill and penalty reductions
There is currently a legislative bill in the Congress which proposes a reduction of the maximum penalties for transfer pricing documentation and returns.
Specifically, regarding transfer pricing documentation, the tax reform looks to limit the maximum penalty for lateness, errors, inaccuracy or information that does not allow verifying the application of transfer pricing, to 15,000 UVT. Currently, the maximum penalty is 28,000 UVTs. Additionally, the tax reform proposes that in case the taxpayer does not provide the required documentation, the maximum penalty to be 20,000 UVT. Currently, that penalty is 39,000 UVT.
In relation to transfer pricing return penalties, the proposed changes in the tax code seek to set a maximum penalty of 20,000 UVT. The current maximum penalty is 39,000 UVT. This represents a potential reduction of 48.7% in penalties.
Penalty relief
See above section for penalty relief regimes.
Documentation requirements
Taxpayers must prepare supporting documentation proving each transaction with foreign related parties complies with the arm’s length principle. The transfer pricing documentation includes a functional analysis (organizational structure, business descriptions, functions, assets, risks and detailed information of intercompany transactions, among others); a macro-economic analysis, an industry analysis and an economic analysis
Documentation is not required for transactions within the fiscal year that do not exceed 10,000 UVT. Regulatory Decree 4349 outlines the information to be included in transfer pricing documentation.
Documentation deadlines
A. Documentation
Documentation should be in existence and available by 30 June of the next fiscal year. However, documentation is submitted to the tax authorities only upon formal request.
For fiscal year 2009, all taxpayers that had submitted documentation the previous year, were requested to submit it by 1 July 2010.
B. Filing returns
For fiscal year 2009, transfer pricing returns were submitted between 9 July and 30 July 2010 depending on the taxpayers’ Tax ID number.
Statute of limitations on transfer pricing assessments
A. Documentation
The statute of limitations is five years. The tax authorities can request and review transfer pricing documentation at any time during this period.
B. Transfer pricing return
The statute of limitations is two years. However, if the transfer pricing return is not submitted to the tax authorities, they can request it for up to five years following.
C. Income tax return
The income tax return becomes final after two years of submission in most cases. However, when the taxpayer has the tax audit benefit, the return is final after six months. Since transfer pricing has effects only on the income tax return, in practice, TP assessments can be made during the statute of limitation.
Return disclosures/related-party disclosures
As part of the transfer pricing return, taxpayers must disclose information on related parties such as country of residence and Tax ID number. Other information disclosed on the transfer pricing return includes the type of intercompany transaction, the amount of the transaction, the transfer pricing methodology applied, the company assessed, the price/margin obtained in the transaction and the arm’s length interquartile range.
Audit risk/transfer pricing scrutiny
A. Previous years
The tax authorities have been scrutinizing transfer pricing since 2006, requesting documentation from almost all of the taxpayers who had filed the transfer pricing return for fiscal year 2004 (1,250 taxpayers). In 2004, tax authorities requested clarification regarding non-declared transactions and amendments, and requested more information from six taxpayers, citing a lack of proper documentation.
The tax authorities’ interest and knowledge in transfer pricing matters has increased during the last years. During 2007, approximately 350 taxpayers had requests for their transfer pricing documentation for fiscal year 2005 and 2006. In 2008, over 10 taxpayers were requested to deliver their transfer pricing studies for fiscal year 2007; these companies belonged mainly to the coal and oil industries.
B. 2009 and recent developments
Since 2009 all taxpayers that submitted transfer pricing returns were requested to present documentation. All taxpayers that did not comply with the arm’s length principle were subject to a transfer pricing adjustment, which according to Article 2 of the Regulatory Decree 4349 of 2004 should be the median of the interquartile range. Moreover, the tax authorities have started to challenge technical issues, such as comparables and comparability adjustments. Transfer pricing scrutiny is expected to increase in the coming years and the tax authorities will probably aim at mining and oil industries, and also focus on challenging comparability adjustments. In this sense, audit risk has been high.
APA opportunity
The tax reform enacted in 2003 established APA regulations. APAs may be granted for a four-year term and they can be renewed, and can only be requested on a unilateral basis. Currently there are no precedents set for APAs or respective requests.
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