Market overview

Law 1819 (approved on December 23 2016) introduced several changes to Colombia's transfer pricing regime. For many practitioners, these changes represent the Colombian government's efforts to keep up with the rest of the world by closely aligning its regulatory framework with the OECD's BEPS programme. In emerging markets like Colombia, the OECD's guidelines are considered hugely significant. The BEPS project has had the impact of engaging these regions in the international tax avoidance debate, encouraging them to tighten their rules and regulations for transfer pricing.

However, in cooperating with the BEPS project, Colombia has also "indirectly created additional tax burdens," said José Andrés Romero, head of tax and transfer pricing at Brigard & Urrutia. Action 2 (hybrid mismatch mechanisms) in particular has had this effect. The law provides that inter-company lending transactions can be recast as equity if they are not carried out on an arm's-length basis. Romero argues that higher withholding taxes on dividends and sanctions generate higher tax burdens for companies.

In addition, complementary rules, specifically those on thin capitalisation (Action 4) have created higher tax burdens. These rules prevent taxpayers from deducting interest payments if it surpasses the 3:1 ratio for debt/equity, "even if such interests are to be paid to a local or foreign third party, or to a related party under arm's-length conditions", said Romero.

Martin Acero, partner at Philippi Prietocarrizosa Ferrero DU & Uría, said the most significant change Law 1819 introduced was a three-tiered approach to transfer pricing, specifically relating to master file, local file and country-by-country reporting (CbCR). Under this approach, multinationals have an obligation to submit these reports in their TP documentation as outlined in BEPS Action 13. The master file must provide detailed information on the overall activities of the multinational group, regardless of whether the controlling entities or subsidiaries are domiciled in Colombia, according to Acero. The local file will report all the inter-company transactions of the multinational group, while CbCR will reveal allocation of income and taxes amongst the multinational group. The Colombian government and the OECD believe that adopting such measures will increase transparency with the tax administration in order to curb the global threat of tax avoidance.

"This set of obligations has a huge impact on the way taxpayers prepare and file the information under the transfer pricing regime," said Acero. "This is not only because it has to be aligned with the standard in other countries, but also because taxpayers have to prove the application of the arm's-length principle," added Acero.

Diana Mogollon, head of transfer pricing at BaseFirma expects that "additional decrees will be issued by the tax authorities", which will include further guidance on the thresholds for filing obligations and specific regulations for the content and submission deadlines of the CbCR, local file and master file. While the law tells Colombian taxpayers to submit the master file, it fails to disclose information on like what language should be documented in. Greater refinement in these areas would eradicate the areas of ambiguity in the law to ensure greater levels of certainty for taxpayers.

The law also "introduced important changes in the penalties legal frame," said Acero. It issues penalties for late filing which will be determined based on the days of delays and the percentage over the aggregated amount of the transactions subjected to analysis.

Tax authorities

Dirección de Impuestos y Aduanas Nacionales
Carrera 8 No 6C – 38 Edificio San Agustín, Bogota
Tel: +57 1 607 9999; +57 1 546 2200
Fax: +57 1 333 7841

Tax rates at a glance

(As of July 2017)

Corporate income tax 20/34%
Corporate income tax for equality rate 9%
Corporate income tax for equality surtax 6%
Capital gains 10%
Branch tax rates 34% 5% 40%
Withholding tax
Dividends 0% 5% 0/40%
Interest 5% 15%
Royalties from patents 15%
Technical services 15%
Technical service 15%
Software 26.4%
Branch remittance tax 0/40%
Other 33/35%

Source: Deloitte