Transfer pricing - Colombia

The Transfer Pricing regulation applicable in Colombia is contained in the Tax Statute in articles 260-1 to 260-11 and Regulatory Decree 2120 of December 15, 2017. Its regulations follow the Transfer Pricing guidelines of the Organization for Economic Cooperation and Development (OECD). 

It is worth remembering that the Transfer Pricing regime is based on determining the ordinary and extraordinary income, costs, deductions, assets and liabilities, for income tax and complementary purposes, considering for those operations the prices and profit margins that would have been used in comparable operations with, or between independent parties (Article 260-1 of the Tax Statute). 

In accordance with Colombian law, those who belong to the income tax and complementary tax regime in that year, who enter operations with economic links domiciled abroad and/or in a free zone, or with entities located, resident or domiciled in non-cooperative jurisdictions with low or no taxation and exceeding 100.000 UVT in gross equity and/or 61.000 UVT in gross income.

In the same way, it will be obliged to present a Local File if, by type of operation, amounts equal to or greater than 45.000 UVT and transactions carried out with natural or legal persons residing in non-cooperating jurisdictions with low or null taxation or preferential tax regimes when they exceed an accumulated annual amount of 10.000 UVT. 

In accordance with Colombian law, according to Article 108 of Law 1819 of 2016, it modified Article 260-5 of the Tax Statute, which includes the Master File that offers an overview of the Multinational Group's business, including the nature of its economic activities worldwide, its general Transfer Pricing policies and its global distribution of income, risks and costs.

The Master File referred to in article 260-5 of the Tax Statute and Section 2 of Chapter 2 of Title 2 of Part 2 of Book 1 of Decree 1625 of 2016, which was modified by article 1 of Decree 2120 of 2017, must be prepared and sent by those taxpayers who comply with the limits indicated in this article to present the Local File and who belong to multinational groups, understood as those that consist of two or more companies whose tax residence is in different jurisdictions, or that is made up of a company that is resident for tax purposes in one jurisdiction and is taxed in another jurisdiction for activities carried out through a permanent establishment.

In consideration of the above, it is necessary to establish the content of the Master File, considering the results of Action 13 of the Base Erosion and Profit Shifting BEPS OECD / G20 project, for taxpayers to adequately comply with the obligation.

• In October 2015, the Organization for Economic Co-operation and Development (OECD) published the document titled "Guidelines for Transfer Pricing Documentation and Country-by-Country Reporting," replacing Chapter V of the OECD Transfer Pricing Guidelines. Later, in 2017, the OECD incorporated these provisions into the official update of its guidelines, reflecting the changes introduced by Actions 8 to 10 and 13 of the BEPS Plan.

• Action 13 includes new standards for Transfer Pricing documentation, incorporating the need to have three levels of reporting:

  • Local File.

  • Master File.

  • Country-by-country report.

• This regulatory framework, adopted by multiple countries, aims to ensure tax transparency and enable tax authorities to better assess transfer pricing risks, preventing base erosion and profit shifting. 

The OECD has established a set of methods for determining transfer prices between related entities to ensure compliance with the arm’s length principle. These methods, adopted by numerous countries, including Colombia, are:

• • Comparable Uncontrolled Price (CUP).

  • Resale Price Method (RPM).

  • Cost Plus Method (CPM).

  • Transactional Net Margin Method (TNMM).

  • Profit Split Method (PSM).

In Colombia, these methods are established in Article 260-3 of the Tax Statute, which aligns with OECD guidelines to ensure that transactions between related entities comply with the Arm’s Length Principle.

The correct application of these methods is essential in the tax planning of multinational companies, as it allows them to determine appropriate prices or margins for transactions between related entities, ensuring they are comparable to those agreed upon between independent parties. This is crucial to prevent (BEPS) practices that tax authorities seek to combat to prevent fraud and tax evasion.

Therefore, it is vital for multinational companies to select the method that best reflects the appropriate margin or price in their intercompany transactions, ensuring compliance with tax regulations and avoiding disputes with tax authorities.

Colombia has a self-assessment regime, in which the burden of proof falls on the taxpayer to ensure that the Transfer Pricing rules are complied with, being fundamental the compliance with the Arm's Length Principle, so that if this principle is not complied with, the consequences will fall on what is presented in the income tax return for the year under analysis.

In Colombia, Transfer Pricing obligations are aligned with international standards and require the submission of various documents to the Dirección de Impuestos y Aduanas Nacionales (DIAN). These obligations include:

• Country-by-Country Notification.
  
  
• Informative Return (Form 120).
  
  
• Local File.
  
  
• Master File.
  
  
• Country-by-Country Report.

The Transfer Pricing Informative Return must be submitted using Form 120. Like the other obligations, it must be filed electronically through the DIAN's online services, following the specific conditions set by Colombian regulations. The submission must comply with the established deadlines and include the required annexes, such as the Local File, Master File, and supporting documentation.

• Loss of profit margin in transactions with related parties.
  
  
• Transactions with related parties’ resident in low tax jurisdictions.
  
  
• Corporate restructurings, or changes in the TP model, may also trigger a challenge, but it goes without saying that companies may evolve, and if the previous TP method no longer seems the most appropriate.
  
  
• The risk of income tax return corrections and the information reported to the tax administration.

The Tax Authority, in exercising its verification and control powers, may conduct audits and impose sanctions on taxpayers subject to Income and Complementary Taxes who engage in transactions with related entities if they fail to comply, correct, omit, or present inconsistencies in the required formalities.

The sanctions applicable to Transfer Pricing obligations are established in Article 260-11 of the Tax Statute.

A. Sanctions Related to Supporting Documentation:

1. Late Submission of Supporting Documentation:

• Within five (5) business days after the deadline: A penalty of 0,05% of the total value of the transactions subject to documentation will be imposed, not exceeding 417 UVT.
  
  
• After five (5) business days following the deadline: A penalty of 0,2% of the total value of the transactions per month or a fraction thereof will apply, not exceeding 1.667 UVT per month and a total of 20.000 UVT.

2. Penalty for Inconsistencies in Supporting Documentation: Errors or missing information that prevent verification of compliance with the transfer pricing regime will result in a penalty of 1% of the transaction value, with a limit of 5.000 UVT.

3. Penalty for Failure to Submit Supporting Documentation:

• Transactions with related parties: A penalty of 4% of the total value of undocumented transactions, with a limit of 25.000 UVT, in addition to the disallowance of related costs and deductions.
  
  
• Transactions with entities in tax havens: A penalty of 6% of the total value of undocumented transactions, with a limit of 30.000 UVT, in addition to the disallowance of related costs and deductions.

4. Penalty for Omission of Information in Supporting Documentation: The total or partial omission of information carries a penalty of 2% of the omitted amount, not exceeding 5.000 UVT.

B. Sanctions Related to the Informative Return: 

1. Penalty for Failure to Submit the Informative Return: A penalty of 1% of the value of the transactions omitted, with a limit of 15.000 UVT.

2. Penalty for Late Submission of the Informative Return:

• Within five (5) business days after the deadline: A penalty of 0,05% of the total transaction value, not exceeding 417 UVT.
  
  
• After five (5) business days following the deadline: A penalty of 0,2% of the total transaction value per month or fraction thereof, not exceeding 1.667 UVT per month and a total of 20.000 UVT.

3. Penalty for Inconsistencies in the Informative Return: Errors or missing information that prevent verification of compliance with the transfer pricing regime will result in a penalty of 1% of the transaction value, with a limit of 15.000 UVT.

It is essential that taxpayers subject to the transfer pricing regime in Colombia comply with the documentation and reporting obligations within the established deadlines and conditions to avoid these penalties.

• The Comparability Analysis is a fundamental element in determining Transfer Pricing and is defined in the OECD Guidelines applicable to multinational enterprises and tax administrations. In Colombia, this analysis is regulated by Article 260-4 of the Tax Statute, which states that two transactions are comparable when there are no significant differences that could materially affect their evaluation under an appropriate transfer pricing methodology.
  
  
• If differences exist, they may be eliminated through sufficiently reliable adjustments, allowing for a more precise comparison with transactions between independent parties.
  
  
• To determine whether transactions are comparable, the following key factors must be analyzed, depending on the selected transfer pricing method:

1. Characteristics of the Transactions: 

• Financing transactions: Considerations include the principal amount, term, risk rating, collateral, debtor’s solvency, and interest rate.
  
  
• Provision of services: The nature of the service, the need for its acquisition, and the know-how or technical expertise involved must be analyzed.
  
  
• Use or disposition of tangible assets: Factors such as physical characteristics, quality, reliability, availability, and supply volume of the asset are considered.
  
  
• Transfer or exploitation of intangible assets: Elements such as the type of asset (patent, trademark, trade name, or know-how), duration, level of protection, and expected economic benefits must be considered.
  
  
• Sale of shares: The present value of projected profits, future cash flows, or the issuer's market price at the time of the sale must be evaluated.

2. Economic Functions and Risks Assumed: Each party involved in the transaction must be analyzed based on:

• Activities performed.
  
  
• Assets used.
  
  
• Risks assumed (operational, financial, strategic, etc.).

This analysis ensures that profit allocation within a multinational group is consistent with the arm’s length principle.

3. Contractual Terms: Agreements must reflect the economic reality of the transaction, avoiding clauses that differ from the terms independent parties would accept under similar circumstances.

4. Market Factors and Economic Conditions: Considerations include:

• The geographical location of the parties involved.
  
  
• Market size and competition level.
  
  
• Availability of substitute goods and services.
  
  
• Government regulations and macroeconomic conditions (inflation, interest rates, taxes, etc.).
  
  
• Production, transportation, and commercialization costs.

5. Business Strategies: An assessment of the company’s market policies should include:

• Market penetration and expansion strategies.
  
  
• Pricing policies based on strategic positioning.
  
  
• Cost reduction and profitability optimization approaches.

• Advance Pricing Agreements (APAs) in Colombia are primarily regulated by Article 260-10 of the Tax Statute and Decree 1625 of 2016, specifically in Articles 1.2.2.4.1 to 1.2.2.4.4.10. These agreements are signed between DIAN and taxpayers subject to income and complementary taxes. They establish the criteria and methodologies for setting prices, consideration amounts, or profit margins applicable to transactions with related parties over specific tax periods.
  
  
• According to the current regulations, the effects of an APA may apply to the tax period in which the agreement is signed, the immediately preceding year, and up to three subsequent tax periods, as agreed by the parties. DIAN will accept the declared values for transactions between related parties when they reflect economic reality and the correct application of the agreement.
  
  
• Although Colombian tax regulations have established procedures for entering APAs, no agreements are currently in force. However, taxpayers may request an APA following the procedures set forth in the applicable regulations.
  
  
• APAs offer significant advantages, such as reducing the risk of transfer pricing adjustments and preventing tax disputes by providing certainty and clarity in the valuation of related-party transactions.

• Not applicable in Colombia.

• N/A.

• N/A.

• Colombian tax authority DIAN, has reinforced the elaboration of robust functional analyses that describe the assets used, risks incurred, and functions performed in each of intercompany transaction analyzed, exposing that a deficient functional analysis could lead to erroneous conclusions.

• N/A.