Transfer pricing - Colombia

• The Transfer Pricing regulation applicable in Colombia is contained in Articles 260-1 to 260-11 of the contained in the Tax Statute in articles 260-1 to 260-11 and the Regulatory Decree 2120 of December 15, 2017.  Its regulation follows 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 the determination of the income, ordinary and extraordinary income, costs, deductions, assets and liabilities, for income and complementary income tax and complementary tax purposes, considering for those operations the prices and profit margins of the and complementary taxes, considering for those transactions the prices and profit margins that would have been used in comparable comparable operations with or between independent parties (Article 260-1 of the Tax Statute). 
• According to the Colombian law, the following would be obliged to file the Informative Return of Transfer Prices for those who belong to the regime of income tax payers and taxpayers of the income tax and complementary taxes in that year, that transactions with related parties domiciled abroad and/or in a free zone, or with entities located in a free trade zone, or with entities located, resident or domiciled in non-cooperating jurisdictions of low or no jurisdictions of low or no taxation and exceeds 100,000 UVT (equivalent to $3,800,400,000), in gross equity and/or 61.000 UVT (equivalent to $2.318.244.000) in gross income. 
• The Master Report referred to in Article 260-5 of the Tax Statute and in Section 2 of Chapter 2 of Chapter 2 of Title 2 of Part 2 of Book 1 of Decree 1625 of Section 2 of Chapter 2 of Chapter 2 of Title 2 of Part 2 of Part 2 of Book 1 of Decree 1625 of 2016, which was amended by article 1 of Decree 2120 of 2017, must be prepared and sent by those taxpayers that comply with the ceilings in this article to file the Local Report and that belong to multinational groups, understood as multinational groups, understood as those that consist of two or more companies whose tax companies whose tax residence is located in different jurisdictions, or which are composed of a company resident for tax purposes in one jurisdiction and taxed in another jurisdiction for taxable in another jurisdiction for activities carried out through a permanent establishment. 
• In consideration of the foregoing, it is necessary to establish the content of the Master Report, taking into account the results of the Master Report, taking into account the results of the Action 13 of the BEPS project OECD/G20 project, in order to ensure that taxpayers comply adequately with the obligation.

• In October 2015, the Organization for Economic Cooperation and Development (OECD) published the document called: Guidelines for the Documentation of Transfer Pricing and Country-by-Country Report, which replaces Chapter V. of the OECD Guidelines on Transfer Pricing. This document is the result of BEPS action 13 ("Reexamining Transfer Pricing documentation").
  Action 13 includes new standards for Transfer Pricing documentation, incorporating the need to have three levels of reporting:
  
  • Master File.
  • Local studio.
  • Country by country report.

The latter requests details of income, profits, taxes paid and, in general, more economic information.
This initiative seeks to achieve greater transparency of information regarding Transfer Pricing in general for all tax administrations in the world.

• Determine the appropriate price or margin in operations carried out between related companies, complying with the premise that said price or margin would be, if not similar to, that of operations carried out between independent third parties;  It is perhaps the fundamental element of tax planning in multinational companies, for this a key element will be to choose which method would best reflect this situation, compliance with the arm's length principle.
• The OECD has described a series of possible methods applicable in determining transfer prices between related companies which have been adopted by a large number of countries in the world.
• Controlling the prices at which goods and/or services are transferred between these so-called related companies has been an important strategy used by the different tax authorities in the world in order to combat fraud and tax evasion, which is why at Within multinational groups, it is of important to determine what should be the method that best reflects the margin or price to be agreed upon in the purchase or sale of goods or services with its affiliates in order to avoid inconveniences with the treasury.
• The methods suggested by the OECD and adopted by Colombia are set forth in article 260-3 of the tax statute, which are as follows: 
  
  • Comparable Uncontrolled Price. 
  • Resale Price.
  • Added Cost.
  • Transactional operating profit margins.
  • Profit sharing.

• 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 there are five types of Transfer Pricing documentation: (i) Country by Country Notification (ii) Informative Return, (iii) local file, (iv) master file and (v) Country by Country Report. Since the Company's management is the one who best knows the operation and relationships between related parties, we will work closely with said management to generate the documentation that supports the Transfer Pricing.
• These must be presented in accordance with specific conditions regulated by Colombian regulations.
• These obligations are presented to the tax entity by means of Form 1125 - Informative Declaration.
• With their respective Annexes corresponding to the local report and the necessary supporting documents.

• En accordance with the provisions of articles 260-5, 260-9 and paragraph 2 of article 260-7 of the Tax Statute, they are required to present an informative return of transfer pricing, to prepare and send the Local Report and the Master file of supporting documentation, income and complementary tax payers when:
  1. Your gross assets on the last day of the respective year or taxable period are equal to or greater than the equivalent of one hundred thousand (100,000) UVT or your gross tax income for the respective year is equal to or greater than the equivalent of sixty-one thousand (61,000). UVT. and fulfill one(s) of the following situations:
  
  • That carry out operations with foreign affiliates.
  • That they are located, domiciled or are residents in the National Customs Territory and carry out operations with related parties located in the free zone.
  • That they are permanent establishments of non-resident natural persons or foreign legal persons or entities, branches and agencies of foreign companies, taxpayers of income and complementary tax, referred to in the paragraph of article 20-2 of the Tax Statute and carry out operations with related parties from abroad and/or carry out operations with related parties located in a free zone.
  • That they are permanent establishments of non-resident natural persons or foreign legal persons or entities, or branches and agencies of foreign companies, taxpayers of income and complementary tax, referred to in the paragraph of article 20-2 of the Tax Statute and in accordance with article 260-2 of the same Statute, when non-resident natural persons or legal persons or foreign entities and/or related parties located in a free zone, carry out operations with other non-resident natural persons, legal persons or foreign entities in favor of said establishment permanent.
• The Master Report 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 the Single Regulatory Decree 1625 of October 11, 2018 must be prepared and sent by those taxpayers who meet the limits indicated here to submit the Local Report and who belong to multinational groups, understood as those that consist of two or more companies whose tax residence is in different jurisdictions, which is composed of a company resident for tax purposes in one jurisdiction and that is taxed in another jurisdiction for activities carried out through a permanent establishment. (Single Regulatory Decree 1625 of October 11, 2016, article subsection 2 and paragraph 1 to 4)

• 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 administration, in use of its verification and control powers, may carry out inspection tasks and impose sanctions on those taxpayers of the Income and Complementary Tax who carry out operations with economic associates, when they fail to comply, correct, omit or present inconsistencies in the obligations. established formalities.
  The sanctions applicable to Transfer Pricing obligations are established in articles 260-11, of the Tax Statute.
• Extemporaneity penalty: Late submission of supporting documentation will give rise to a penalty for lateness, which will be determined as follows:
  
  • Presentation within five (5) business days following the expiration of the deadline for submitting the supporting documentation: the untimely presentation of the supporting documentation within five (5) business days following the expiration of the deadline for its presentation, will give rise to a penalty of zero point zero five percent (0.05%) of the total value of the operations subject to documentation, without said penalty exceeding the sum equivalent to four hundred seventeen (417) UVT.
  • Submission after five (5) business days following the expiration of the deadline for submitting supporting documentation: the untimely submission of supporting documentation after five (5) business days following the expiration of the deadline for its submission, will give rise to a penalty of zero point two percent (0.2%) of the total value of the operations subject to documentation, for each month or fraction of a calendar month of delay in the presentation of the documentation, without said penalty exceeding for each month. or fraction of a month the sum equivalent to one thousand six hundred and sixty-seven (1,667) UVT.
    The total penalty resulting from the application of this literal will not exceed the sum equivalent to twenty thousand (20,000) UVT.
• Penalty for inconsistencies in supporting documentation: When the supporting documentation presents inconsistencies such as errors in the information, information whose contentdoes not correspond to what was requested, or information that does not allow verifying the application of the transfer pricing regime, there will be a penalty equivalent to one percent (1%) of the value of the transaction with respect to which the inconsistent information was provided.
  The sanction indicated in this section will not exceed the sum equivalent to five thousand (5,000) UVT.
• Penalty for not presenting supporting documentation. When the taxpayer does not present supporting documentation while being obliged to do so, there will be a penalty equivalent to
  
  • Four percent (4%) of the total value of operations with related parties for which supporting documentation was not presented.
    The penalty indicated in this paragraph will not exceed the sum equivalent to twenty-five thousand (25,000) UVT. Additionally, ignorance of the costs and deductions originated in the operations will operate.
  • Six percent (6%) of the total value of the operations carried out with persons, companies, entities or companies located, resident or domiciled in tax havens, for which no supporting documentation was presented.
    The sanction indicated in this paragraph will not exceed the sum equivalent to thirty thousand (30,000) UVT. Additionally, ignorance of the costs and deductions arising from operations for which supporting documentation was not presented will operate.
• Penalty for omission of information in supporting documentation. When the supporting documentation omits total or partial information related to operations with related parties, a penalty equivalent to:
  • Two percent (2%) of the sum regarding which total or partial information was omitted in the supporting documentation.
  • When the omission does not correspond to the amount of the operation, but to the other information required in the supporting documentation, the penalty will be two percent (2%) of the value of the operation for which the information was not provided.
  • The sanction indicated in this section will not exceed the sum equivalent to five thousand (5.000 UVT).
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• 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.