In Colombia transfer pricing rules date back to the year 2002 when by means of the Law 788 of that year, articles from 260 to 260-11 were added to the Tax Code (TC). These articles have been subject to amendments in the tax reforms made after 2002. But it was not until the 2012 through Article 113 of the Law 1607 that the National Government dealt with the intragroup services directly, pointing out in paragraph 2, the following:
"Paragraph 2. For intragroup services or cost sharing agreements, rendered between related parties, the taxpayer must demonstrate the actual provision of the service and that the amount charged or paid for such service is at arm's length, as established in this article".
Subsequently, in 2013, this article was subject to regulation, in the following terms in Article 5 of Decree 3030, which in general terms stated:
- The way in which the services received generate a benefit for the recipient must be described in the transfer pricing documentation, and such services are not acquired therefrom, the company would be willing to contract an independent third party for the rendering thereof. Additionally, it should be explained if the methodology used for the determination of the service charge is consistent with the one that independent third parties would have used. In this section, a relevant clarification is made and it is that such conditions should be reviewed not only from the perspective of the service provider but also from that of the beneficiary.
- Describe the methodology used to determine the service value, i.e., how costs and expenses were attributed, as well as the mark-up applied to each type of service.
- In case that the service agreement has been set as a lump sum, the effective use of these services should be documented.
It is important to state that these requirements of substantial nature do not obviate compliance with formal aspects such as performing tax withholdings and having a written agreement registered in front of Tax Authorities, when required by local tax regulations.
However, what is most important with regard to the regulation is the alignment with the vision of the Organization for Economic Cooperation and Development (OECD) in the sense that it seeks to document the reality and benefits of the services received, more than one simple confirmation of the fulfilment of formal requirements as occurred in the past. However, the regulation itself has challenges not only for the Tax Authorities but also for taxpayers, as follows:
- For the Tax AuthoritiesThe Authorities should design tax plans beyond formal aspects and rhetorical aspects that do not consider the new business environment; that is, that the world economy is trending towards globalization and every day there are more taxpayers who receive support from their foreign related parties not only motivated by financial aspects but also by strategic issues.It is not possible to continue discussing the deductibility of a payment abroad due to the unawareness of the new business reality; on the contrary, it is this new reality that gives authorities new control tax tools not only in terms of exchange of information but also in technical elements such as the OECD BEPS Actions, but to use this tool, there should be a change in tax processes.
- For taxpayersContracting processes with their related parties should be "redefined"; this means making a rigorous application of the arm's length principle as shown below:
- There should be a clear and detailed definition within contracts of services received;
- There should be documents demonstrating that the services were necessary and were effectively received; and
- There should be a clear understanding of how collections for the services received were appraised.
In this sense, it is clear that payments for services to related parties should not be understood as an assignment of expenses that lack supporting documents that demonstrate the way in which services have been rendered and the benefits generated, requirements that in general terms would be requested of any independent provider.
In summary, the application of the regulation of intragroup services within the short term will be the source of tax discussions, the expectations for success of taxpayers; to a great extent it will be based on a rigorous application of the arm's length principle, which transcends statistical ranges and addresses negotiation conditions.