International Tax Planning to Optimize Transfer Pricing in Colombia

In a globalized world, companies with operations in multiple countries face unique challenges in terms of tax compliance. One of the most critical areas is transfer pricing, which refers to the prices at which companies within the same group conduct any type of transaction among themselves, such as the purchase and sale of products or assets, provision of services, granting of loans, among others. Adequate international tax planning is key to optimizing these transfer prices and ensuring both efficiency and regulatory compliance.

What is Transfer Pricing?

Transfer pricing refers to the prices at which transactions are conducted between companies that belong to the same corporate group but operate in different jurisdictions. This mechanism is essential for the correct distribution of income and expenses among the various entities of a corporate group, ensuring that they are reflected fairly and in accordance with the tax laws of each country.

The Importance of International Tax Planning

Effective international tax planning allows companies not only to comply with local and international regulations but also to optimize their tax burden. In Colombia, the regulatory framework for transfer pricing aims for transparency and fair tax contributions, aligned with OECD practices. However, without an adequate strategy, companies may face significant tax adjustments and penalties.

A well-planned transfer pricing strategy can offer several benefits, such as the reduction of legal and financial risks, tax optimization, and improvement in business and financial planning. By staying up-to-date with tax regulations, companies can avoid costly penalties and litigation. Through an effective strategy, it is possible to achieve an efficient tax burden, thereby maximizing the profitability of the corporate group.

At BéndiksenLaw, we understand the complexity of the global tax environment and offer specialized services in transfer pricing. We analyze your company’s current transfer pricing policies and suggest adjustments to align them with recommended international practices. Additionally, we assist in preparing all necessary documentation to comply with Colombian regulations and reduce the risk of tax adjustments.

If your company operates internationally and seeks to optimize its transfer pricing strategy, contact BéndiksenLaw. Our experts are ready to help you navigate the complexities of the international tax environment and ensure that your company complies with all regulations while maximizing its tax efficiency.

COLOMBIA – TAX ON SIGNIFICANT ECONOMIC PRESENCE (E-COMMERCE TAX)

Introduction

Inspired by BEPS Action Plan 1, Colombia decided to enact, effective as of 2024, a tax on income generated by nonresidents with a significant economic presence in Colombia, i. e. a tax on e-commerce.

The reasoning in the bill submitted by the Government to Congress, introducing the new tax, explains:

“Capital-importing countries such as Colombia have suffered a significant loss in their rights to tax activities carried on by foreigners in connection with its territory. This loss is due to the fact that international rules allow foreign companies to be taxed only in the presence of the so-called permanent establishment (PE), i.e., when the company has a fixed physical presence and a duration of activities of at least one (1) year in the country. In the midst of the digitalization of the economy, the physical presence and the 1 year duration are not necessary to carry out very relevant activities from an economic point of view, with an expectation for a greater reduction in the physical scope of business and in the times to carry out the different activities.

“Emerging countries, such as Colombia, are the most affected by this situation. However, the solution currently offered by the international community (the so-called Pillar 1) only covers about 108 companies (with annual turnover of over 20 billion euros), and only transfers the right to tax profits in a minimum percentage that represents less than 0.5% of the current revenue, according to the calculations of the DIAN[1] and experts. In addition, experts currently assign a low probability to the ratification of the Multilateral Convention (MLC) that would implement the solution. Thus, if Colombia does not approve an alternative solution, it would lose the opportunity to tax the revenues of the digital economy.”

That is, rather than following the BEPS principles -including the fact that no taxes shall be imposed on e-commerce, Colombia decided to approve an alternative solution in order not to lose the opportunity to tax digital economy revenues.

As seen, the new tax is merely revenue-oriented, intended to tax electronic transactions that presently escape taxation in Colombia.  Thus the fact the Article 20-3 of the Tax Code, introducing the new tax, is embodied in Title VI of Law 2277 of 2022, labeled “Combat Mechanisms Against Tax Evasion and Avoidance”. 

For this very reason, this tax does not apply to transactions that are already subject to income tax under other provisions of the Tax Code, such as technical services, consulting services, technical assistance and education services, even if they are provided electronically.

Furthermore, the bill submitted by the government to Congress underwent major changes during the debates, both at the House and at the Senate, thus resulting in a hodgepodge, with inconsistencies.

Let us delve into the salient features of the new tax.

Taxable Income, Taxpayers

The first paragraph of Article 20-3 of the Tax Code provides that there is subject to Colombian income tax all income from the sale of goods or from service, received from clients and/or users located in Colombia, by individuals who are not residents of Colombia or legal entities with no domicile in Colombia, provided they have a significant economic presence in the country.

It appears, in principle, that, in addition to taxing sales of goods, this tax is addressed at taxing any type of services, as the provision mentioned above refers to services in general, drawing no distinction.  Reference to services, in general, also appears in other sections of Article 20-3.

However, based on the reasoning in the bill submitted to Congress, quoted above, and on the debates there, in our opinion the tax applies exclusively to digital services through a significant economic presence in Colombia, not to all types of services.

Digital Services

The regulations define digital services as those services provided through the internet or an electronic network in an automated manner, that require minimal human participation by the service provider and are impossible to guarantee in the absence of information technology.

Digital services are listed in Article 20-3 of the Tax Code itself, in what in principle appears to be a comprehensive list of taxable services, as follows:[2]

  1. Online advertising services.
  2. Digital content services, whether online or downloadable, including mobile applications, e-books, music and movies.
  3. Free transmission services, including television shows, movies, streaming, music, multimedia transmissions, podcasts and any form of digital content.
  4. Any form of monetization of information and/or data of users located in Colombia, which have been generated by the activity of such users in digital markets.
  5. Online intermediation platform services.
  6. Digital subscriptions to audiovisual media including, but not limited to, news, magazines, newspapers, music, video and games of any kind.
  7. Management, administration or handling of electronic data including web storage, online data storage, file sharing services or cloud storage.
  8. Standardized or automated online search engines services or licensing, including custom software.
  9. Granting the right to use or exploit intangibles.

But, at this point, the last two items in the list are, in fact, catchall provisions that lead to the conclusion that all digital services through a significant economic presence in Colombia are subject to this tax:

  1. Other electronic or digital services destined to users located in Colombia.
  2. Any other service provided through a digital marketplace destined to users located in Colombia.

Significant Economic Presence

Again, working around the inconsistencies in the law, in our opinion a significant economic presence in Colombia exists, for both sales of goods and for digital services, whenever both of the following requirements are met:

  • That a purposeful and sustained interaction is maintained in the Colombian market, that is, with customers and/or users located in Colombia.
  • That during the previous or the current tax year the taxpayer generates gross income from such users of at least thirty-one thousand three hundred (31,300) UVT[3].

These requirements are aggregated when the activities are carried out by related parties, as defined in the Tax Code.

Purposeful and Sustained Interaction Presumption

The law includes a rebuttable presumption to the effect that a purposeful and sustained interaction in the Colombian market, that is, with customers and/or users located in Colombia, exists in any one of the following events:

  • When the non-resident individual or the entity not domiciled in Colombia maintains an interaction or marketing deployment with three hundred thousand (300,000) or more customers and/or users located in Colombia during the previous or the current tax year.
  • When the non-resident individual or the entity not domiciled in Colombia maintains or establishes the possibility of displaying prices in Colombian pesos or allowing payment in Colombian pesos.

As mentioned, the 300,000-customers-or-users threshold is only a rebuttable presumption. Therefore, it doesn’t mean that by reaching that threshold an individual or entity will necessarily be found to have a purposeful and sustained interaction In the Colombian market, as the presumption could be rebutted with whatever arguments may be available in any specific case. By the same token, having less than 300,000 customers and/or users does not necessarily mean that no purposeful and sustained interaction will be found to exist. The underlying issue is that neither the law nor the regulations include any guidance as to when a purposeful and sustained interaction should be taken to exist.

Users Located in Colombia

With respect to digital services, the regulations provide that users are deemed to be located in Colombia in any one of the following events:

  • The domicile or where the client habitually resides or lives is located in Colombia.
  • Payments are made through credit, debit or other types of cards or vouchers or through any payment mechanism, located in Colombia.
  • The credit or debit card used to pay for the transaction was issued in Colombia.
  • The shipping address for the sale of goods is located in Colombia.
  • The Internet Protocol (“IP”) address of the device used by the client is located in Colombia, at the time of the operation.
  • The country mobile code (MCC) of the international identity of the subscriber of the mobile service stored in the SIM card (subscriber identity module) used by the client locates the client in Colombia.

As regards sales of goods, the users are deemed to be located in Colombia whenever any two of the above conditions are satisfied.

Tax Rates, Payment

Significant economic presence taxpayers are subject to tax under one of three different scenarios.

  • Under the general rule, the tax is paid through withholding, at a 10% rate on gross revenues without deductions.  As mentioned in the introduction, in that this tax was designed to curb tax evasion and avoidance, this withholding does not apply where the payment in question is already subjected to tax withholding under other sections of the Tax Code. Where all income is subjected to withholding tax, the taxpayer need not file tax returns.
  • As an option, an election may be made to file tax returns, pay a 3% tax on gross revenues from the sale of goods or from the digital services, and thus for no withholding tax to apply.  Under this election, the taxpayers must register for tax purposes in Colombia, make bi-monthly 2% estimated tax payments and file annual returns.
  • Alternatively, under the election in b. above the taxpayer may nonetheless elect for the 10% significant economic presence tax withholding to continue to apply as a means for payment of the tax, with the right to refunds of the excess of the taxes withheld over the 3% annual tax rate.

Tax Treaties

To rest the international community assured that Colombia does not intend to dishonor its international commitments, the law includes a provision, originating from the bill submitted to Congress, expressly providing that the new tax is without prejudice to the provisions of the double taxation conventions signed by Colombia.

In the same vein, Congress introduced a provision to the effect that whenever any international agreement signed by Colombia prohibiting taxation of electronic commerce is implemented, the domestic provisions dealing with this tax shall cease to apply for fiscal years beginning after the date on which the international agreement enters into force.

Constitutional Relief

A constitutional analysis of the tax is outside the scope of this general article. 

We may, nevertheless, highlight the fact that foreign individuals and entities may find relief, dispensing them from payment and all other obligations related to this e-commerce tax, through an action filed before our Constitutional Court.

In the writer’s opinion there are at least two arguments that could render the tax unconstitutional:

  • When dealing with the various elements of this tax, the law indistinctly makes reference to “services” or to “digital services”.  This creates confusion, as it is not possible to conclude, with any degree of certainty, whether the tax applies to all services rendered by the intended individuals and entities or exclusively to digital services.  This lack of clarity is contrary to our Constitutional principles and may be grounds for the court to rule the law as being unconstitutional.
  • The law has no indication as to when an individual or entity is deemed to have a purposeful and sustained interaction with customers and/or users located in Colombia.  This is, similarly, a cause for Constitutional relief against the tax given the uncertainty as to whether a given individual or entity may or may not be subject to the tax.

Conclusion

Enactment of the significant economic presence tax overcame objections from many of the large economic players in Colombia and within Congress itself.  But not all is hunky-dory. Its practical implementation is complex, with issues such as the new taxpayer’s election to be taxed through withholding or by filing returns, reversal of such election, filing tax returns, payment mechanisms and proper withholding on all transactions to avoid the need to file tax returns, to mention a few.

BéndiksenLaw is here to assist you in navigating through this maze. Contact us.

Jaime G. Béndiksen

[1] The Colombian tax administration, National Taxes and Customs Directorship.

[2] This list of activities was borrowed by Congress from Kenya’s digital services tax and from Article 12B “Income from automated digital services” of the United Nations Model Double Taxation Convention between Developed and Developing Countries 2021.

[3] “Tax Value Units” or UVT for their Spanish acronym.  The present UVT value is $47,065 Colombian pesos (roughly US$12).

Main Points of Colombia’s Latest Tax Reform

On December 13, 2022, Colombia enacted Law 2277, embodying the most recent tax reform which came into effect on January 1, 2023 with some exceptions. In this article, our new Head of Tax explains several topics of the reform of interest to our clients.

I.    Alternative Minimum Tax.

Inspired by the OECD BEPS global anti-base erosion (GloBE) rules Pillar Two recommendations, the tax reform introduces a new 15% alternative minimum tax for corporate taxpayers, including taxpayers operating in free-trade zones (“zonas francas”).  This minimum tax does not apply to non-resident foreign entities.

This minimum tax, called Net Tax Rate (Tasa de Tributación Depurada or “TTD” for its acronym in Spanish) is based on the taxpayer’s book profits (with certain adjustments), called Net Book Profit (Utilidad Depurada or “UD” for its acronym in Spanish).

The TTD paid by any given taxpayer, that is, its effective tax rate, is arrived at by dividing the taxpayer’s Net Income Tax (“ID”) by its Net Book Profit (“UD”).  It is expressed in the law with the following formula:

Whenever the TTD computed under the above formula is lower than 15%, taxpayers must determine the amount of Additional Tax Due (“IA”) by multiplying the Net Book Profit (UD) by 15% and subtracting the Net Income Tax (ID):

For purposes of these calculations:

The Net Income Tax (ID) is the actual income tax paid (“INR”), increased by tax discounts or credits originating from tax treaties and by foreign tax credits (“DTC”), minus the income tax paid on passive income from foreign controlled entities (computed by applying the general 35% corporate tax rate to the taxable passive income) (“IRP”).  The formula is:

The Net Book Profit (UD), in turn, is calculated under the following formula:

Where:

UC                   is the book profit before taxes.
DAPARLrefers to permanent differences set forth in the law that increase taxable income.
INCRNGOrefers to income that is neither taxable income nor capital gains income and which affects book profits.
VIMPPis the income determined under the equity method for the corresponding tax year.
VNGOthis is the net value of capital gains income affecting book profits.  
REstands for exempt income originating from tax treaties, income received under the Colombian holding regime, exempt income on certain sales of social interest and priority interest housing and income received under certain pension funds
Ccompensation of prior years’ net operating losses or excess of presumptive income, taken during the tax year and which did not affect the book profit for the tax year.

Special calculations apply for taxpayers consolidating financial results.  In essence:

  • The Net Tax Rate for the Group (“TTDG”) is calculated by dividing the sum of the Net Income Tax of each Colombian resident taxpayer in the consolidation (“SID”) by the sum of the Net Profit of each such taxpayer (“SUD”):
  • Where the result is lower than 15%, the Additional Tax Due for the Group (“IAG”) is determined by the difference between the sum of the Net Book Profit for each Colombian resident taxpayer in the consolidation (SUD) multiplied by 15% less the sum of the Net Tax of each such taxpayer (SID):
  • In order to determine the Additional Tax (IA) for each Colombian resident taxpayer, the above result is multiplied by the factor resulting from dividing the Net Book Profit of each taxpayer higher than zero (“UDB”) by the sum of the Net Book Profit of all taxpayers in the group with Net Book Profits higher than zero (“SUDB”):

These alternative minimum tax rules do not apply to the following taxpayers:

  • Taxpayers who do not consolidate financial results and their Net Book Profit (“UD”) is zero or lower.
  • Taxpayers who consolidate financial results and the sum of all Net Book Profits (“SUD”) is zero or lower.
  • Entities incorporated as Special Economic and Social Zones (“Zonas Económicas y Sociales Especiales or “ZESE”).
  • Certain government-owned entities engaged in gambling or alcohol and liquor monopolistic activities.

II.   Capital Gains

The rate for capital gains (“ganancias ocasionales”) generated by Colombian entities and by non-resident entities alike was increased from 10% to 15%.

III. Dividends

Dividends paid to nonresidents are subject to a 2-tier withholding tax calculation, as follows:

  1. If the dividends originate from earnings that have not been previously taxed, then they will be taxed at the general 35% corporate tax rate.
  2. The balance remaining after payment of the above tax is further subject to withholding tax.  Here the tax rate was doubled by the tax reform, increasing from 10% to 20%.

IV.  Free-Trade Zones

Entities carrying on operations in specified free-trade zones are entitled to a preferential 20% corporate tax rate, except for commercial users, to whom the general 35% tax rate applies.

Effective 2024, the tax reform sets the following distinctions:

Industrial users:

  • The ratable portion of taxable income corresponding to exportation of goods and services will be taxed at the preferential 20% rate.  This will include health services provided in certain specific free-trade zones to patients residing outside Colombia.

    This benefit is subject to the industrial free-zone users signing, with the Ministry of Commerce, Industry and Tourism, in 2023 or 2024, an internationalization and annual sales plan for each tax year, setting forth maximum goals for net income from operations of any kind within Colombia and income from activities other than their authorized activities. 

    Such a plan will be mandatory for entities securing free-trade zone authorization as from 2025.

    Failure to sign the plan or to reach the maximum income goals will result in the benefit of the preferential tax rate being lost and thus being subject to the general 35% rate.
  • The ratable portion of all other taxable income will be subject to the general 35% corporate tax rate.

Commercial users:

Commercial free-zone users will continue to be taxed at the general 35% corporate tax rate.

Rules of Exception:

  • Industrial free-zone users with an increase of at least 60% in gross revenues in 2022 as compared to 2019 shall be entitled to apply a 20% tax rate through 2025.
  • Free-trade zone users who have signed with the Colombian government a so-called “legal stability agreement” (agreements basically freezing the tax provisions in place at the time they are signed and thus protecting against future changes in the tax law) will be subject to the tax rate called for in such agreement.
  • The preferential 20% corporate tax rate also applies to the following: offshore free-trade zones; industrial users of special permanent free-trade zones of port services, industrial users of port services in free zones (“zonas francas”), industrial users of special permanent free zones (“zonas francas”), whose main corporate purpose is refining of petroleum-derived fuels or refining of industrial biofuels; industrial users of certain qualifying logistics services and free zone (“zona franca”) operator users.

V.   Research and Development Investments

The tax credit for investments in qualifying research and development is increased from 25% to 30%.

Cost and expenses qualifying for this tax credit cannot be capitalized or claimed as costs or deductions.

VI.  Amnesties

The reform includes the following few amnesties:

  • Late-payment interest: the late payment interest on overdue taxes and customs dues paid on or before June 30, 2023, and on extensions granted by the tax administration on or before that same date is reduced by 50%.  Applications for extensions must be filed not later than May 15, 2023.
  • VAT returns: VAT returns filed up to November 30, 2022, stating an incorrect tax period and thus null and void, may be filed up to April 30, 2023, with no late-filing penalty and no late-payment interest. 
  • Taxpayers may, before May 31, 2023, file returns not filed up to December 31, 2022, paying the corresponding amounts due, with a reduction of 60% of the penalty that would apply after the reductions in Article 640 of the Tax Code and a 60% reduction in the interest rate.  The same benefits apply where, in lieu of payment, these taxpayers request a payment agreement with the tax administration before May 31, 2023, and sign such agreement before June 30, 2023.
  • Taxpayers who have been served notices to file or amend tax returns or to pay taxes assessed, may pay the corresponding amounts on or before June 30, 2023, with a 20% reduction of the amount assessed. The reduction also applies to taxpayers who file for a payment agreement with the tax administration no later than May 15, 2023, and sign the corresponding agreement by June 30, 2023.

Should you have any questions, do not hesitate to contact us.

Meet BéndiksenLaw Colombia’s New Head of Tax

Seeking to provide a more complete and comprehensive service to our clients, we are proud to announce that our founding partner, Jaime G. Béndiksen, will head the Tax Practice area of ​​our Colombia office. Throughout his more than 50-year professional career, Mr. Béndiksen has accumulated extensive experience in the tax law area, advising a wide variety of clients in Colombia, Mexico and the U.S. which is why we are confident that his appointment will allow us to further strengthen and consolidate our office in Colombia. For this reason, we present his resume below:

Education

Mr. Béndiksen graduated in 1970 from Universidad Nacional Autónoma de México (Mexico City), receiving an LLB, also received a Masters in Comparative Jurisprudence (diploma) from New York University in 1974 and a JD from ICFES in Colombia in 1982.

Jurisdictions

Admitted to practice in Mexico and Colombia (South America).

Practice

Practiced with the law firm of Baker & McKenzie from 1970 through 2011, elected international partner in 1977.  With this firm he practiced from 1978 through 1992 in Colombia.

Founding partner of BéndiksenLaw.

Practice Areas

Mr. Béndiksen has over 50 years of experience in Mexican and Colombian tax law in general, with emphasis in tax treaties, competent authority proceedings, international tax planning, supply-chain restructuring, oil exploration, production and services, taxation of software, wealth management, mergers and acquisitions, permanent establishments, cross-border transactions, transfer pricing, employee stock plans and value-added tax.  In tax litigation he has secured landmark decisions on complex tax issues, overturning previous tax court positions.

Public Service

Advisor to the Colombian Tax Administration (DIAN) in 2000-2001 to introduce transfer pricing in Colombia, illustrating the DIAN on this area of tax law and its benefits of the system, drafting the first statutory provisions, drafting the bill submitted to Congress and persuading Congress of the benefits to Colombia in approving the system.

Expert Witness

Has acted as an expert witness on Mexican tax law for the US Internal Revenue Service (IRS).

Also acted as expert witness on Mexican tax law in a US arbitration proceeding between two US multinational entities.

Coordinating Counsel for Multinational Clients

Mr. Bendiksen has extensive experience serving as coordinating counsel for multinational clients, first as Head of the Tax Practice Group at Baker & McKenzie Mexico, and, since 2011, at BéndiksenLaw.

Publications

Writes widely on domestic and international tax topics.  Among many other publications, Mr. Béndiksen:

  • Wrote the Colombia/Mexico national reports for the International Fiscal Association Annual Congresses in Amsterdam (1988), Delhi (1997) Mumbai (2014).
  • Has published several pieces in the Colombian Tax Law Institute Magazine (Revista del Instituto Colombiano de Derecho Tributario).
  • Has written two reports for the Colombian Tax Law Institute (Instituto Colombiano de Derecho Tributario) Annual Tax Law Conferences. 
  • Co-authored the section on Mexico in CCH’s “International Transfer Pricing Laws”. 
  • Directed and co-authored CCH’s “Mexican Tax Guide”. 
  • Was the editor of “Practical Mexican Tax Strategies” published bi-monthly by World Tax Executives, Inc./Thomson Reuters. 
  • Co-authored the Mexico country profile for the Global Tax Guide, published by BNA International.
  • He is a correspondent in Mexico for Tax Notes International.

Presentations

Frequent speaker at local and international fora, on domestic and international tax matters, including:

  • American Bar Association.
  • Asociación Nacional de Industriales (ANDI).
  • Bloomberg BNA.
  • Bogota Chamber of Commerce.
  • Calgary Oil.
  • Canadian Tax Foundation.
  • Colombian Tax Law Institute (Instituto Colombiano de Derecho Tributario).
  • Council for International Tax Education.
  • D. C. Bar.
  • Executive Enterprises Institute.
  • International Fiscal Association, Annual Congresses of Amsterdam (1988), Delhi (1997), Uruguay (2012).
  • Petroleum Equipment Suppliers Association.
  • The Society of Trust and Estate Practitioners (STEP).
  • Tax Executives Institute.
  • Universidad de los Andes.

Recognitions

  • Consistently listed in the Guide to the World’s Leading Tax Advisers, published by Euromoney Publications of London. 
  • Ranked regularly as a leading advisor on Mexican tax matters in the annual poll of 1000 corporate tax directors conducted by International Tax Review.
  • Named as one of the top tax lawyers in Latin America by Latin Lawyer.
  • Recognized as a leading individual on cross-border structuring matters by International Tax Review. 
  • Recognized as “Tax Advisor of the Year” by “Defensa Fiscal”, a specialized Mexican tax publication, in 2005.
  • Recognized regularly by Chambers & Partners in its Global Guide as one of the best tax lawyers in Mexico, dubbing him as “a phenomenal tax lawyer, especially in consulting and litigation”, adding “He is a leader in the field and ‘highly skilled and responsive’ according to clients”.   
  • Regularly listed by Who’s Who Legal, published by Law Business Research, Ltd.
  • Listed yearly as a recommended lawyer by PLC Which Lawyer?
  • Regularly ranked as a Top Tax Lawyer in Mexico in Chambers Latin America Guide.
  • Chambers and Partners top 5% of lawyers globally.

Memberships

  • Member of the International Fiscal Association (IFA), where he was President of the Colombia chapter. 
  • Member of the Precedents and Legislation Committee of the International Fiscal Association (IFA), Mexico Branch.
  • Member of the Transfer Pricing Committee of the International Fiscal Association (IFA), Mexico Branch.
  • Honorary member of the Colombian Institute of Tax Law (Instituto Colombiano de Derecho Tributario) since 1992.

Languages

Spanish, English, Italian

In case you need legal counsel on tax matters, do not hesitate to contact us.