Find out when businesses should carry out a transfer pricing study in Colombia, and changes in the regulatory environment that could impact your activities.
Transfer pricing is a broad concept coined by the Organization for Economic Cooperation and Development (OECD) which encompasses a set of obligations for multinational enterprise groups who develop commercial transactions between their member companies.
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What is a transfer pricing study in Colombia?
In its most basic definition by OECD, a transfer price is “a price, adopted for book- keeping purposes, which is used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises.”
In the development of that definition, OECD issued a set of recommendations which have been progressively adopted by the member countries’ internal legislation, including by Colombia.
In essence, transfer pricing regulations aim to reduce the shifting of profits from one jurisdiction to another through internal transactions inside a corporate group. Any transaction made with a company inside the same corporate group must be made amarket conditions.
Who must comply with regulations for transfer pricing studies in Colombia, and how?
Colombia, as a recently accepted member of OECD, has included the organization’s recommendations regarding transfer pricing into its regulations. The country has a standing regime companies must comply with as mandated by the Tax Code from article 260-2 to 260-11.
The DIAN (Dirección de Impuestos y Aduanas Nacionales) is Colombia’s tax authority responsible for administering regulations for transfer pricing in Colombia
Standing arm’s principle
The most basic level of compliance applies to every company that makes transactions with related companies regardless of its amount. Every transaction between related parties to be made following the “Standing arm’s principle,” which requires that every operation has to be made at the same price, quality and quantity conditions as if it were to be made with a non-related third party.
Companies that must comply with the Standing arm’s principle include those:
- with a gross equity over COP$3,427,000,000 for the last taxable year, and/or
- a gross income over COP$2,090,470,000 on the current taxable year, and/or
- who made transactions with parties located in countries with different taxation standards or free trade zones
These companies must report to the DIAN through an “Informative return”.
Master and local files
The second level of compliance for transfer pricing in Colombia refers to the filling of the Master and Local Files. These documents are mandatory for companies bound to comply with the Informative Return requirement, who also realized transactions with:
- related companies above the amount of COP$1,542,150,000, or
- non-related third parties in countries with different taxation standards for amounts above COP$342.700.000 over the taxable period.
A Master File document must describe the composition of the multinational group, identify the parent and subsidiary companies, location of headquarters, and include the relevant information of the group activities.
Local files must detail the description of every operation carried out by the Colombian taxpayer company with every other company inside the group or in other jurisdictions, showing that every operation was undertaken in compliance with the transfer pricing regime in Colombia.
Country by country report
Finally, there’s a third document named the Country by Country report. This report must include the description of the income generated and taxes paid by each member company of the group, plus the financial performance metrics of the group as a whole.
This last level of compliance is mandatory for the following taxpayers:
1. Multinational Enterprise Group’s controlling (parent) companies who:
- Are residents for tax purposes in Colombia
- Have related companies located abroad
- Are the leading company of the group meaning there are no other companies above in the groups structure
- Are bound to present consolidated financial statements
- Have accrued more than COP$2,884,167,000 in operative income (Group consolidated)
2. Non-parent companies in Colombia who have been designated by the Group’s parent company to fulfill this obligation.
3. Non-parent companies located in Colombia when:
- The company’s income represents at least 20% of the group’s total income
- The parent company has not yet filed the Country by Country report for that non-parent company in their country of residence
- They have accrued more than COP$2,884,167,000 in operative income (Group consolidated).
How have transfer pricing studies in Colombia been impacted by Covid-19?
Colombia is acting to reduce the tax burden on taxpayers during challenging times brought on by Covid-19.
Practically, the country is taking measures to extend filing deadlines for income tax, VAT, and some local taxes.
However, the Colombian government has not extended the deadlines or granted any concession regarding transfer pricing, and taxpayers are expected to comply with these obligations from July 2020, as shown below. The DIAN has issued a resolution containing steps for taxpayers to comply with the filing of transfer pricing documents entirely through its digital platform.
Note: taxpayers who do not comply with these requirements on the set dates are exposed to penalties for late filing or non-filing respectively, and may have their expenses rejected for income tax purposes.
Informative declaration and Local File filing dates:
|Last digit of Tax ID||2020 deadline|
Master File and Country by Country Report filing dates:
|Last digit of Tax ID||2020 deadline|
Seek advisory support to carry out a transfer pricing study in Colombia
Colombia has a complete set of regulations that companies must follow to comply with the transfer pricing regime and avoid penalties from the country’s tax authorities.
It is important for every company that is part of a corporate group and for companies who make transactions with parties in other jurisdictions to monitor these regulations in Colombia as in every other jurisdiction in which activities are carried out. To support you with this process, engage with a local tax advisory specialist who can provide guidance and advice and ensure your company’s compliance with the law.
Our experts at Biz Latin Hub can help you understand and navigate regulations for transfer pricing in Colombia and the wider Latin American region.
Contact us today so we can empower your business with transfer pricing compliance and optimized opportunities for growth.
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