Annual International Bar Association Conference 2014 Tokyo, Japan Recent Developments in International Taxation Colombia Ana Lucía Barrientos Posse, Herrera, Ruiz ana.barrientos@phrlegal.com
RECENT HIGHLIGHTS 1.1 Tax Reform s regulatory decrees The most significant developments in the past year have been the decrees issued by the Colombian Government to regulate specific details of Law 1607, which was passed on December 2012 and that introduces important changes to our tax system. The main regulatory changes are the following: 1.1.1. Tax Havens: Colombian Government issued Decree 2193/2013, which includes the list of tax havens. Forty-four jurisdictions were included in the list. Seven countries were included in a watch list and their inclusion is conditioned to signing a TIEA with Colombia before October 2014. Among others, the main consequences of being considered tax haven are the following: Colombian source income payments to entities or persons located in a tax haven are subject to a 33% withholding tax; All transactions with entities or persons located in a tax haven are subject to transfer pricing rules, regardless if the parties are related. Additionally, the Colombian taxpayer must file supporting documentation, irrespective of the transaction amounts. Deductibility of expenses for operations with entities or persons located in a tax haven are conditioned to having a functions, assets and risks analysis of the counterpart located in a tax haven, and having evidence of the costs and expenses incurred by the counterpart for the provision of services or goods. Proceeds from portfolio investment in Colombia by entities or persons located in a tax haven are levied with a 25% rate. The general rate for portfolio investments is 14%. Colombian citizens whose tax residence is in a tax haven are deemed Colombian residents and are taxed on their worldwide income and assets. 1.1.2. Permanent Establishment: Decree 3026/2013 regulates the concept of permanent establishment ( PE ), which was only introduced last year into our domestic legislation. Basically, the Decree reproduces the OECD s criteria for the existence of a PE. However, it is important to highlight that the Decree sets forth a list of preparatory or auxiliary activities, issue that was not covered in Law 1607 and which was necessary to grant taxpayer some certainty on their operations. Among others, the non-exhaustive list of auxiliary and preparatory activities includes having facilities for storing, displaying or delivering goods; having merchandise belonging to one enterprise processed by another enterprise on behalf of the fist-mentioned enterprise; having a fixed place of business exclusively to purchase goods, to gather information for the enterprise or to carry out promotional activities.
According to the new regulation, each PE must be registered on the Tax Register. When a single enterprise has multiple PEs in Colombia, each of the PEs must be registered independently and a tax return must be filed for each of the PEs. Since the PE will be taxed in Colombia on the income and assets that are attributable to it, the Decree illustrates the content of the analysis that must be carried out to assign the income to the PE. For such purposes, following OECD s comments, a functions, assets and risks analysis must be performed, which shall be duly documented, since the PE s accounting will be prepared based on the conclusions of such analysis. Finally, the PE Decree also settled the discussion on whether profits of branches belonging to the special exchange regime (oil and mining enterprises) were taxed as dividends when remitted to the home office. According to the Decree, any reduction at the end of the year on the supplementary investment to assigned capital account will be deemed as a dividend and hence, subject to taxation under normal circumstances. The applicable rate on levied dividends (profits that were not subject to taxation at the branch level) is 33%. 1.1.3. Effective place of management rules: Section 12-1 of Colombian Tax Code, modified by Law 1607, states that any corporation or entity incorporated and/or domiciled abroad Colombia, shall be considered as a Colombian national for tax purposes if their place of effective management is located within the Colombian territory. For purposes of this provision, the place of effective management should be understood as the place where key management and commercial decisions that are necessary for the conduct of the corporation or entity s business as a whole are in substance made. Decree 3028/2013 regulates this topic and, even though the Government did not clarify the criteria that should be considered to determine whether a company is effectively managed from Colombia, the new regulation does allow anticipating some of the consequences of being considered a domestic corporation for tax purposes: They would be taxed with the following Colombian taxes over their world-wide income and assets: o 25% corporate income tax over its net taxable income. o 9% Income Tax for Equality (CREE Tax) over a special Net Taxable Income, which allows limited deductions and tax benefits. The applicable rate is 8% from fiscal year 2016 onwards. Corporations or entities deemed as Colombian would have to apply the alternate presumptive income system (3% of the net equity of the prior taxable year) in order to calculate the base for its corporate income tax and CREE Tax. They would have to keep accounting records under Colombian GAAP. The foreign corporation or entity would be subject to the same formal tax responsibilities as domestic corporations.
1.1.4. Thin capitalization rule: Law 1607 included a thin capitalization rule according to which interest paid by companies that exceed a 3-1 equity-debt ratio are non-deductible in such part that exceed the maximum debt amount. Decree 3027 defined the procedure and criteria to be taken into account for the application of this rule. Of particular importance is the fact that, for the calculation of the maximum amount of indebtedness permitted, taxpayers must include liabilities with both related and unrelated parties, and either foreigners or locals. 1.1.5. Transfer pricing rules: On December 2012, the transfer pricing rules were changed in order to align them with OECD s latest standards. Among the new inclusions, Law 1607 regulated the cost sharing agreements. Decree 3030/2013, which regulated the transfer pricing regime, sets specific conditions to be met in order for these agreements to be acceptable in Colombia. According to the Decree, the Colombian party s contribution should be at arm s length, that is, equivalent to the price paid by a non-related entity taking into account the effective benefits of the services that would expect to get of the collective agreement. Regarding intercompany services, Decree 3030 states the transfer pricing documentation must include an analysis on how or in what form, the service generates an economic or commercial benefit to the local recipient, reinforcing its market position, noting if under comparable circumstances, an independent would have satisfied the identified need exercising the same activity or using a third party. 1.2 Financial transactions tax On December 2013, the Colombian Congress passed Law 1694 which delayed the progressive reduction of the financial transactions tax rate. Even though the applicable rate was supposed to be of 0.2% starting on January 2014, the new legislation states the rate for 2014 remains at 0.4%. Starting on 2015, the rate is lowered to 0.2%, 0.1% for 2016 and 2017 and finally the elimination of the tax from 2018 onwards. 1.3 Treaty Developments To date Colombia has six treaties in force (Spain, Chile, Andean Community, Canada, Switzerland and Mexico) and four more (Portugal, South Korea, India and Czech Republic) are expected to entry into force in the coming months. The Colombian Tax Authority is conducting an active negotiation of tax treaties. Additionally, Colombia adhered to the Convention on Mutual Administrative Assistance in Tax Matters and has also signed a TIEA with the Unites States in order to facilitate the application of FATCA.
An important highlight is Decree 186/2013 which regulates the procedure to get tax treaty relief for levied dividends paid under the treaties with Spain and Chile, when the shareholders reinvest the proceeds for three years or more. According to the Decree, domestic corporations must withhold the applicable tax when paying the dividends and three years later, the shareholders must file a refund claim before the Colombian tax authority.