Colombia's National Directorate of Taxes and Customs (DIAN) released detailed guidelines (the Guidelines) to clarify the procedure for Advanced Transfer Pricing Agreements (APAs) requests in order to ensure certainty between the parties regarding their transfer pricing arrangements. These guidelines are the result of cooperation with the OECD and World Bank Group, including the work carried out by Randall Fox and Joel Cooper during their time at the World Bank Group.
The new guidelines cover three types of APAs:
- Unilateral APAs – whereby an agreement is entered into between a taxpayer and the Colombian tax authorities alone.
- Bilateral APAs – whereby a taxpayer requests that the Colombian Competent Authority reach an advance pricing agreement with a double tax convention partner in accordance with the arm's length principle under the applicable double tax convention.
- Multilateral APAs – whereby a taxpayer requests that the Colombian Competent Authority reach agreement with two or more double tax convention partners.
Under the Guidelines, taxpayers are encouraged to pursue bilateral/multilateral APAs where the transactions are covered by a double tax convention; unilateral APAs will only be considered in exceptional circumstances (e.g. where the tax convention partner is not willing to enter into negotiations).
In order to be covered by an APA, the value of the transactions must exceed UVT100,000 in the year prior to the request or, if the transaction is new, UVT100,000 in the year of the request (according to projections). UVT100,000 is equivalent to COP3,427 billion (approximately USD1 million). The UVT value is updated on a yearly basis depending on the inflation rate.
The advance pricing agreement process in Colombia takes place in six stages:
- Stage 1 – pre-filing meeting: although this stage is optional, it is highly recommended as it provides a way to assess the likelihood of success of the APA application.
- Stage 2 – formal application: the taxpayer files information and the Colombian tax authorities confirm whether the application has been accepted within nine months (for unilateral APAs), or to do by mutual agreement with the treaty partner (for bilateral and multilateral APAs).
- Stage 3 – evaluation: the tax authorities evaluate the information filed and do fieldwork as necessary.
- Stage 4 – negotiation: a discussion with the taxpayer (for unilateral APAs) or the exchanging of position papers and discussions with treaty partners (for bilateral and multilateral APAs).
- Stage 5 – drafting and execution: once agreement has been reached, the APA is drafted and signed.
- Stage 6 – annual compliance: the tax authorities may audit the taxpayer’s compliance with formal requirements in the APAs and the taxpayer is obliged to submit a completed APA Annual Compliance Notice for each of the tax periods covered by the APA.
The maximum covered period for an APA is five years – the year in which the agreement is concluded, the immediate prior year, and up to three succeeding years. Where an APA is implemented according to a mutual agreement procedure (MAP) under a double tax convention, the time period of the MAP process is applicable.
APAs will not cover collateral issues such as deductibility of payments, withholding taxes, existence of a permanent establishment, attributions of profits to a permanent establishment, etc. Once an agreement is reached, the APA will protect the taxpayer from a transfer pricing adjustment, but collateral issues can be audited and reassessed.
The APA guidelines are in line with international standards and practices, as they were developed in conjunction with the OECD and the World Bank Group. However, it is likely that the actual practice will evolve over time.
Taxpayers with substantial related party operations in Colombia should proactively consider the use of APAs, especially bilateral APAs, as they provide certainty regarding transfer pricing in Colombia.
Taxpayers with current cross-border transfer pricing disputes involving Colombia should also consider relying on the new APA guidelines, as bilateral APAs offer another potential dispute resolution mechanism. By involving tax authorities in another country through a MAP, APAs can be an effective dispute resolution tool for transfer pricing disputes. Colombia has double taxation treaties with the following countries: Canada, Mexico, Spain, Chile, South Korea, India, Czech Republic, Portugal and Switzerland. Five other treaties (France, the UK, United Arab Emirates, Italy, and Japan) are expected to enter into force once legislative process is complete and others are under negotiation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.