Colombia has been in the process of accession to the OECD since 2013, and reforms already initiated by the government show its intention to implement the standards and practices developed under the OECD’s Action Plan on BEPS.
In December 2016, Colombia’s National Tax Authority enacted in Law 1819, making major changes to the country’s transfer pricing regime. However, the regulatory decree setting out when the new requirements take effect has not been issued to date.
Additional measures in Law 1819 influenced by the OECD BEPS Action Plan recommendations include the enactment of the CFC standards proposed under Action 3.
The bill’s CFC rules — like those of the US and EU — aim to prevent base erosion through the use of foreign companies controlled by resident shareholders in Colombia or those located in jurisdictions of low or zero taxation or non-cooperatives, where the foreign company’s income is mainly passive (e.g. dividends, royalties, interest, income from the alienation or leasing of real estate and provision of services).
In the Colombian regulation, CFCs are understood to be entities that are not Colombian tax residents and that comply with the requirements of subordination or economic linkage under Colombia’s transfer pricing
regime.8 CFCs include investment vehicles (e.g. corporations, independent assets, trusts, collective investment funds, other fiduciary businesses, private
foundations) that are incorporated, domiciled or operating abroad, regardless of whether they have legal personality or are transparent for tax purposes.
The regulation presumes that Colombian tax residents always have control over CFCs that are domiciled, incorporated or operating in a non cooperating or low- or no-tax jurisdiction or entities subject to a preferential tax regime,9 regardless of their participation in them.
For income tax purposes, a CFC’s taxable income and associated costs and deductions are considered to accrue to the Colombian tax residents who control the CFC directly or indirectly, in the taxable period in which the CFC accrues the income and costs (even where profits are undistributed) in proportion to their participation in the capital of the CFC or in its results (in which case the foreign tax credit would apply).
Taxpayers subject to the CFC regime should give special consideration to the tax rules for calculating income from a CFC, income on the dividends distributed by the controlled foreign entity on the sale of its shares, and the foreign tax credit claimed for foreign tax paid on the CFC’s income.
Law 1819 includes measures proposed under Action 5 of the OECD’s Action Plan, which aims to modernize the OECD’s 1998 work on harmful tax practices. The Action 5 proposals set business substance requirements for preferential regimes using the nexus approach, thus preventing the artificial shifting of benefits.
Preferential regimes are identified as those that attract income from mobile activities, such as services and intangible assets, and that grant preferential tax treatment to non- resident entities compared to residents.
To defend against these regimes, the Colombian government issued a ruling decree listing preferential tax regimesthat meet at least two of the four criteria to characterize a jurisdiction as non-cooperating (i.e. as a tax haven). These criteria are:
Also listed are so-called ‘ring-fenced’ regimes that give preferential tax treatment to a jurisdiction’s non-resident entities.
Listed jurisdictions are subject to the same limitations and requirements as non-cooperating jurisdictions, including higher withholding tax rates.
Colombia has implemented the OECD’s digital economy recommendations under Action 1, substantially changing the VAT rules for services rendered from abroad to the Colombian territory.
The new rules impose VAT on services rendered from abroad at the place of use or consumption of the services, insteadof where they were executed, as was the case before 2016. Thus, with some exceptions, VAT now applies to all services rendered from abroad to beneficiaries in Colombia.
Further, the Colombian government will introduce a principal system requiring direct VAT compliance by foreigners providing digital services. Where the service provider does not observe the principal system, a secondary system will require financial entities that manage credit and debit cards and others authorized by the tax authorities to withhold VAT on payments to foreign suppliers of digital services.
Colombian VAT now also applies on the sale or license of intangibles related to industrial property.