Colombian tax rules on non-cooperative or low-tax jurisdictions (tax havens), as well as preferential tax regimes (PTR), provide certain tax implications on payments made from Colombia to persons or entities located, resident, domiciled or carrying out tax activities. shelters or PTR, mainly that:
- These transactions trigger Transfer Pricing (TP) obligations and reports (even if the transaction is with an unrelated third party). In the case of transactions with related parties, it should also be required to prepare a functional profile of the entity in the tax haven or TOR; and
- Colombian source payments, considered as taxable income for the recipient, would be subject to withholding tax at the general corporate tax rate (31% for 2021, 35% from 2022).
The current list of tax havens was published in 2014 and includes 37 jurisdictions. On the other hand, no list of PTR has yet been issued, because in the law such an issue is optional, but this does not prevent the fact that the tax administration can determine the existence of PTR on a case-by-case basis.
By law, in order to determine the existence of a PTR, at least two of the following criteria must be met in a specific situation: (i) No tax rates or existence of low nominal income rates; (ii) The absence of an effective exchange of information or the existence of legal regulations or administrative practices which limit this exchange of information; (iii) Lack of transparency at the legal, regulatory or administrative level; (iv) the lack of a substantial local presence or the development of a commercial activity with economic content; and (v) Schemes available only to non-residents (cantonment schemes).
So far, we are not aware of any discussions around PTRs in Colombia, as the above criteria were rather vague and difficult to apply. However, on October 28, 2021, the Colombian government issued Decree 1357, providing guidance on how the criteria should be determined. With this new regulation, the identification of PTR is likely to become a hot topic in tax audits in Colombia.
The new regulations
Decree 1357 includes guidance on multiple aspects of PTR, some of which are relevant clarifications. For example, if the PTR entity resides in a tax treaty jurisdiction (and qualifies for treaty benefits), that tax treaty should take precedence over the withholding tax applicable on payments to PTRs. However, some aspects that raise doubts about the application of the PTR regime (and tax havens) have not been addressed. The question is whether dividends paid to PTRs should be subject to increased withholding tax, given that they are not deductible for the payer.
In addition, many provisions of the decree can be controversial, especially if it is expected that tax officials, during their tax audits, in each case determine the existence or not of PTR, on the sole basis of the new regulations.
Here are some examples of things that could be problematic:
- Scope of PTRs: In principle, one would expect PTRs to refer to a specific regime within a given jurisdiction, which deviates from the general taxation established in that jurisdiction. Indeed, it seems reasonable that if an entire jurisdiction is not considered appropriate, it is instead listed as a tax haven. However, the wording of Decree 1357 is not clear on this aspect, and sometimes mentions that the criteria should be tested at the level of “jurisdiction”. Therefore, discussions may arise as to whether certain jurisdictions as a whole are considered PTRs, such as those which do not have corporate tax in general or which establish a territorial system;
- Interaction with the harmful tax practices of the OECD: Decree 1357 refers to the list of harmful practices published by the OECD, but providing that harmful practices must also be tested according to the criteria provided by Colombian law and regulations. Therefore, it appears that a regime that has been found to be non-detrimental by the OECD can still be considered a PTR for Colombian purposes. This may not be consistent and might be inappropriate for Colombia as a member of the OECD; and
- Low tax rate as a criterion for PTR: In accordance with Decree 1357, the low tax criterion will exist when the applicable tax for PTR is less than 60% of the Colombian tax that would have been applied on the same taxable income. The decree accepts that income tax, as well as taxes of “an identical or similar nature to income tax” may be taken into account in determining the tax applied for the PTR, but it is not provided guidance on which taxes could be considered as such. Moreover, given the high corporate tax applicable in Colombia, this rate below 60% could still be high in many cases (considering the rate of 35% for 2022, lower than 60% would be lower than 21 %). In particular, taking into account that, according to the OECD for 2021, the average nominal corporate tax rate (taking into account 111 jurisdictions) is 20%.
What to expect?
The introduction of the new regulations to identify PTRs could trigger multiple disputes with the Colombian tax administration, especially if tax officials can apply these rules on its tax audits on a case-by-case basis, as this can lead to inconsistent results. in situations.
It is highly desirable that a list of PTRs and / or additional guidance on this subject be published in order to reduce potential uncertainties and controversies. However, further steps on the regulatory side are unclear at this stage.
In the meantime, Colombian taxpayers are recommended to review payments made to non-residents to prove that recipients are not PTRs (and have them readily available in the event of a tax audit), or take corrective action, to manage the application of penalties, interest, the request for additional withholding tax, and the possible refusal of fees or expenses.
Luis O Sánchez
Partner, EY Colombia
Manager, EY Colombia
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