Controversies may arise because of tax audits; tax assessments, tax self-assessments or reassessments; withholding tax; and/or other administrative decisions. There are, however, certain situations in which controversies are likely to be triggered, these include:
The tax that gives rise to the most controversies is corporate income tax. The most representative cases in terms of amounts involved are those related to transfer pricing issues. The amount of litigation involving municipality taxes (turnover tax) has increased significantly.
It is important that taxpayers identify the tax risks associated with their line of business and establish the way in which they should be managed. Taxpayers should be alert to new audit trends and programmes, and to the effects that new interpretations from the Tax Office, or new rulings from the Supreme Administrative Court, could have on their tax decisions.
It is highly recommended that taxpayers that enter into complex transactions, reorganisations or any other operation that may have a significant tax impact prepare a thorough defence file to document said operations.
Having a defence file that supports any special transactions impacting the tax calculations is key in the audit process. When an audit process has been started, showing the information properly will avoid tax challenges.
Tax authorities are especially keen when auditing transactions with foreign-related parties. When entering into this kind of transaction, it is important not only to have the necessary support for the transaction from a transfer pricing perspective, but also any documentation that may be required for proving the reality of the transaction.
The Tax Office is especially attentive to taxpayers that amend their returns; avoiding amendments is a way of keeping away from controversies.
Although the influence of the Base Erosion and Profit Shifting (BEPS) project of the OECD in the three most recent tax reforms is undeniable, it has produced controversies, mainly due to the special attention given by the tax authorities to these matters.
For many years Colombian tax law was out of date in international tax matters and although this has started to change in recent years, the Tax Office still needs to prepare better to audit international transactions.
Controversies under double taxation agreements have increased recently and there have been some under the Andean Community Double Taxation Agreement, but this agreement was not drafted under the OECD Model. Note also that, although Colombia signed the BEPS Multilateral Instrument (MLI), none of the modifications to its treaties have come into effect yet.
The taxpayer is not forced to submit a guarantee or pay the higher tax value to file a foreclosure or an administrative or judicial claim.
As of 2020, tax felony is considered to be a criminal offence, called fraud and tax evasion, and it applies to taxpayers that wilfully do not file a tax return, hide assets, avoid declaring taxable income or include non-existent deductions. The penalty for this felony is a prison sentence.
Due to the COVID-19 pandemic, the national government has declared a nation-wide state of emergency, which includes a suspension of terms on both the administrative and the judicial channels. Although, tax officers continue to perform their activities from home, they cannot make notifications to continue with tax processes that were already in course. However, some online processes are excluded from these measures, including:
The way in which the suspension of terms was declared by the tax authorities may generate a significant amount of litigation.
Lockdown measures prevent individuals from accessing offices and will reduce the chances of obtaining evidence and other documents required to properly exercise the right of defense in the ongoing processes.
Likewise, the pandemic affects substantial aspects of tax controversy. Taxpayers may argue force majeure to reject the application of tax penalties, to justify the loss of assets or inventory, to reduce presumptive income and eventually, to excuse a lack of compliance with formal obligations (as long the interested party can proves the impact received and the cause of that impact).
Considering the economic emergency measures taken by the national government, additional taxes and exemptions have been created to levy some sectors and relieve others.
Tax benefits created during the pandemic, such as VAT exemptions, must be subject to a restrictive interpretation, which may also increase the level of litigation.
From our perspective, COVID-19 will not have an impact on pending litigation or on new cases due to a new pressure on magistrates or jurisdictional entities from the tax authorities. However, regulation for new taxes to avert the crisis will likely generate discussion.
In Colombia, regulation allows for all the judicial processes to take place electronically, however information systems only allow implementation of this during some sub-stages of the process. Notwithstanding this, due to the current circumstances cause by COVID-19, the administrative and judicial authorities have been required to accelerate the systematisation of processes, trials, hearings and online notifications.
Lastly, aside from measures taken due to COVID-19, we considered that the national tovernment will continue to focus on the implementation of measures to control tax erosion and avoidance, to increase the prevalence of electronic invoicing, to gradually implement a technology modernisation plan for the tax administration, to intensively implement information exchanges, and to apply tax regulation included in the recent tax reform. It should also be noted that Colombia recently joined the OECD, which may cause an increase in tax audits and litigation in Colombia.
The entities with the highest risk of being audited are oil and gas companies; goods and services exporters; those, regarding which the tax authorities have received a third party notice of fraud; and, in general, companies subject to the transfer pricing regime. Companies in any economic sector that request significant tax refunds or that have significant tax losses also have a high risk of being audited.
The Colombian tax regime has traditionally been formalist, and we have observed a large number of audits derived from errors in formal matters or a lack of coherence between the information reported by the taxpayer and that reported by third parties on the same operations.
Big taxpayers operate under special surveillance by the tax authorities, which carefully audit their tax returns with a more technical team and more sophisticated audit programmes.
The general statute of limitations in Colombia is three years counted as from the filing date of the relevant tax return, or from the date on which the taxpayer requests a tax refund. The statute of limitations is five years in relation to returns in which tax losses are determined or compensated and in relation to returns filed by taxpayers that perform transactions subject to transfer pricing regulations. For the taxable years 2019, 2020 and 2021 the law allowed audit benefits with a reduced statute of limitations of 6 to 12 months, depending on the increase of the tax calculated in relation to the previous year.
The statute of limitations may prevent the starting of an audit process. Likewise, if an audit process has been started it won’t suspend the statute of limitations itself. The statute of limitations is interrupted when the Special Assessment (see 3.1 Administrative Claim Phase) has been issued by the tax authorities.
Some of the tax audits occur in the tax authority’s headquarters but many of them take place in taxpayers’ premises. Very commonly, tax officials request that taxpayers transfer electronically the tax and accounting information that they require to perform an audit.
Most of the taxpayers are required to invoice electronically. It is expected that in 2020 those taxpayers obliged to invoice, will be obliged to do so electronically, with prior validation from the tax administration.
Some of the key areas that are currently being reviewed by the Tax Office are:
In Colombia, tax audits conducted by the tax authorities of different countries are not common. There have been simultaneous tax audits in different countries, but they have not been developed together under the same leadership. It is, however, true that communication between the Colombian tax authorities and the tax authorities of other countries has increased in the last few years, aided by technological advances, but this does not mean that tax authorities from different states are jointly carrying out tax audits.
The key points for a taxpayer to consider during a tax audit are the following:
When an additional tax assessment is notified by the tax authorities, the administrative claim is optional if the Special Assessment/Summons (first tax assessment) is answered on time. To skip the administrative claim phase, the lawsuit must be submitted four months after the notification of the additional tax assessment.
The administrative tax procedure in Colombia is the following. Once the tax return is submitted by the taxpayers required to do so, the tax authorities have a time limit to provide and notify the Special Assessment/Summons to the taxpayer. It is not compulsory for this to be answered by the taxpayer; as a result, no penalty or negative legal consequence can be foisted. After the preliminary stage of the Special Assessment/Summons, during the following six months the tax authorities must provide the Official Assessment, in which the tax that will be borne by the taxpayer is determined. If the taxpayer decides to discuss this official act, they can present an administrative appeal within two months after the Official Assessment notification. If the administrative appeal complies with the legal requirements, the tax authorities have one year to accept or reject the arguments presented by the taxpayer. If no answer is given to the administrative appeal, the taxpayer would be under "administrative silence" which means that all the arguments of the taxpayer may be considered accepted and the process has concluded in his or her favour.
Internally there are guidelines for officials regarding deadlines and distribution of administrative burdens, but these are not mandatory for the development of the investigation.
However, there are deadlines that tax authorities must fulfil by law, most of them related to the time given to submit the Official Review Assessment and the ones mentioned in 3.1 Administrative Claim Phase. When the authorities do not answer an administrative claim in time, it is understood as resolved in favour of the taxpayer. Of course, if the authorities answer the claim in time and against the taxpayer, the procedure must continue to the judicial stage.
The only way to initiate tax litigation is for the taxpayer to submit a lawsuit in a tax court, which he or she can do if they have been notified of an official assessment or a tax authority ruling that is against his or her interest.
After the administrative tax procedure ends, the taxpayer files the lawsuit before the appropriate tax court depending on the amount and the place of the process. Once the lawsuit is filed, the judge has three options: to admit it, not to admit it or to reject it. When it is not admitted, formal objections must be amended on time; and if it is rejected due to substantive issues, the taxpayer must file another lawsuit. When the lawsuit is admitted, the counterparty must answer it in less than 55 days.
Once the lawsuit is answered, three hearings are held: the initial hearing, where the litigation is set; the evidence hearing, where evidence is heard and depositions are taken; and the final hearing, where closing arguments are made. However, the law allows the judge to skip these two last stages, replacing them with written documents. After the hearings, the judge issues the ruling, which can be appealed to a higher court. In the second instance, the parties can submit new evidence and present their closing arguments again. Once the higher judge issues his or her final decision, the tax judicial procedure is over.
There are judicial deadlines in the law, but these deadlines are not always met; however, there are not many consequences, as the judge’s competence is not lost for that reason.
As an extraordinary appeal, the judicial decisions can be further reviewed if the fundamental right of defence has been somehow violated.
It is very important that all the accounting information requested by the tax authorities is given to them in the tax administrative stage because, if this information is only submitted before the court, this will be treated as a misconduct indication against the taxpayer.
In the lawsuit, evidence can be submitted and promulgated. Most evidence is documentary but any kind may be submitted. For transfer pricing and other technical cases, experts' opinions are a commonly used form of evidence. Certifications from the accountability team and from the auditors are also common forms of evidence. Witnesses may be heard in the evidence hearing stage of the process.
The general principle in Colombia is that the one who alleges the facts is the one who must prove them. However, if a party considers that a counterparty has better access to any relevant evidence, he or she can request that the judge order that counterparty to present the evidence. In criminal tax litigation the prosecutor is mainly the one who has to prove the facts, but the accused must also controvert the facts with evidence.
Each tax case, and the probability of its success, should be analysed following the legal framework and the judicial decisions in similar cases, defining with the above if the cost of litigation would be higher than the reduction on penalties and interest produced by accepting any particular challenge proposed by the tax authorities. Timing and evidence are important matters to take into account when considering an acceptance.
In transfer pricing controversies a strategic option to consider is the submission, as evidence, of expert opinions on the different issues regarding the controversy. Accounting evidence must be submitted in the administrative stage of the controversy.
Another strategic option to consider is reviewing the potential challenges that could arise in other taxable periods. If there are discussions over balances in favour, or the taxpayer claims interest acknowledgment, the other taxable periods should be reviewed and what is better for the client should be established. In cases where there are administrative acts that harm the client, it is important to consider a nullity action against those acts and ask for precautionary measures that suspend those acts.
If there are tax amnesties, the probability of success of claims against the benefits offered by the tax amnesty need to be considered.
Jurisprudence and rulings are very relevant and taken into consideration by the courts in Colombia. International guidelines are also relevant in this jurisdiction because within those guidelines are criteria to interpret the law in cases where the law could be understood in different ways. However, while it is true that the international guidelines do not have the same enforceable effect as internal regulation, they are an auxiliary criteria used by judges to take decisions.
In those cases in which the administrative judge ruled at first instance, the appeal is decided by the Administrative Tax Court and in those where the Administrative Tax Court was the first instance forum, the appeal is heard by the Council of State. The Council of State is also competent to preside over lawsuits against the official doctrine of general nature that contains ruling decisions and nullity actions against decrees of national level. This means that all the rulings issued by the tax authorities, bearing in mind their interpretative role in the legal tax framework, as well as the national Decrees issued by the government to develop the Tax Act, could be submitted to jurisdictional control by a simple nullity lawsuit. However, if they relate to general acts, but committed by local authorities (eg, Municipal Decrees), the Administrative Tax Court or even local judges can solve those controversies.
The method of determining the appropriate judge at first instance considers the amount of the controversy and the territory where the tax return was submitted. If the amount of the controversy is less than 100 minimum wages (approximately USD25,000), an administrative judge is appropriate. But if the amount of the controversy is more than this, the Administrative Tax Court is appropriate.
First, the party that wants to appeal the decision has ten days once the ruling decision is notified. If the appeal fulfilled the legal requirement and was submitted in the legal term – ten days – the judge will grant the appeal and subsequently order the file to be sent to the higher judge.
When the higher judge receives the file, if he or she finds all the requirements fulfilled, he or she will decide about the admission of the appeal. Furthermore, once the appeal has been admitted or the evidentiary term has expired, the higher judge will schedule a date to carry out the allegation and ruling hearing. However, if he or she considers that it is not necessary to carry out the hearing, he or she will order the parties to present their closing arguments in writing and, once the parties have submitted their allegations, take the final decision in the controversy.
Administrative judges are competent to preside over tax controversies. As explained in 5.1 System for Appealing Judicial Tax Litigation, who decides cases at first instance depends on the amount of the controversy and, at second instance, the superior of the first instance judge decides. In Colombia a third instance does not exist.
When an administrative judge is the competent authority, the case is always decided by a single judge. However, when the case should be decided by the Administrative Tax Court or the Council of State, due to their collegial characteristics, the panel should be formed by more than one judge. Generally, this panel has three supreme judges who take the decision collectively.
Colombia has been implementing an alternative method of dispute resolution called a mutual agreement procedure (MAP). The MAP is a method whereby taxpayers can prevent litigation against tax authorities by paying the discussed tax and getting a large reduction of the penalties and interests. The MAP ends the administrative controversy.
There are also temporary ADR procedures, that are brought about by each new tax reform. Those depend on the stage of the process (administrative or judicial stage). However, the taxpayer must follow the deadlines and all the documentation for applying. With these procedures the taxpayer can get a reduction on penalties and interest.
The national tax administration (DIAN) is competent to settle the tax dispute, once the taxpayer fulfils his or her obligations.
In ADR, if the discussion is in the administrative stage, the competent authority is the tax authority and if it is in the judicial stage, it must be subject to a conciliation which has to be submitted for the approval of the judge.
See 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction.
Advance information and ruling requests are not binding in Colombia. Although officials must fulfil the content of the rulings, these are not binding in the administrative or the judicial stages of a controversy.
In Colombia there is no arbitration procedure for tax issues. With regard to the forms of ADR implemented in the last tax reform (see 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction), these are temporary mechanisms in which the taxpayer must fulfil the legal requirements during the deadlines established for that purpose. If the taxpayer does not fulfil these requirements, he or she will not be allowed to apply for these forms of ADR.
In Colombia there is no arbitration procedure for tax issues. It is important to bear in mind, however, that the MAP as well as the temporary mechanisms (see 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction) can be applied in transfer pricing cases.
If the tax authorities consider that there is tax fraud or tax evasion, the director of the Colombian tax administration is the only person able to request that the district attorney's office start a criminal investigation. The taxpayer is subject to the administrative investigation that is carried out by the tax authorities and only if this process officially finds a higher tax responsibility, can there be a criminal investigation carried out by the district attorney in the criminal jurisdiction.
The relationship depends on the offence. In tax evasion crimes the administration must issue an Official Assessment. Depending on the amount of the process, if the taxpayer pays the amount determined in the Official Assessment, the criminal procedure will be finished. On the other hand, in crimes related to non-paying withholding tax or VAT, the tax authorities only need to determine the taxpayer's non-payment to begin a criminal procedure. Even without a declaration, just the proof of the withholding or VAT charged and not paid to the government means the criminal procedure can continue.
The crime of tax evasion – hiding assets, leaving out income, or including false costs and expenses – has been included since 2019 in the national law. Also, in Colombia there is a crime associated with assets' omission and the inclusion of non-existent liabilities. So, if the Official Assessment is issued by the tax authorities, and the DIAN director or his or her delegate submits a complaint to the district attorney’s office, the prosecutor could start a criminal procedure. The above applies if the higher values determined are not related to a reasonable interpretation of the tax law. However, if withholdings pursued or a VAT charge in operations were detected and those withholdings or VAT were not paid to the government by the taxpayer, the tax authorities could submit a criminal complaint for the crime of omission by the withholding agent or VAT taxpayer.
The penalty in crimes of asset omissions and inclusion of non-existent liabilities depends on the values of the relevant tax determined by the tax authorities, which means that the penalty for this crime is going to be graduated and is going to increase according to the value determined.
The Administrative Tax Court and the Criminal Court are in different jurisdictions. Official determination is reviewed by administrative courts and criminal offences are heard by criminal courts. In the criminal courts, first the prosecutor would start the investigation. Then, if he or she considers that there is a crime, they would formally accuse the person. In Colombia, legal persons, as opposed to natural ones, cannot be found criminally liable, so when a legal person commits a crime, the general rule is that the prosecutor formally accuses the legal representative of that legal person. Furthermore, there will be a preparatory hearing in which the parties will show their evidence followed by an oral hearing in which the parties will conduct interrogations and present their final allegations. Moreover, the judge, in the same oral hearing, will pronounce the sense of the ruling decision and finally, in the ruling hearing, the judge will read the ruling decision.
According to the fiscal law, reductions are applicable depending on the stage of the process at which the taxpayer accepted the challenges and amended their return. Once the taxpayer has paid the higher values determined by the tax authorities, the criminal case can be closed.
The criminal prosecution will be extinguished when the taxpayer submits or amends its tax return (during the legal term), paying the higher tax, penalties and interest. No agreement can be signed if the above condition has not been accomplished.
According to the Criminal Procedure Act, a party must submit its appeal against the decision at the same hearing at which the judge will read the verdict, named in 7.4 Stages of Administrative Processes and Criminal Cases, as a ruling hearing. The appeal could be sustained in the same hearing and the judge, in the hearing, will give the opportunity to the counterparty to speak about the appeal. Otherwise, the appellant has five days after the ruling decision to submit his or her appeal in writing and the judge will give five days to the non-appellant party to pronounce upon the appeal.
Any conduct by the taxpayer that results in a higher tax determined over 250 minimums wages (approximately USD62,500) is considered a felony. The director of the tax administration – only if he or she considers that the interpretation taken by the taxpayers to omit income or include tax deductions is not according to the law – has the competence to submit the complaint before the district attorney’s office, but if the interpretation used by the taxpayer is reasonable, the claim will not proceed.
In previous cases, the courts have admitted that in transfer pricing issues the interpretation used by the taxpayer is reasonable. In other cases, the Council of State had disqualified as reasonable the interpretation used by the taxpayer with regard to the applicable rule.
Before 2019 all controversies had to go through domestic litigation, as the MAP had not yet been implemented. So, before 2019 it was not possible to examine which of these alternatives were used most by the taxpayers.
However, considering the resolution that will regulate the MAP, it is evident that this procedure is going to be faster than domestic litigation. While this process has a period of approximately 90 days, domestic litigation has an estimated time of four to five years. So, during the next few years the MAP may start to acquire more relevance.
There are not many precedents on the application of tax treaties in Colombia. In addition, the current general anti-abuse rule (GAAR) was only enacted very recently and it has not been widely applied yet. The prior GAAR, enacted in 2012, was almost never applied in practice, because it required compliance with some requirements that made it very hard to use.
In some tax treaties negotiated by Colombia there is a provision that the tax treaty would not prevent the application of local anti-abuse provisions; therefore, in these cases it seems that the application of the local GAAR and specific anti-abuse rule (SAAR) is viable. However, when such a provision is not included in those treaties, it can be understood that the local anti-abuse rules are not applicable, but only the anti-abuse rules provided in the relevant tax treaty, in view of the prevalence of the tax treaties over local rules, which has been recognised by the Colombian courts.
Finally, with the MLI, which Colombia has signed but which is still pending domestic approval, under the saving clause, it is possible that the GAAR and SAAR would be applicable in many cases, even when the tax treaty does not make a reference to the possibility of applying the local anti-abuse clauses.
The way that transfer pricing adjustments are challenged in domestic courts is through double taxation treaties and domestic law. In Colombia, multilateral transfer pricing conventions are not used to challenge a transfer pricing adjustment.
Advance pricing agreements (APAs) are not common mechanisms used in Colombia. The Tax Office has only approved one APA and it does not seem interested in approving more soon.
First, the taxpayer must submit a request before the tax authorities. Then, the tax authorities have nine months to study the request, receive and ask for adjustments and explanations, and accept or reject the request to start the process.
Once the parties – tax authorities and taxpayer – have signed the APA, if the taxpayer is considering substantial changes in the assumptions considered at the moment of the agreement signature, the taxpayer could ask for an amendment. The tax authorities then have two months to accept, reject or dismiss the amendment request.
If the tax authorities find a violation of the agreement by the taxpayer, they will proceed with the cancellation of the agreement. Also, if the tax authorities find inaccurate information – submitted by the taxpayer during the negotiation of the agreement, at the signature of the agreement or during the term of the agreement – they will revoke the agreement and interpret it as having had no effect since the subscription date.
Transfer pricing, taxes paid abroad taken as credits, and withholding on foreign payments are the cross-border situations that generate the most litigation.
To mitigate the risk of litigation, as described in 1.3 Avoidance of Tax Controversies, it is important to have all the supporting documentation of the comparable operations and ensure that they fulfil the arm’s-length principle.
There are no eventual fees to be paid to tax authorities in the administrative process; litigation before the tax administration is free and the taxpayer does not have to pay any fee to be a part of the process, as they have the constitutional right to defend themselves. However, if the taxpayer wants to add a piece evidence that has a cost, such as an expert opinion, it should be paid by the taxpayer. Besides the previous example, no other fee should be paid in the administrative process.
The losing party in the controversy could be condemned to pay additional amounts as expenses. Those expenses must be paid once the final ruling is enforced. In these cases, the losing party should pay the expenses that have been proved.
The taxpayer can request an indemnity only in cases where the controversy is based on a balance-in-favour refund request that is questioned and rejected by the tax authorities. In those cases, if the tax court approved the request, the tax authorities will have to pay the current interest up to two years after the lawsuit admission.
In Colombia there are no court fees if the taxpayer opts to use any of the available ADR mechanisms.
According to the statistics given by the Colombian Tax Institute, in 2017 the Council of State, which usually deals with second-instance procedures, issued 262 rulings.
This firm does not have statistics available regarding the number of cases initiated and terminated every year relating to different taxes, only their value. According to the ruling observatory, in 2017, the amount discussed was higher on turnover tax compared to the rest of tax returns.
The last statistics the firm has are from 2017. In that year 38% of the decisions were in favour of the tax authorities, 38% were in favour of the taxpayers and 24% were split decisions (ie, decisions that partially favoured the taxpayer and partially the Tax Office).
Before judicial litigation, the main strategic guideline is to enter discussions before the controversy begins. Taxpayers must give clear and convincing answers to the tax authorities. When the taxable year ends, the taxpayer must have solid arguments and all the information necessary to support the tax return. When a tax refund is requested, it is important to have a defence file prepared with evidence of the materiality of the operations. Every uncertain position adopted in the tax return must have solid support.
During the judicial litigation, the main strategic guideline is to have solid evidence support and analyse the points indicated by the tax authorities in the Special Assessment/Summons to amend, because they are not allowed to correct the mistakes that they make subsequently in the Official Assessment. The above means that the taxpayer should not always present all its arguments at the first stage, but rather defer some of them for filing the administrative appeal.
The taxpayer must also define the impact one controversy may have on other taxable periods of the discussed tax. Sometimes it is cheaper to accept all the charges presented by the tax authorities to prevent future challenges by the tax authorities in other taxable periods.