Tax Controversy 2023

Last Updated May 18, 2023

Colombia

Trends and Developments


Author



Posse Herrera Ruiz is a Colombian law firm that uses a multidisciplinary, systematic approach to finding creative, prudent and value-generating business solutions. The firm has extensive experience of advising national and international transactions in the most relevant and complex transactions in Colombia in recent years. Posse Herrera Ruiz provides legal counsel tailored to each client and its needs, whether a single practice area or a combination of practice areas are needed. The firm’s team of highly competent, experienced and multidisciplinary professionals continually strives to achieve the best results for its clients, providing a full service which optimises the clients’ return on investment, while minimising risks.

Tax Litigation in Colombia

Prior to presenting and evaluating the recent trends and developments related to tax litigation and controversy, as part of the conjunctural background of the future of tax discussions, it is considered important to expose the fiscal policy changes that were introduced in Colombian tax legislation as configuration or materialisation of the strategic goals outlined by the new government of Colombia.

Since August 2022, Gustavo Petro has been President of the Republic of Colombia. One of his primary initial political goals was to introduce a tax reform that would generate a tax collection of approximately USD11 billion, a significant proportion of which would be applied to development of the social change proposed in his presidential campaign.

However, throughout the political debate and transit of the aforementioned tax reform in Congress of the Republic, the scope of collection by Law No 2277 of 2022 on tax reform was very significantly reduced, its projection being less than half of what was budgeted, oscillating between USD4 billion and USD4.4 billion. This decrease in the projected collection will necessarily result in greater control being implemented by the tax authority, which will potentially have an impact on greater litigation between taxpayers and the tax authority.

The imminent increase in audits that will be seen in the coming years was even incorporated as part of the integrated tax policy structure in the aforementioned tax reform, evidenced in Sections 66 and 67, which established that the authority would enjoy a greater budget allocation, as well as the possibility of modifying its structure and increasing its staff, with the purpose of increasing the collection, inspection, liquidation, discussion, controversy and collection of taxes.

It is believed that the trend and development of tax controversies and litigation in the future will be directly impacted by these measures included by the legislator in the tax reform, since control, controversy, litigation, sophistication and volume of this important specialty will increase. As a result, this type of publication, year after year, becomes increasingly relevant within the evaluation and critical study of Colombia.

Additionally, it is important to highlight the tax authority’s evolution as concerns the framework of the investigation, examination and liquidation processes, which have been becoming more sophisticated and technical in terms of substance related to aspects of tax discussion and controversy, the interpretation of regulations and facts, as well as the development and incorporation of means of proof. The foregoing has been complemented with important support for the positions and normative interpretations both by the tax authority, as well as by taxpayers and judges who know the tax discussions derived from jurisprudential precedents proffered by the Supreme Court in tax matters.

Having presented the tax collection policy situation strengthened by the aforementioned tax reform, as well as the determination of the general technical framework from which the examination programmes that constitute the trends and developments in tax litigation and controversy are being developed, a detailed study now follows, evaluating these main trends and developments as implemented by the tax authority.

For this purpose, the guide will consider the five main tendencies on which the audit, controversy and tax litigation between taxpayers and the tax authority have been built. These five main trends and developments related to disputes and tax litigation are limited to the following aspects.

  • Discussions related to the application of the transfer pricing regime, where litigation has grown exponentially in relation to operations carried out between taxpayers located in free zones and their related parties located in the national customs territory.
  • The effects on the depuration of income tax of the acquisition of intangible assets, especially regarding their valuation.
  • Compliance and the formal and substantial effects related to the obligation to report and register the beneficial owners.
  • Discussions, controversies and tax litigation that, given their legal impact, generate effects on the exchange and customs regime.
  • Discussions related to fiscal depuration focused on the extractive industry.

The guide will now evaluate the fundamental aspects that the tax authority has determined in the framework of the development of these examination trends.

Disputes related to the application of the transfer pricing regime

Controversies and tax litigation in relation to the transfer pricing regime have become a constant trend of examination in Colombia for more than 15 years. However, given the existence of tax amnesties and possibilities of mitigating the effects of potential breach of the regime, there were no positions derived from substantial jurisprudential precedents in relation to this important regime. In recent years this has changed, as taxpayers are taking their tax disputes to the last instance and, likewise, the tax authority has been intensifying and sophisticating the aspects to be disputed in application of the regime. Controversies and tax litigation have focused on increasingly technical and sophisticated aspects, questioning the technical, economic and legal positions taken by taxpayers and their advisers regarding the transfer pricing regime.

The ground discussed in the audit of the transfer pricing regime has been based initially on the substantiality of the operations, repeatedly questioning the functions performed by simple distributors, qualifying them as full distributors and thereby affecting the comparables, the functional attribution and, therefore, the results of the application of the regime.

In this same sense, the tax authority has demanded substantial support in the selection of methods to evaluate compliance with the regime, as well as the comparables selected to carry out the comparability analyses, requiring in both evaluations the review of the economic attributes made and the elements of each business carried out by the taxpayers with their related parties.

Another aspect that has been the subject of controversy and litigation has been the use of expert or technical opinions from independent third parties, with the purpose of proving substantial compliance with the transfer pricing regime and additionally evidencing a correct interpretation of the regulatory provisions, as well as of their technical application.

Finally, a trend of litigation and controversy has been generated that has grown exponentially, regarding the questioning of the operations that taxpayers carry out with their related parties located in the free zone. Although the transfer pricing regime in Colombia covers these operations, experience has shown how the tax authority has not applied criteria of correlative adjustments to the related companies but rather, to the detriment of the tax principle of justice, has developed its audit function seeking only greater collection.

Discussions related to the fiscal effects in the depuration of income tax of investments in intangible assets

Tax authority questioning related to the amortisation of the acquisition of intangible assets in income tax has increased significantly. Specifically, controversies and litigation have revolved around the technical valuation of intangibles paid by taxpayers, leading to controversies related to refusals of deductions.

This constitutive aspect of an important trend and development of tax controversies has been based as a whole on the application of tax regulations with the valuation of intangibles. However, in practice it has been noted that litigation and controversies have been built based on the tax authority questioning the same entity regarding the valuation, without incorporating as evidence the valuation of an expert third party.

These discussions will be resolved based on the probative assessment of the technical aspects related to the allocation and determination of the value of intangible assets and, with it, the amortisation taken in the depuration of taxpayers’ income tax.

Formal and substantial compliance related to the registry of final beneficiaries

Although compliance with the formal obligation to register final beneficiaries is not yet a trend of controversy and litigation (on publication of this guide, May 2023), said obligation must be fulfilled by 31 July 2023 and it will be part of the development of future controversies and tax litigation, given the sensitivity and importance of the information.

It is important to consider the recent history of the application of this obligation in OECD countries, such as Switzerland or Spain, with which Colombia has agreed double tax treaties, where the conceptualisation and interpretation of the final beneficiary has been modulated, trying to avoid taxpayers reducing their tax burdens, deriving as “of high importance” the compliance with a very acute evaluation of the determination of final beneficiaries, in which the substantiality of operations prevails.

Tax disputes with additional effects on the exchange and customs regime

The Colombian tax authority has broad and comprehensive functions in tax matters. However, said entity also exercises an integral function related to the administration, investigation, control and determination of customs obligations: that is, the tax authority is the same customs authority, its acronym in Spanish, DIAN, meaning “Directorate of National Taxes and Customs”. Additionally, said entity partially holds the functions of control and surveillance of the exchange regime.

Given the multiplicity of regimes administered and supervised by the tax authority, this entity has been developing inspection programmes that have resulted in tax litigation, as well as customs and exchange disputes, due to the combined effects resulting from the application of these regimes.

For example, in import operations, the tax authority has deployed the administration of the three regimes under its responsibility and has developed an inspection trend questioning the origin of the costs derived from imports, and subsequently imposing customs sanctions given the improper valuation, or the incorrect supports presented and, likewise, imposing sanctions on the exchange regime for using the currency system on incorrect values. In this sense, the tax authority has been effectively crossing the multiple effects that a tax discussion can generate in the other regimes administered by it: customs and exchange.

Another development of litigation and tax controversy, which has generated much discussion for having contrary effects, has been the interrelation of customs obligations in the valuation, which seek to increase the value of imported merchandise, with the tax obligations related to the transfer pricing regime, in which an attempt is made to reject the value of the costs incurred with related parties, thus generating a contradictory effect between both regimes that must be evaluated with special care by the taxpayers and by the authority itself.

Controversies and tax litigation focused on the development of extractive industries

The extractive industries of non-renewable natural resources constitute in themselves a focal element of the trends and developments of the controversy and of the tax litigation, given that due to the size of their operations, the volume of their income from costs and expenses, the application of very high withholding tax, the existence of operations with related parties and the constant result of favourable balances, has led the tax authority to investigate the correct determination of substantial obligations as well as compliance with all the formal obligations of taxpayers engaged in this industry.

However, the recent trend in the tax authority’s supervisory development, which has resulted in a growing volume of litigation and tax controversy, has been limited to three main points:

  • rejection of the deduction of royalties;
  • challenging the deduction of investments that are ultimately unsuccessful; and
  • challenging the costs of carrying out extensive tests.

Regarding the first point mentioned, two moments must be distinguished: the moment, before Law No 2277 of 2022 introduced the last tax reform in Colombia, in which the deduction of royalties was allowed; and from the year 2023 and following, it is clear that royalties are not deductible due to an express legal prohibition. However, it should be noted that the regulations that incorporated the aforementioned prohibition are being sued through multiple unconstitutionality actions before the Constitutional Court.

The second moment, related to the years prior to the legislative change, requires taking into account two aspects in the framework of the development of this trend. On the one hand, that the deductions proceed in Colombia when the expenses are not prohibited and additionally meet the criteria of necessity, causal relationship and proportionality. On the other hand, the fact that a regulatory provision prohibited the deduction means that it was previously allowed, however, this is an important and growing trend of tax disputes between taxpayers and the tax authority.

Regarding the second point, the tax authority has been intensely challenging the origin of amortisations related to unsuccessful investments, mainly rejecting the necessity and causal relationship of expenses incurred as a result of activities carried out by the taxpayers of these industries, leading to discussions falling on technical aspects of high-level extractive industries, accompanied by means of related proof, and, of course, to the application of special regulations.

Regarding the third and last point of the growing trend and development in tax controversies that fall on taxpayers dedicated to the extractive industry, the tax authority has been seen to question the origin of costs derived from the application of extensive tests prior to the exploitation of a certain natural resource, which has been challenged on the basis of necessity and causal relationship, once again leading the discussion to technical elements of the industry that require sophisticated and very high-level tests, as well as the correlation of the tests with the applicable regulations.

Conclusion

Thus, although the tax authority has been constantly and sustainably increasing different investigation and examination programmes, the aforementioned trends correspond to the main and most recent developments related to tax controversy and litigation. In the vast majority of discussions, the common elements initially raised converge, such as the legal and technical sophistication of the discussions, the implementation of precedents as important elements of defence and the high evidentiary requirement.

Finally, as the trends and developments of controversy and tax litigation are changing and evolving hand in hand with the needs of the country, the economy and the priorities and programmes of successive governments, the importance of this guide in Colombia will continue from the present and into the future.

Posse Herrera Ruiz

Carrera 7 No 71–52
Torre A, Piso 5
Bogotá
Colombia

+571 325 7300

+571 325 7313

phr@phrlegal.com www.phrlegal.com
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Trends and Developments

Author



Posse Herrera Ruiz is a Colombian law firm that uses a multidisciplinary, systematic approach to finding creative, prudent and value-generating business solutions. The firm has extensive experience of advising national and international transactions in the most relevant and complex transactions in Colombia in recent years. Posse Herrera Ruiz provides legal counsel tailored to each client and its needs, whether a single practice area or a combination of practice areas are needed. The firm’s team of highly competent, experienced and multidisciplinary professionals continually strives to achieve the best results for its clients, providing a full service which optimises the clients’ return on investment, while minimising risks.

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