a) Cost Sharing
Under Colombian law there was no regulation on cost sharing before 2013. However, through Decree 3030 of 2013, the National Government regulated the cost sharing agreements by setting the following rules.
Cost sharing agreement are framework agreements that allow companies to share the costs and risks related to the development, production or procurement of assets, services or rights and determine the nature and extent of the interests of each one of the participants in these assets, services or rights.
Cost sharing agreements signed by related parties shall comply with the Arm's Length Principle in accordance with paragraph 2 of Article 260-3 of the Tax Code.
For such purposes income taxpayers shall include in the supporting documentation the following information:
- Describe and demonstrate annual costs or expenses incurred during the development of the activity of the cost sharing arrangement. The respective documents must be available for the tax administration if requested.
- Identify the direct and/or indirect benefits of the cost sharing agreements, including the name or business name, tax identification number and country of residence or domicile.
- Specify the nature and importance of the benefits of each participant over the results of the activities of the cost sharing agreement, activities and projects, term of the agreement, obligations and responsibilities.
- Indicate if any payment other than the contributions related to the cost sharing arrangement was made, corresponding to acquisition of the effective benefit on assets, services or rights.
- Detail the method of allocation, criteria, conditions and adjustments, if any that reflect the participation fee and the quantification of benefits that are expected from the agreement, comparing the forecasts used to determine the expected benefits against the obtained results.
- Detail procedures for membership or withdrawal of a participant of the cost sharing agreement and its consequences, as well as the procedures and consequences of termination.
b) Intra-group Services
When intra-group services are conducted between income taxpayers and related parties located abroad, in Free Trade Zones in Colombia, or parties located in a tax haven, whether or not related, the taxpayer is required to demonstrate that the service was effectively provided and that the remuneration of that service is at arm’s length.
Article 5 of Decree 3030 of 2013 establishes that according to paragraph 2 of Article 260-3 of the Tax Code, the taxpayer shall:
- Detail, in the supporting documentation, how or in what form, the service performed generates an economic or commercial benefit to the recipient, strengthening its commercial position, determining in any case if in comparable circumstances a third party would have satisfied the identified need exerting the same activity or would have used a third party, and what would have been the compensation in full competition if the event had taken place between unrelated parties, operating in the free market, considering both the point of view of the provider of the service and that of the beneficiary. For this purpose, the relevant factors include the value of the service to the recipient and the amount that an unrelated party would have been willing to pay for that service in comparable circumstances, as well as the costs incurred by the service provider.
- Specify in the supporting documentation, if the amount perceived for each of the intra-group transactions meet the arm's length principle, identifying the agreements, forms or methods agreed between the parties that allowed invoicing the respective service.
- In the event that the retribution for the services rendered between related parties has been included in the price of other transactions, it must be demonstrated that any additional costs or expenses were not invoiced in respect of such services, in which case the relevant and conducive information must be available to the tax authorities if requested.
- In the case that a certain amount for use and subsequent billing has been agreed within the terms of the provision of services, its effective use shall be documented.
c) Business restructuring
Through Decree 3030 of 2013, the National Government stated that de redistribution of functions, assets and risks between related parties must comply with the Arm´s Length Principle. For these purposes, the supporting documentation shall include and detail the information established in Article 7 of said Decree, as follows:
- Identify the object of the restructuring, operations, contract terms and the way it was conducted.
- Identify assets, functions and risks before and after the restructuring process.
- Identify the rights and obligations in accordance with the conduct of the parties and the legal and contractual framework that operated before the restructuring as well as the changes produced for the parties involved.
- Detail the risk sharing carried between the parties.
- Describe the potential benefits to the parties derived from the transfer of risk.
- Identify which of the parties involved in the operation takes decisions related to risk and its management.
- Describe the expected synergies from the restructuring and economic analysis, financial and other measures that were taken into account for such forecasts.
- Description of compensation or remuneration for the restructuring and quantification.