Colombia’s Council of State -- its highest court on tax matters -- upheld the modifications made by the Colombian tax authority (DIAN) and confirmed the applicability of the accuracy-related penalty, rejecting deductions related to intercompany services provided from abroad when the taxpayer failed to sufficiently demonstrate the effective provision of the services (reality, substance, and materiality) through appropriate defence files.
The DIAN challenged the deductibility of certain intercompany service expenses paid to companies abroad, arguing that the taxpayer failed to demonstrate the effective provision of the services.
During the audit process, the taxpayer submitted supporting documentation such as emails, internal documents, manuals, and working papers; however, the DIAN concluded that this evidence did not sufficiently prove the material execution of the services.
The dispute also involved payments made to the head office for management and administrative services. In the case of those payments, the DIAN questioned their deductibility because no tax was withheld in Colombia.
The case ultimately reached the Council of State, which confirmed the DIAN’s position, concluding that the taxpayer did not provide robust and verifiable evidence of the services rendered and therefore the deductions and related tax treatment were not allowed.
The Council’s decision clearly stated that emails or internal documents were not sufficient to demonstrate the effective provision of services. In this sense, the intercompany agreements must make it clear that they will lead to the distribution of deliverables.
The Council of State emphasised that when a contract establishes that the service should be evidenced through a report, email, document, or other deliverable, the taxpayer must provide robust and verifiable evidence of such deliverables. In the case at hand, the evidence provided (emails, working papers, manuals, etc.) was considered insufficient to demonstrate that the services were rendered; thus, deductibility was denied.
The court also stated that documents drafted partially or entirely in a foreign language must be formally translated to Spanish. Otherwise, they may not be considered valid evidence.
The decision highlights that being subject to transfer pricing regulations does not exempt the taxpayer from complying with the withholding tax requirements established in the Colombian Tax Code.
Even if a taxpayer’s transfer pricing and withholding processes have been duly implemented and executed, Colombian taxpayers should review their intercompany services defence file: contracts, evidence of service execution (deliverables), and traceability every tax year.
BDO can support businesses to comply with this new evidence standard through:
For further guidance or to discuss the implications of this decision, please reach out to your regular BDO contact or the author of this article.
Freddy Sanchez
Ivonne Acosta
Juan S. Torres-Richoux
Luis Miguel Jimenez
Martha Diovad Reyes Amaya
BDO in Colombia
Background
The DIAN challenged the deductibility of certain intercompany service expenses paid to companies abroad, arguing that the taxpayer failed to demonstrate the effective provision of the services.During the audit process, the taxpayer submitted supporting documentation such as emails, internal documents, manuals, and working papers; however, the DIAN concluded that this evidence did not sufficiently prove the material execution of the services.
The dispute also involved payments made to the head office for management and administrative services. In the case of those payments, the DIAN questioned their deductibility because no tax was withheld in Colombia.
The case ultimately reached the Council of State, which confirmed the DIAN’s position, concluding that the taxpayer did not provide robust and verifiable evidence of the services rendered and therefore the deductions and related tax treatment were not allowed.
The Court’s Reasoning
The Council’s decision clearly stated that emails or internal documents were not sufficient to demonstrate the effective provision of services. In this sense, the intercompany agreements must make it clear that they will lead to the distribution of deliverables.The Council of State emphasised that when a contract establishes that the service should be evidenced through a report, email, document, or other deliverable, the taxpayer must provide robust and verifiable evidence of such deliverables. In the case at hand, the evidence provided (emails, working papers, manuals, etc.) was considered insufficient to demonstrate that the services were rendered; thus, deductibility was denied.
The court also stated that documents drafted partially or entirely in a foreign language must be formally translated to Spanish. Otherwise, they may not be considered valid evidence.
The decision highlights that being subject to transfer pricing regulations does not exempt the taxpayer from complying with the withholding tax requirements established in the Colombian Tax Code.
How Can BDO Help?
Even if a taxpayer’s transfer pricing and withholding processes have been duly implemented and executed, Colombian taxpayers should review their intercompany services defence file: contracts, evidence of service execution (deliverables), and traceability every tax year.BDO can support businesses to comply with this new evidence standard through:
- Transfer pricing alignment and documentation support, verifying that service charges comply with the arm’s length principle while remaining fully supported by substantive evidence of service execution.
- Diagnostic review of payments abroad and risk mapping (deductibility, withholding tax, applicability of tax treaties, and supporting documentation).
- Design of deliverables, matrices, and evidence packages for each type of intercompany service.
- Review of intercompany agreements (deliverables clauses, acceptance mechanisms, traceability).
- Support in withholding tax control processes and preparation of documentation for tax audits.
- Represent the taxpayers during administrative discussions with the DIAN and, if required, before Colombian tax courts.
For further guidance or to discuss the implications of this decision, please reach out to your regular BDO contact or the author of this article.
Freddy Sanchez
Ivonne Acosta
Juan S. Torres-Richoux
Luis Miguel Jimenez
Martha Diovad Reyes Amaya
BDO in Colombia