All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Colombia begins taxing indirect sales

Sponsored by eygreece.png
ib-colombia.jpg

Aleksan Oundjian of EY discusses the impact in practice of new rules on taxing the indirect transfer of goods and shares.

Starting in January 2019, under Law 1943, Colombia finally changed a long time tradition of taxing only the direct sale of goods or shares located in Colombia and introduced rules to tax their indirect transfer as well. The rules are set to capture any type of change in legal ownership of such assets, irrespective of actual beneficial ownership changes.

The indirect tax applies over the sale of a vehicle that directly or indirectly owns assets in Colombia. The seller is subject to tax over the profit, which is treated as a capital gain and taxed at a 10% rate if the vehicle transferred was owned for two years or more, or at 33% if such vehicle was owned for less than two years. Curiously enough, the tax cost used to determine the profit is the tax cost that the direct owner in the Colombian assets had. In other words, if a US company has a tax cost in a Colombian company of $100 and its owner sells the shares of the US company, the tax cost the seller uses to determine the Colombian indirect tax is $100. Furthermore, that cost is retained by the purchaser even if the purchaser paid $200 for the shares of the US entity, which means there is no step up for the purchaser in light of the price paid for the vehicle acquired. This has created much concern when dealing with the acquisition of Colombian assets as part of broader transactions.

Further concern has been raised in relation to the use of treaties, an area that was not addressed by the new rules and which has created different views as to how they should be applied. For example, if a Spanish company sells shares in a Colombian entity, such an operation may be exempt from tax in Colombia under treaty provisions. However, if the Spanish vehicle is sold by its shareholder located in a non-treaty jurisdiction then the sale becomes taxable in Colombia under the indirect tax rule. Even under the Andean Pact treaty where taxation is set at source there is doubt given that the treaty does not address the indirect transfer of shares: if a Peruvian company sells a Colombian entity the operation is taxed; if the Peruvian company is sold, will Colombia forfeit its right to taxation under the treaty or move to tax at source too? Taxation also takes place in the case of internal reorganisations where beneficial ownership does not change. The only exceptions to indirect taxation depend on whether the seller is listed in a recognised stock exchange or if the value of the assets in Colombia represents less than 20% of the total assets of the seller.

In the context of transactions where Colombian assets are involved, both seller and purchaser should be aware of these rules, as there is a joint liability of the indirect tax between the seller and the Colombian entity where the assets lie, and between the seller and the purchaser.

Draft regulation is being discussed in order to harmonise the rules with existing treaties, recognising the tax cost paid for the Colombian assets and making the system more reasonable.

Until this occurs, care should be taken in relation to indirect transfers of Colombian assets, and close monitoring of upcoming regulation or guidance from the authorities should be maintained.

EY

E: aleksan.oundjian@co.ey.com

W: www.ey.com/co/es/home

More from across our site

But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
12th annual awards announce winners
Businesses need to improve on data management to ensure tax departments become much more integrated, according to Microsoft’s chief digital officer at a KPMG event.
Businesses must ensure any alternative benchmark rate is included in their TP studies and approved by tax authorities, as Libor for the US ends in exactly a year.
Tax directors warn that a lack of adequate planning for VAT rule changes could leave businesses exposed to regulatory errors and costly fines.
Tax professionals have urged suppliers of goods from Great Britain to Northern Ireland to pause any plans to restructure their supply chains following the NI Protocol Bill.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree