Adrian Rodriguez (pictured below), a partner at Lewin & Wills in Bogotá, explains the options for Colombian taxpayers facing a dispute.
International Tax Review (ITR):What advice would you give to companies about how to reduce the risk of becoming involved in a dispute with the Colombian tax authorities?
Adrian Rodriguez, Lewin & Wills (AR): Obtaining on the ground tax advice in advance of any transaction from Colombian qualified tax attorneys is paramount to mitigating the risk of becoming involved in a dispute with the national and local level tax services (the service).
Although the risk of a tax dispute is always present because of aggressive tax audit programmes implemented by the service, mitigating such risk begins with clear corporate directives for company’s business agents to be mindful of the potential tax issues involved in the company’s operation and transactions.
Aggressive tax planning and breaches of the statute in highly technical issues are the most common causes of expensive and lengthy tax disputes with the service.
The Colombian tax system has nuances and complexities that need to be addressed in line with the businesses or transactions being carried out in the country and this should be done contemporaneously or in advance if at all possible.
It is common in most cases resulting in tax disputes to find the taxpayer often sought tax advice after the transaction when the exposure was already unavoidable.
In this sense, companies should issue clear directives about tax planning and tax compliance with strict due diligence protocols to enable the adoption of reasonably safe tax mitigation strategies in balance with their business and their risk tolerance.
Another very important factor to mitigate the risk of tax disputes, or improve defences that increase the chance of success in a dispute, is raising awareness about the importance of adequate contemporaneous documentation which gives account of the legitimate business purposes behind all decisions taken and, where applicable, evidencing compliance with the legal requirements to benefit from treatments available in the tax statutes.
ITR: What options do Colombian taxpayers have to resolve disputes with the tax authorities other than litigation?
AR: As a general rule – and unlike other jurisdictions – in Colombia the settlement of tax disputes either at services or tax court level is forbidden.
Nevertheless, a recent tax reform act availed taxpayers involved in disputes with certain generous settlement facilities, available for a limited time.
Provided there is full payment of the disputed tax liability, a taxpayer using these temporary facilities will benefit from a full forfeit of the attached penalties and interest. In open cases where the chances of success are uncertain or unfavourable, the utilisation of these facilities should be carefully considered.
In the regular tax dispute landscape, the service does not have authority to negotiate with the taxpayer and, unless the taxpayer accepts the challenges posed by the service, once an investigation is on the way and/or reaches the tax courts, both service and taxpayer must pursue the dispute until a final ruling is issued, probably after seven years of being engaged in expensive litigation that if lost by the taxpayer, will likely result in a hefty tally above and beyond the discussed tax liability because of the attached penalties and interest.
Every now and then a tax reform act is implemented granting temporary powers to the service to settle open disputes.
The awaited 2012 Tax Reform Act #1607 enacted on December 26, availed taxpayers with certain settlement facilities. These facilities are available for a limited time only, as the powers granted to the service expire on August 31 2013. If a taxpayer wants to benefit from these facilities the corresponding settlement must be entered on or before that date.
The negotiations and the required paperwork and procedures to enter into a settlement with the service can be lengthy and complex. Therefore, interested parties must move rapidly to review eligibility for the facilities and initiate the required actions with the service.
ITR: Are you seeing any trends in the types of dispute cases the Colombian tax authorities are taking up, and those where they are succeeding in the courts?
Expensive disputes regarding aggressive bank debit tax (BDT) mitigation strategies offered by financial service providers and transfer pricing application, specifically in the mining industry, have been frequent in recent years.
These have not yet reached a final ruling stage, so it is hard to anticipate the success rate of the service in these disputes and, because of the settlement facilities temporarily offered by the recent 2012 Tax Reform Act, we may never get to know whether the service would have succeeded.
The service is always willing to pursue their challenges in all areas of tax in the tax courts, partly because, in the regular tax dispute landscape the lack of authorisation to negotiate with taxpayers imposes a duty to pursue disputes until a final ruling is entered, unless the taxpayer fully accepts the service’s challenges
ITR: What do you think multinationals in Colombia can expect from the Colombian tax authorities in future?
AR: The 2012 Tax Reform Act is introducing a set of statutory specific anti-avoidance provisions with respect to tax-free reorganisations and also the ability to lift the corporate veil in certain tax fraud cases. The Act is also introducing a general anti-avoidance rule (GAAR) that is potentially applicable to any transaction and that effectively shifts the burden of proof to taxpayers in transactions meeting certain key statutory features.
These newly introduced anti-avoidance rules are relatively complex and promise to be a cause for concern in all matters dealing with tax planning.
With these new rules, previously legitimate tax avoidance strategies may become obsolete, with taxpayers fearing scrutiny under new standards containing the undefined business purpose threshold.
It will very likely take time before the development of consistent doctrine and case law regarding the tests for the business purpose threshold, which is undefined by the statute that merely states that the drivers for a transaction must be beyond tax.
Both the service and taxpayers are at the beginning of the learning curve with the new rules and face a period of uncertainty deriving from their application to specific cases, which will likely result in a number of disputes about how the newly introduced standards apply.
The service has a duty to develop strategies to use these new tools in the fight against tax evasion reasonably and with due care, without abusing them in detriment of their overall standing before the tax court.
Regarding alternative dispute resolution, it is hard to anticipate whether the Colombian lawmakers will at last lift the service’s ban on negotiating with the taxpayer. It seems very unlikely in the short term and the lawmakers will probably maintain the current approach of granting these powers to the service only from time to time and on a temporary basis. In recent years the service has improved electronic real time reporting for large taxpayers.Adrian Rodriguez (firstname.lastname@example.org) of Lewin & Wills.
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