Mandate agreements

12 July 2024 - The constant transformation of the world economy since the 20th century has generated the need for companies to develop their capacity to adapt to increasingly competitive commercial markets. In order to develop strategies aimed at optimizing resources, some business collaboration contracts have been established that allow companies to become more competitive and efficient in an increasingly demanding market. Below, we explain some important points to consider:

What are business collaboration agreements?

The business collaboration contract is an agreement developed by two or more parties, in which each of them assumes particular obligations and rights. This business integration presupposes a legal framework that will ultimately define the type of contract and the clauses by which it will be governed.

When is a mandate agreements established?

In general terms, Article 2142 of the Colombian Civil Code defines a mandate as an agreement in which one or more parties (the principals) designate the management of their business to another (the mandatary), which, in turn, develops the activities on behalf and at the risk of the first one. Having said the above, it is important to mention that this type of contract is generated under the consensus of the parties, so that its conclusion may be carried out in any manifest form, verbal or written, using public or private documents and in certain occasions, as a product of a tacit responsibility, acquired in the development of business activities, being able to be free or remunerated.

What are the types of mandate agreements?

As mentioned above, one of the parties that enters into the mandate contract will be in charge of developing the activity for which it has been designated, but it is important to understand the implication that this party could have at a legal level.

A mandate contract can be developed with or without representation, so that Article 1505 of the Colombian Civil Code defines the effect of the representation as the same as the one that would have been generated acting in its own name. In other words, the obligation acquired by the agent also binds the principal.

In the case of a mandate contract without representation, the agent will act in his own name, therefore, although he will act to develop the activities of the principal, this information must not be disclosed and any agreement signed between the agent and a third party, will never extend the obligations resulting from this to the principal, nor the rights that will be generated by the transaction.

Regulatory accounting framework of the mandate agreements

The accounting recognition of the transactions carried out in the mandate contract will depend mainly on the assessment of the performance of the agent, in terms of IFRS 15 Revenue from Contracts with Customers and Section 23 of IFRS for SMEs Revenue from ordinary activities, where its participation as agent or principal must be defined.

The participation as agent of the agent in the rendering of the service or sale of the goods is normally related to the mandate contract, but it should not be understood as definitive, since there is a need to deepen the essence of the clauses that will govern the agreement.

If acting as an agent, the accounting recognition will be defined with a liability for income for third parties or mandate contract and will subsequently be transferred to the principal for recognition. The portion of the revenue to be recognized by the agent will be the portion agreed as its commission or revenue for management services of the mandate contract. From the perspective of the principal, in the event that the agent acts as an agent, the principal must recognize the assets, liabilities, income and costs associated with the mandate contract.

This treatment has been reiterated by the CTCP Technical Council of Public Accountants, in concept 0678 of 2020, which defines the aspects that must be considered to consider the mandatary as an agent, when:

It is not exposed to the significant risks and rewards associated with the sale of goods or the rendering of services;
An entity is considered to be acting as an agent when the amount of its profit is predetermined, either a fixed commission per transaction or a set percentage of the amount billed to the customer.

Similarly, it is understood that an entity acts as a principal when:

The entity has a primary obligation to provide goods or services to the customer, or to fulfill the order; for example, by being responsible for the acceptability of the products or services ordered or purchased by the customer;
The entity may, at its discretion, set prices, either directly or indirectly, for example, by providing additional goods or services;
The entity assumes the customer's credit risk.

Finally, the agent's statement of financial position should fully identify the accounts receivable and payable, as well as the income from the service of administration of mandate contracts.

Tax framework of the mandate agreements

The nature of the mandate contract brings some special formal obligations for the parties within which some of them may fall on the mandatary or the principal.

Billing:

Decree 358 of 2020 which amended article 1.6.1.1.4.9 of Decree 1625 of 2016, states that the invoicing of services rendered or sale of goods in the development of a mandate contract shall be in charge of the mandatary, so the invoice shall be issued to the client on its part complying with the total of the established requirements. The purchase invoices arising from transactions that have a causal relationship with the development of the contract must be issued by the suppliers in the name of the mandatary. After this initial treatment, the mandatary must transfer and certify the transactions by means of a mandate certificate signed by a public accountant and a statutory auditor, depending on the obligatory nature, in which the amounts and concepts resulting from these transactions will be detailed.

Value added tax (VAT):

The VAT generated as a result of the sales transactions of the mandate activities must be invoiced and collected by the mandatary in accordance with the rates determined for the activities developed, however, and according to concept 077986 of 2001, issued by the DIAN, the formal obligation in the presentation of the returns related to this tax falls directly on the principal, based on the information provided by the mandatary. In line with the above, it will be the principal who will declare the income and request the deductible taxes.

Withholding taxes (WHT):

For the treatment of the withholding tax derived from the activities of the mandate contract, it is necessary to point out that the mandatary must assume the capacity of the principal. Based on the above, it is understood that if the principal is a withholding agent, the mandatary must assume this quality even if he does not have it for his own activities. This treatment is supported by concept 091385 of 2007, issued by the DIAN, which also states the obligation for the mandatary to declare, pay and certify the withholdings at source and additionally make the payment of penalties and interest for this concept.

Income tax:

The declaration of income, expenses, costs and deductions will be in charge of the principal, as well as withholdings and deductible taxes. It is in this instance where the issuance of the mandate certificate becomes relevant, which must be issued by the mandatary, and which will serve as support according to the amounts and concepts certified within the development of the mandate contract, so that the invoices will be replaced by this support, being this an exception on the support of costs and deductions, indicated in article 771-2 of the tax statute.

Exogenous information:

Regarding reporting on magnetic media, the exogenous information to be taken into account will be that set forth in article 631 of the tax statute, where the mandatary must take into account the reporting of information on income received for third parties and the formats applicable to business collaboration contracts, in accordance with the validity and mandatory nature of each of these.

Regulations: