Modification to the foreign payment regime

In the first place, the project eliminates the deductibility of the payment of royalties made to related parties abroad or in free zones, for intangibles formed in Colombia or related to finished products. In this sense, if a Colombian taxpayer forms an intangible in Colombia (database, good will, know-how, trademark) and sells it to a related party abroad, when paying royalties for the use of the same, such expense cannot be deducted. The same happens if a royalty is paid for the use of a finished product. This violates the principle of justice and tax equity since the payment of royalties to foreign related parties is today subject - except when double taxation avoidance agreements apply - to a withholding tax of 33% and must be subject to transfer pricing legislation, reason for which the tax authorities are more than protected in any type of transaction carried out in this sense. Denying the total deductibility of the payment distorts the economic reality of the transaction and generates a double taxation in the same, since the payment would not be deductible for the one who makes it, but it would be taxable (by the withholding method) for the one who receives it.

Secondly, the project limits the payments made to foreign commission agents for the import or export of goods to 15% of the taxpayer's net income. We agree with the national doctrine that this restriction, as well as the other general rules that limit deductions of costs and expenses abroad should be eliminated, since, on the one hand, the globalization of the economy makes this rule obsolete and restricts the real recognition of commercial transactions and, on the other hand, there are sufficient mechanisms -such as the transfer pricing regulation and the legal limitations of 5% and 10% in the deductibility of payments for imports and exports, respectively- to ensure that such provision is not abused.

Thirdly, the bill conditions the deductibility of payments accrued for the importation of technology, patents and trademarks to the extent that the registration of the corresponding contract or its modification has been requested before the competent official agency within three months of its execution. This rule ignores the reality of international transactions and, instead of favoring the liberation of trade and the abolition of unnecessary formalities, it generates obligations to register contracts that violate the principle of good faith, since it tends to presume that unregistered contracts do not exist.

In fourth place, the bill establishes that payments or credits on account made to persons (natural, legal or of any nature) incorporated, located or operating in non-cooperating jurisdictions, of low or no taxation or to entities belonging to preferential regimes, will not constitute a cost or deduction, except when withholding at the source has been made. This rule raises a big question as to when a jurisdiction is to be considered as a low tax jurisdiction. If this rule is harmonized with article 139 of the reform, it may be concluded that jurisdictions that have a nominal income tax rate equal to or lower than 80% of the income tax rate in Colombia would be considered as such. Given that the rate of this tax in Colombia, after the reform (and computed partnership-partnership, i.e., adding the tax on dividends) will be 45.1% in 2017, 42.4% in 2018 and 38.8% in 2019 and following years, it is extremely easy to make payments to low tax jurisdictions, since almost any jurisdiction in the world would be. Likewise, given that -incredibly- the use of treaties to avoid double taxation -DI- is considered by the tax reform as an act of aggressive tax planning, it should then be studied what would be the impact in Colombia with transactions made with special entities or companies (ETVE's, Companies incorporated in the International Business Center of Madeira -Portugal-, among others) located in countries such as Spain, Switzerland, Canada and Portugal (countries with which there is a DTA), whose domestic legislation confers them certain tax benefits.