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August 20, 2021
OECD releases Colombia Stage 2 peer review report on implementation of Action 14 minimum standard
On 26 July 2021, the Organisation for Economic Co-operation and Development (OECD) released the Stage 2 peer review report of Colombia relating to the outcome of the peer monitoring of the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard under Action 14 on improving tax dispute resolution mechanisms. Stage 2 focuses on monitoring the follow-up of any recommendations resulting from Colombia’s Stage 1 peer review report.1 Colombia requested that the OECD also provide feedback concerning their adoption of the Action 14 best practices, and therefore, in addition to the peer review report, the OECD released an accompanying document addressing the implementation of best practices.2
Overall, the report concludes that Colombia addressed most of the shortcomings identified in its Stage 1 peer review report. In general, all but one of Colombia’s tax treaties contain a provision relating to Mutual Agreement Procedure (MAP). Those treaties mostly follow paragraphs 1 to 3 of Article 25 of the OECD Model Tax Convention (OECD 2017). Colombia’s treaty network is consistent with the requirements of the Action 14 minimum standard with some exceptions, as discussed below.
In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 which form the basis of the MAP peer review and monitoring process under BEPS Action 14.
The Terms of Reference translate the minimum standard approved into a basis for peer review, consisting of 21 elements complemented by 12 best practices. The Terms of Reference assess a Member’s legal and administrative framework, including the practical implementation of this framework to determine how its MAP regime performs relative to the 21 elements in four key areas: (i) preventing disputes; (ii) availability and access to MAP; (iii) resolution of MAP cases; and (iv) implementation of MAP agreements.
The Assessment Methodology establishes detailed procedures and guidelines for a two-stage approach to the peer review and monitoring process. Stage 1 involves the review of a Member’s implementation of the minimum standard based on its legal framework for MAP and the application of this framework in practice. Stage 2 involves the review of the measures taken by the Member to address any shortcomings identified in its Stage 1 peer review. In light of the above, the OECD has also released a schedule for Stage 1 of the peer review and a questionnaire for taxpayers. The schedule catalogues the assessed jurisdictions into 10 batches for review.
Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration’s (FTA) MAP Forum.3 In summary, Stage 1 consist of three steps or phases:
Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalized, it is sent for approval of the FTA MAP Forum and later to the OECD Committee on Fiscal Affairs (CFA) to adopt the report for publication.
For Stage 2, there are two steps or phases: (i) approval of Stage 2 peer monitoring report of an assessed jurisdiction and (ii) publication of Stage 2 peer review reports. More specifically, an assessed jurisdiction should within one year of the adoption of its Stage 1 peer review report by the CFA submit a detailed written report (Update Report) to the FTA MAP Forum. The Update Report should contain (i) the steps that the assessed jurisdiction has taken or is taking to address any shortcomings identified in its peer review report; and (ii) any plans or changes to its legislative or procedural framework relating to the implementation of the minimum standard. Members of the FTA MAP Forum should also provide their comments on the Update Report provided by the assessed jurisdiction. Based on the Update Report submitted by the assessed jurisdiction and the input from the peers, the Secretariat will revise the Stage 1 peer review report of the assessed jurisdiction with a view to incorporate these updates in the Stage 2 peer monitoring report of the assessed jurisdiction. After adoption from the CFA, the Stage 2 peer monitoring report will be published.
Minimum standard peer review reports
The report is divided into four parts, namely:
Each part addresses a different component of the minimum standard.
Overall, Colombia addressed most of the shortcomings identified in its Stage 1 peer review report.
A.1 Include Article 25(3), first sentence, of the OECD Model Tax Convention in tax treaties
One (i.e., the Andean tax treaty) out of 15 tax treaties does not contain a provision that is equivalent to Article 25(3), first sentence, of the OECD 2017.4 Said treaty will not be modified by the Multilateral Instrument (MLI) to include the required provision. However, Colombia informed that negotiations have already been initiated to achieve the required modification.
The recommendation of the report states that: (i) Colombia should continue negotiations with the treaty partner with a view to including the required provision; and (ii) Colombia will seek to include Article 25(3), first sentence, of the OECD 2017 in all of its future tax treaties.
A.2 Provide roll-back of bilateral advance pricing arrangements (APAs) in appropriate cases
In relation to bilateral APAs, the methodology to be applied prospectively under an APA may be relevant in determining the treatment of comparable controlled transactions in previous filed years. The “roll-back” of an APA to these previous filed years may be helpful to prevent or resolve potential transfer pricing disputes.5
The report finds that no roll-back is provided for all appropriate cases. Therefore, it is recommended that Colombia should commit, without further delay, to introduce the possibility and in practice provide for roll-back of bilateral APAs in all appropriate cases.
Availability and access to MAP
B.1 Include Article 25(1) of the OECD Model Tax Convention in tax treaties6
Of Colombia’s 15 tax treaties subject to review, 12 contain a provision allowing taxpayers to submit a MAP request to the competent authority of the state in which they are resident. Two of Colombia’s tax treaties contain a provision allowing taxpayers to submit a MAP request to the competent authority of either state. With the MLI, it is expected that four additional tax treaties will allow a MAP request to be submitted to the competent authority of either state.
Only one tax treaty (the Andean tax treaty) does not contain a provision that is equivalent to Article 25(1), first sentence of the OECD 2017. The Andean tax treaty will not be modified by the MLI to include the required provision. It is recommended that Colombia continues negotiations with the treaty partners with a view to including the required provision.
Of the 14 tax treaties that include Article 25(1), 1 provides that the timeline to file a MAP request is shorter than three years from the first notification of the action resulting in taxation not in accordance with the provision of the tax treaty (one and a half years in the case of Mexico). In addition, one tax treaty does not include the timeline to file the MAP request (Chile). Since these treaties (Mexico and Chile) will be modified by the MLI to include the required timeline, it is recommended that Colombia ratifies the MLI as soon as possible to incorporate the equivalent of Article 25(1), second sentence, of the OECD 2017.
B.2 Allow submission of MAP requests to the competent authority of either treaty partner, or, alternatively, introduce a bilateral consultation or notification process
The report acknowledges that Colombia has introduced (via Resolution 53 of 2019, later replaced by Resolution 85 of 2020, issued by the Tax Authority) a bilateral consultation or notification process which allows the other competent authority concerned to provide its views on cases when Colombia’s competent authority has considered the objection raised in the MAP request not to be justified.
Provide access to MAP in transfer pricing cases (B.3); in relation to the application of anti-abuse provisions (B.4); in cases of audit settlements (B.5); and if required information is submitted (B.6)
Colombia reported that it has not denied access to MAP for: (i) transfer pricing cases; (ii) cases concerning the conditions for the application of a treaty anti-abuse provision; (iii) cases where an audit settlement would have been concluded; and (iv) cases where required information is submitted.
B.7. Include Article 25(3), second sentence, of the OECD Model Tax Convention in tax treaties
The second sentence of Article 25(3) sets forth that competent authorities may consult together for the elimination of double taxation in cases not provided for in their tax treaties.
Six (i.e., Andean tax treaty, Chile, Korea, Mexico, Portugal, United Arab Emirates (UAE) treaties) of Colombia’s 15 tax treaties do not contain a provision that is equivalent to Article 25(3), second sentence, of the OECD 2017. With respect to these six treaties:
B.8 / B.9 Make MAP guidance available and easily accessible and publishing MAP profile
With the latest tax reforms (Law 1943 of 2018 and Law 2010 of 2019), Colombia introduced article 869-3 to the Tax Code to regulate the MAP process. This has been the base for the MAP guidance later issued (Resolution 53 of 2019, replaced by Resolution 85 of 2020).
In relation to the MAP profile, it currently contains outdated information (at the time of the review the last update on the OECD’s website was on September 2018). Colombia was recommended to update said profile to include the most up to date information and align the content of its MAP profile with its MAP guidance.
B.10 Clarify in MAP guidance that audit settlements do not preclude access to MAP
Colombia currently does not have an internal administrative or statutory dispute settlement/ resolution process in place; therefore, this may not be currently a point of concern.
Colombia has had temporary possibilities to enter into a settlement agreement (the last one until June 2020). Colombia’s MAP guidance (article 33) provides that, even though access to MAP would be granted in relation to such settlements, Colombia’s competent authority would not be able to deviate from such settlements and would only be able to allow correlative adjustments in the treaty partner jurisdiction.
Resolution of MAP cases
C.1 Include Article 25(2), first sentence, of the OECD Model Tax Convention in tax treaties
The first sentence of Article 25(2) of the OECD 2017 requires that the competent authority who receives a MAP request from the taxpayer, shall endeavor, if the objection from the taxpayer appears to be justified and the competent authority is not itself able to arrive at a satisfactory solution, to resolve the MAP case by mutual agreement, with the competent authority of the other Contracting Party, with a view to the avoidance of taxation which is not in accordance with the tax treaty.
As 1 (i.e., Andean tax treaty) out of Colombia’s 15 tax treaties does not contain the equivalent of Article 25(2), first sentence, of the OECD 2017, and said treaty will not be modified via the MLI, Colombia is recommended to continue negotiations with the treaty partners with a view to including the required provision.
Additionally, the competent authority does not seek to resolve MAP cases where the taxpayer does not withdraw domestic administrative or judicial remedies within 15 days of the acceptance of the MAP request by the competent authority. In this case, Colombia is recommended to resolve all MAP cases that were accepted into the MAP and that meet the requirements under Articles 25(1) and (2) of the OECD 2017 as incorporated in Colombia’s tax treaties, even if domestic administrative or judicial remedies are not withdrawn.
C.2 Seek to resolve MAP cases within a 24-month average timeframe
Colombia reported that the inventory of pre-2016 MAP cases consisted of one case, which was an attribution/allocation case, that was still outstanding at the end of the Statistics Reporting Period (starting on 1 January 2016 and ending on 31 December 2019). In relation to post-2015, two cases (filed in 2018) were reported. Such cases remain unresolved at the end of the Statistics Reporting Period.
As Colombia did not close any MAP cases during the Statistics Reporting Period, the average timeframe for both pre-2016 cases and post-2015 cases is not applicable in this regard.
Colombia noted that after the Statistic Report Period (in 2020) that the long-pending case was closed with the treaty partner through the withdrawal of the MAP request by the taxpayer and that its two remaining pending cases had been pending for less than 24 months as of 31 December 2019.
C.3 Provide adequate resources to the MAP function
Colombia reported that it expected that its competent authority will increase the number of staff in charge of MAPs and APAs within the following two years in order to enhance its capacity.
C.4 Ensure staff in charge of MAP has the authority to resolve cases in accordance with the applicable tax treaty
The report recognizes that the newly added Article 869-3 of Colombia’s Tax Code gives its competent authority the authority to act in MAP cases and has given it an independent budget as well. Colombia reported that its MAP staff does not consult or involve personnel outside of the MAP office, except when it handles attribution/allocation cases. The APA staff who has not yet been delegated competent authority status is consulted for these cases.
C.5 Use appropriate performance indicators for the MAP function
Colombia reported that its staff members are evaluated based on weighted qualitative criteria such as the time taken to resolve each case (80%); behavioral skills, such as independence from tax treaty policy considerations (10%); and evaluation of management (10%). Staff members in charge of MAP are not evaluated on the basis of the material outcome of MAP discussion.
C.6 Provide transparency with respect to the position on MAP arbitration
Colombia reported that Law 1563 of 2012 expressly forbids arbitration on tax matters, but that it can be overridden by any ordinary law including a law to approve a double taxation agreement. Colombia noted that this prohibition on arbitration was in accordance with a very well embedded opinion among Colombia’s judiciary, according to which only the judiciary itself is able to rule on tax disputes. Colombia reported that at the time of its review, its Constitutional Court was reviewing the constitutionality of Colombia’s arbitration clause for one tax treaty that has not yet gone into effect.
It is important to highlight that recently the Colombia Constitutional Court has issued a decision recognizing the constitutionality of the one tax treaties that includes the arbitration clause as a final stage to the MAP (Italy7). The other tax treaty entered by Colombia that contains an arbitration clause (France) is currently under review by the Constitutional Court.
Implementation of MAP agreements
D.1 Implement all MAP agreements / D.2 Implement all MAP agreements on a timely basis
As there was no MAP agreement reached during the review period that required implementation by Colombia, it was not possible to assess whether Colombia would have implemented all MAP agreements thus far.
It was noted that in the Stage 1 report that the implementation of MAP agreements was subject to Colombia’s domestic statute of limitations. However, as noted above, this position has been overruled by the enactment of article 869-3 of Colombia’s tax code and now MAP agreements may be implemented irrespective of domestic time limits. Therefore, the recommendation made in the Stage 1 report has been addressed.
D3. Include Article 25(2), second sentence, of the OECD Model Tax Convention tax treaties or alternative provisions in Article 9(1) and Article 7(2)
Jurisdictions should either: (i) provide in their tax treaties that any mutual agreement reached through MAP shall be implemented notwithstanding any time limits in their domestic law (Article 25(2), second sentence), or (ii) be willing to accept alternative treaty provisions that limit the time during which a Contracting Party may make an adjustment pursuant to Article 9(1) or Article 7(2), in order to avoid late adjustments with respect to which MAP relief will not be available.
Four (i.e., Andean tax treaty, Mexico, Chile, Switzerland treaties) out of Colombia’s 15 tax treaties do not contain a provision that is equivalent to Article 25(2), second sentence, of the OECD 2017. Of these treaties, one contains an alternative provision in Article 9(1) (Switzerland).
For those treaties that will not be modified by the MLI to include the required provision, Colombia is recommended to continue (the initiation of) negotiations with the treaty partners with a view to including the required provision or be willing to accept both alternative provisions.
In a post-BEPS world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Colombia’s Stage 2 peer review report represents the continued recognition and importance of the need to achieve tax certainty for cross-border transactions of MNEs. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely mutual agreement process.
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A.S. Bogota
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young Abogados, Latin America Business Center, Madrid
Ernst & Young LLP (United Kingdom), Latin America Business Center, London
Ernst & Young Tax Co., Latin America Business Center, Japan & Asia Pacific