Colombia puts in place a preferential international shipping tax regime

1. Global revenue
2. Colombian-sourced income (related to Colombian clients and shipping activities carried out within Colombia)
3. Proportion of Colombian-sourced revenue vs. global revenue (i.e., Colombian-sourced revenue related to shipping activities/global revenue from shipping activities)
4. Colombian taxable base (0.2*1000)

1. 1000
2. 200
3. 0.20
4. 200

From a compliance standpoint, these branches or PEs are required to file annual tax returns and settle any outstanding tax payments, which are due in October of each year.

For completeness, non-residents performing this activity in Colombia directly (i.e., not through a branch or PE) are subject to a 5% withholding tax over the gross consideration of the fee as defined in Section 414-1 of the Colombian Tax Code (CTC), and no compliance obligation arises considering Section 592 of the CTC. However, if the payer is not a withholding Colombian, then they must file an income tax return within the deadlines and settle any outstanding tax related to its net Colombian-sourced income (i.e., less allowed costs and expenses for tax purposes) with the 2% rate if the services are rendered with Colombian registered ships.

Analysis of the criteria of Action 5 of BEPS

One cornerstone issue that must be addressed concerns whether this special tax regime could be deemed “harmful” from a tax perspective under the rules envisaged in Action 5 of BEPS, as the regime has not been peer reviewed by the BEPS inclusive framework. Nevertheless, an analysis of the matter, considering both the 5 key factors and the other 5 factors considered by BEPS, is as follows:

5 Key Factors

1. The regime imposes no or low effective tax rates on income from geographically mobile financial and other service activities.
2. The regime is ring-fenced from the domestic economy.
3. The regime lacks transparency.
4. There is no effective exchange of information with respect to the regime.
5. The regime fails to require substantial activities.

Comments

1. Although there is a reduced tax rate (2% nominal), this fact per se does not imply that there is a harmful tax regime, as one must consider all the other factors.
2. The regime is not partly or fully insulated from the Colombian domestic economy, and both domestic and foreign companies can apply.
3. The regime is completely open in terms of transparency.
4. The regime does not provide any disposition that hampers the exchange of information.
5. Only taxpayers developing substantial shipping activities can apply.

Assessment

1. Not Applicable
2. Not Applicable
3. Not Applicable
4. Not Applicable
5. Not Applicable

Other Five Factors

1. An artificial definition of the tax base.
2. Failure to adhere to international transfer pricing principles.
3. Foreign source income exempted from residence country taxation.
4. Negotiable tax rate or tax base.
5. Existence of secrecy provisions.

Comments

1. The tax base is calculated based on a general and, hence, not a special formula.
2. Shipping companies are subject to the general transfer pricing rules without any special consideration.
3. Such an exemption is not envisaged in this regime.
4. It is not possible to negotiate a special tax rate or tax base.
5. No secrecy provisions are in place.

Assessment

1. Not Applicable
2. Not Applicable
3. Not Applicable
4. Not Applicable
5. Not Applicable

As one can see, the Colombian special tax shipping regime does not fulfill the requirements to be labeled as harmful based on the yardsticks provided in Action 5 of BEPS.

Impact over tax treaty distributive rules

One must point out that the Colombian special tax shipping regime would not apply if the branch were registered in Colombia by a company resident in a tax-treaty jurisdiction, as Section 8 of those treaties forbids the taxation in situ of any income arising from international transportation and hence the taxation is due in the location of the place of effective management (bearing in mind that Colombia has followed such a rule from the OECD’s tax treaty model).[4]

Lastly, that same tax rule has been agreed in treaties to avoid double taxation with respect to international shipping conducted with Argentina, Brazil, Germany, and the United States.

[1] LLM and Advanced Diploma in Taxation, Universidad de los Andes; LLB and Advanced Diploma in International Economic Law, Universidad Externado de Colombia. Manager at PwC Colombia. The author can be contacted at omar.cabrera@uexternado.edu.co.

[2] Defined by Executive Order 804 of 2001 as “transportation that takes places between Colombian and foreign ports”.

[3] The Colombian government recently presented a tax bill that would increase the corporate tax rate to 35%. However, the bill is still under debate in the Colombian congress.

[4] Colombia has signed tax treaties with Spain, Switzerland, Chile, Canada, India, Korea, Portugal, the Czech Republic, Mexico, and the United Kingdom. Treaties have been signed, but are not yet in force, with Italy, Japan, France, and the United Arab Emirates.