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protection, etc. Such entities are subject to a reduced tax rate of 20%. 34

Until recently (December 2012), Colombia applied the cri- teria of domicile or incorporation to determine the resi- dence of companies. Law 1607 added the criterion of place of effective management. Place of effective management is further defined in paragraph 1 of article 84 of Law 1607. These criteria follow, to a significant extent, the criteria in the Commentary on Article 4(3) of the OECD Model. Such criteria include the place where (1) the key manage- ment and commercial decisions are made, (2) the meet- ings of its board of directors or equivalent body are usually held, and (3) the senior day-to-day management of the company is carried on.

Furthermore, paragraph 2 of article 84 of Law 1607 intro- duced additional criteria to clarify the residence of corpo- rations in Colombia. Paragraph 2 states that a corporation is not a resident of Columbia for tax purposes solely on the basis that the management board meets in Colombia or on the basis that individuals or companies resident for tax purposes in Colombia are shareholders.

As a consequence, in order to determine the tax residence of corporations, the domicile, incorporation or place of effective management of the corporation will be taken into account. By introducing the place of effective management criterion, Colombia is essentially updating the residence criteria in accordance with the tax treaties that have been concluded to date.

For illustrative purposes, the Colombia-Spain Income and Capital Tax Treaty (2005) and the Colombia-Switzerland

Income and Capital Tax Treaty (2007) 35 follow article 4

of the OECD Model, which provides for the use of the place of effective management as a tie-breaker rule where

a company is a resident of both countries (dual residence). In the Chile-Colombia Income and Capital Tax Treaty (2007), 36 in case of dual residence, the parties determine residence by mutual agreement. In the Canada-Colombia

Income and Capital Tax Treaty (2008), 37 in case of dual

residence, the place of incorporation prevails. This tax treaty also states in article 4(4) that, if it is not possible to determine residence, the states may determine residence by mutual agreement and, if agreement cannot be reached, no treaty benefits are given to the company.

Prior to Law 1607, individuals were resident for tax pur- poses if they had been in Colombia for a period exceeding six months in the relevant tax year. Colombian nationals were also resident if there had been a close connection, i.e. family ties or place of business in Colombia.

With Law 1607, the criterion of residence for individuals has been substantially amended. Individuals will be resi- dent for tax purposes if they have been in Colombia more than 183 days (consecutive or not) in a period of 365 days. Members of the diplomatic service will also be consid-

34. Art. 356 Tax Code. 35. Colom.-Switz. Income and Capital Tax Treaty. 36. Chile-Colom. Income and Capital Tax Treaty. 37. Can.-Colom. Income and Capital Tax Treaty.

ered to be Colombian residents. In addition, Colombian nationals will be residents if one of the following condi- tions are met: (1) a spouse or child(ren) are resident for tax purposes in Colombia; (2) 50% of the income, including assets and/or wealth, are sourced in Colombia; (3) the indi- viduals are resident in a tax haven; or (4) upon request by the Colombian tax administration, no proof of residence in another country is provided by the taxpayer.

Residence in regard to individuals in the tax treaties con- cluded by Colombia with Canada, Chile, Spain and Swit- zerland is based on article 4 of the OECD Model, including the tie-breaker rules. However, the changes to the criteria of residence in Law 1607 can potentially raise issues of dual residency that will need to be taken into account by Colombia when negotiating future tax treaties. For illustra- tive purposes, Law 1607 states that a Colombian national can be deemed to be resident for tax purposes in Colombia even if the national is a resident of another country. This may result in an additional burden for the taxpayer, i.e. dual residence, simply because the person is a Colombian national. Furthermore, the tax administration will need to further clarify how these criteria in respect of nationals will apply, and what to do in the event of dual nationality, for instance, in regard to a national of the United States and Colombia in respect of which there is no tax treaty.

4.2. PEs

When the Colombia-Spain Income and Capital Tax Treaty (2005) was negotiated, Colombia did not have a PE concept. At that time, the Colombian government, however, stated that, even though Colombia does not employ a PE concept, it is important to follow the definition of a PE in the OECD Model, except for construction activities and independent personal services, and that this definition assists Colombia in determining what does not constitute a PE. 38

The Constitutional Court, in its constitutional review of the Canada-Colombia Income and Capital Tax Treaty (2008) stated that the lack of a PE definition in the Tax Code does not imply that article 5 is unconstitutional, as the same article provides for the elements of the defini- tion. However, the Constitutional Court stressed that it was important for the government to introduce a PE def- inition in the Tax Code taking into account compliance issues that would have to be addressed in collecting tax from PEs. 39

Law 1607 introduced a PE definition. This definition is, to

a significant extent, in accordance with the OECD Model. The definition does not include activities of a preparatory and auxiliary character, which is in accordance with the

Commentary on Article 5 of the OECD Model (2010). 40 However, in contrast to the current tax treaties concluded by Colombia, no specific reference is made in Law 1607

38. See Legislative Proposal 198 of 2007, supra n. 5.

39. Decision C-295/12 (18 Apr. 2012), at para. 9.5.4. This was also emphasized in CO: CC, 16 June 2010, Decision C-360/10. See also art. 5(4) Colom.-Switz. Income and Capital Tax Treaty. 40. OECD Model Tax Convention on Income and on Capital: Commentary on Article 5 (22 July 2010), Models IBFD.

Irma Johanna Mosquera Valderrama

to a PE including a building site or construction activities (2007)). The concept of “beneficial owner” is also included or to a six-month period in regard to these activities. In

in the dividend provisions of all of these tax treaties. accordance with the tax treaties concluded by Colombia,

In the Chile-Colombia (2007) and the Colombia-Switzer- independent personal services are specifically excluded land (2007) Income and Capital Tax Treaties, article 10, from this definition. which deals with the lower tax rate for substantial share-

Colombia has been following the UN Model (2001) with holdings, applies if the payment is received by a company regard to a building site, a construction assembly or instal-

holding directly the capital of the company making the lation project or connected supervisory activities carried

payments. Conversely, in the Canada-Colombia (2008) out in the source state. Where these activities have been

and the Colombia-Spain (2005) Income and Capital Tax performed for more than six months, a PE is considered to

Treaties, such ownership may be direct or indirect. The dif- exist in the source state. In article 5(3) of the OECD Model,

ferences in these percentages and direct and/or indirect the term set with regard to these activities is a period of

shareholdings arise from the treaty negotiations and, for more than 12 months. The Canada-Colombia (2008) and

the Constitutional Court, the percentages are not contrary Chile-Colombia (2007) Income and Capital Tax Treaties

to the Constitution, as the rates are the result of the applic- also introduced consultancy services into the definition of

ation of the principle of reciprocity. 42

a PE if carried out by employees or dependent agents for

A 0% withholding tax rate on dividends also applies to di- more than 183 days in a 12-month period. vidends that are exempt in Colombia (see article 10 of the

In addition, Colombia has included in its tax treaties Protocol to article 10 of the Chile-Colombia (2007) and article 14 of the UN Model in respect of independent per-

the Colombia-Spain (2005) Income and Capital Tax Trea- sonal services. With regard to the OECD Model, article

ties). Accordingly, dividends paid to foreign companies

5 includes independent personal services in the PE def- or entities not domiciled in Colombia are subject to a 0% inition. The objective of the Colombian government in

withholding tax rate when the dividends are exempt from including article 14 of the UN Model in its tax treaties

Colombian income tax, provided that the dividends are was to remove the limitation imposed on the source state

reinvested in Colombia for a minimum period of three to only tax income from independent personal services if

years. 43 A further different approach can be found in the the income is derived from a fixed base. 41 Protocol to article 10 of the Canada-Colombia Income and Capital Tax Treaty (2008), where a 15% withholding

4.3. Dividends

tax rate applies if the dividends are exempt in Colombia from income tax and insofar as the effective beneficiary

Article 245 of the Tax Code provides for a 0% withhold- of these dividends is a Canadian resident shareholder. 44 ing tax on dividends paid to foreign individuals or com-

The Colombia-Switzerland Income and Capital Tax Treaty panies that are not resident in Colombia insofar as the

(2007) contains none of these provisions. profits from which the dividends are paid have been taxed

at the corporate level. Otherwise, the dividends are subject The Constitutional Court has not lodged any objections to income tax at an overall tax rate of 34% for 2013, 2014

to the addendums to these tax treaties. However, in its and 2015 and 33% for 2015 onwards). This tax rate includes

constitutional review of the Canada-Colombia Income

a 25% income tax and a 9% (8% as of 2015) fairness income and Capital Tax Treaty (2008), the Constitutional Court tax (CREE).

provided further explanation regarding the use of this approach by Colombia. Specifically, the Constitutional

At the international level, Colombia follows the source Court stated that, in order to encourage foreign invest- principle. Accordingly, in respect of dividends, interest and

ment, dividends received by Colombian residents are royalties, for example, withholding tax at source applies.

exempt from tax in Colombia. 45 However, the foreign With regard to dividends, certain exemptions apply such

resident shareholder must pay tax in Canada and, if there that a 0% withholding tax applies at source to a substantial

is no taxation at source, the foreign resident shareholder shareholding of more than 25% (in respect of the Chile-

(taxpayer) in Canada cannot claim a credit in respect of Colombia Income and Capital Tax Treaty (2007)) and 20%

the dividends. 46

(in respect of the Colombia-Spain (2005) and Colombia- Switzerland (2007) Income and Capital Tax Treaties).

The Constitutional Court also acknowledged that this However, in the Canada-Colombia Income and Capital

affects the principle of reciprocity between states, as the Tax Treaty (2008), the percentage for a substantial share-

only beneficiaries of reduced withholding tax on these di- holding is 10% and the withholding tax rate 5%.

vidends are the foreign resident taxpayers in Canada and not Colombian residents. However, for the Constitutional

Portfolio dividends are subject to a 15% (the Colombia- Court, by introducing this addendum to the Protocol, the Switzerland (2007) and Canada-Colombia (2008) Income

taxpayer (investor) is protected given that the decision and Capital Tax Treaties), 5% (the Colombia-Spain Income

to exempt dividends is part of the domestic tax policy of and Capital Tax Treaty (2005)) or 7% withholding tax

rate (the Chile-Colombia Income and Capital Tax Treaty

42. Decision C-577/09 (26 Aug. 2009), at para. 6.2.3. 43. Protocol ad Art. 10 Colom.-Spain Income and Capital Tax Treaty.

41. See Legislative Proposal 198 of 2007, supra n. 5. Article 14 of the UN 44. Protocol ad. Art. 10 Can.-Colom. Income and Capital Tax Treaty. Model applies two alternative tests: (1) regular fixed base, and (2) the

45. Arts. 48 and 49 Tax Code.

183-day rule. 46. Decision C-295/12 (18 Apr. 2012), at para. 9.5.9.

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Colombia and is independent of the subject and the source of these dividends. 47

4.4. Interest, royalties and the MFN clause in tax treaties

4.4.1. Initial comments

Colombia follows the UN Model by including a with- holding tax in articles 11 and 12 on interest and royal- ties, respectively. The tax treaties concluded by Colombia (including those that are in force) also require the recipient to be the beneficial owner so as to counter treaty shopping.

4.4.2. Interest

As of 1 January 2013, interest paid to a foreign resident that cannot be attributed to a PE or branch in Colombia is subject to a withholding tax rate of 33%.

In the Canada-Colombia (2008), Colombia-Spain (2005) and Colombia-Switzerland (2007) Income and Capital Tax Treaties, the withholding tax rate for interest is reduced to 10%. In the Chile-Colombia Income and Capital Tax Treaty (2007), a distinction is made between 5% for inter- est, where the recipient (the beneficial owner) is a bank or an insurance company and 15% in other cases. According to the Constitutional Court, the approach in this provision is in accordance with the Constitution. 48

The Colombia-Spain (2005) and Colombia-Switzer- land (2007) Income and Capital Tax Treaties provide for an additional article 11(3), which states that the interest can only be taxed in the residence state if one of the fol- lowing conditions is met: (1) the beneficial owner is the contracting state or one of its political subdivisions or local authorities; (2) the interest paid relates to an instal- ment sale (venta a crédito) of merchandise or equipment in respect of a company of a contracting state; or (3) the interest paid relates to loans provided by a bank or any other credit institution resident in the contracting state. The Constitutional Court did not refer to this provision, but, in principle, it can safely be argued that the provision is also the result of treaty negotiations between contract- ing states and, therefore, is in accordance with the prin- ciple of reciprocity.

4.4.3. Royalties

As of 1 January 2013, royalties paid to a foreign resident that cannot be attributed to a PE or branch in Colombia are subject to a withholding tax rate of 33%. No definition of royalties is provided for in the Tax Code.

In general terms, the provisions of Colombia’ s tax trea- ties regarding royalties follow the UN Model (2001) in that withholding tax is applied at source. In the Canada- Colombia (2008), Chile-Colombia (2007), Colombia- Spain (2005) and Colombia-Switzerland (2007) Income and Capital Tax Treaties, the withholding tax rate is 10%. If the royalties arise via a PE situated in, or that undertakes

47. Id. 48. Decision C-577/09 (26 Aug. 2009), at para. 6.2.3.

independent personal services in, the other state from a fixed base, the royalties article does not apply and, instead, article 7 regarding business profits or article 14 regarding independent personal services (UN Model) is applicable (see section 4.2.).

Payments made to foreign residents for technical services, management fees, commissions and rental payments are also subject to withholding tax at a rate to be determined by the government, but that cannot exceed 20%. At the time of the writing of this article, this percentage was 10%.

Article 12 of the Canada-Colombia (2008), Chile-Colom- bia (2007), Colombia-Spain (2005) and Colombia-Swit- zerland (2007) Income and Capital Tax Treaties includes payments made for technical services, technical assistance, and consultancy services in the royalties’ definition. Such payments are not included in the relevant definitions of the OECD Model or the UN Model.

4.4.4. MFN clause

Another specific feature of the tax treaties concluded by Colombia is MFN clauses. An MFN-type provision states that, if Colombia concludes a tax treaty with another (third) state in respect of which Colombia grants a reduced percentage or an exemption, this percentage or exemp- tion automatically applies to the tax treaty concluded by

Colombia with the other (second) state. 49 It is submitted that Colombia does not explicitly use the term “MFN” in the text of tax treaties or in related protocols, but the con-

sequences are the same. 50 At the time of the writing of this article, such an MFN-type provision had been intro- duced in the Protocols to the interest and royalties art- icles in the Canada-Colombia (2008), Chile-Colombia (2007), Colombia-Spain (2005) and Colombia-Switzer- land (2007) Income and Capital Tax Treaties.

The Constitutional Court, in its review of the constitu- tionality of the Canada-Colombia (2008) 51 and Colom- bia-Switzerland (2007) 52 Income and Capital Tax Trea- ties, considered the use of such an MFN-type provision in light of the principle of reciprocity. The Court stated that, even though the application of this clause is contrary to the principle of reciprocity, as the only country that ben- efits from this clause is the other contracting state and not Colombia, based on an analysis of the treaty provisions and the Protocol as a whole this does not run counter to the principle of reciprocity. Nevertheless, the Constitu- tional Court called for the government and the legislature to evaluate the use of such MFN clauses in international treaties and specifically in tax treaties. 53

49. Protocol ad art. 12 Chile-Colom. Income and Capital Tax Treaty. 50. Tax treaties may include an MFN clause. In this way, the application of the provisions of a favourable tax treaty can be extended to other tax treaties signed by the country of the taxpayer. 51. Decision C 295/12 (18 Apr. 2012), at para. 9.6. 52. Decision C-360/10 (16 June 2010), at para. 5.4. 53. Decision C 295/12 (18 Apr. 2012), at para. 9.6.

Irma Johanna Mosquera Valderrama

4.5. Treaty anti-abuse clauses

example, article 21 of the Colombia-Switzerland Income and Capital Tax Treaty (2007) includes an LoB clause that

4.5.1. Anti-abuse clauses: limitation of benefits and main

allows for the taxpayer to prove that the transaction was

carried out for commercial reasons. The Colombian gov- Until recently (December 2012), at the domestic level,

purpose test

ernment has not (to date) provided an explanation for why Colombia did not have specific rules regarding abuse

these provisions have been included in these tax treaties. and, therefore, the doctrine that holds that private law

However, it is arguable that this may be the result of treaty should be followed for tax law purposes in such circum-

negotiations. Until now, the Constitutional Court has held stances applied. By means of this doctrine, the intention

that such treaty anti-abuse clauses are in accordance with of the parties is followed if that intention deviates from 57 the Constitution.

the arrangement that the parties have purported to enter into. 54

4.5.2. Anti-abuse clause to counter the improper use of tax treaties

Law 1607 introduced two abuse rules for tax purposes. The first rule relates to abuse in general and the second to fraus

The Canada-Colombia (2008) and the Chile-Colombia legis (fraude a la ley). There will be a presumption of abuse

(2007) Income and Capital Tax Treaties contain an anti- or fraus legis where an operation takes place in accordance

abuse clause to counter the improper use of the tax treaty. with two or more of the following criteria: (1) the opera-

In the event of abuse, the relevant treaty provisions may tion is between related parties; (2) the operation makes use

be subject to renegotiation by the parties. Article 27(4) of of tax havens; 55 (3) the operation includes a special entities

the Chile-Colombia Income and Capital Tax Treaty (2007) regime or an exempt tax entity; (4) the price agreed differs

provides for a more comprehensive provision. It states by more than 25% from the arm’ s length price; and (5)

that, if abuse is present, the competent authorities may, by the conditions agreed by the parties would not have been

means of mutual agreement, recommend specific changes agreed by third parties in similar circumstances. In these

to the tax treaty and, if necessary, modify it. Article 26(4) circumstances, the burden of proof lies with the taxpayer.

of the Canada-Colombia Income and Capital Tax Treaty In cases of abuse, the tax administration may recharac-

(2008) adopts this approach, but, in case of abuse, provides terize a transaction as if the abusive behaviour had not

for a toned down provision pursuant to which the com- taken place. Law 1607 also states that the tax administra-

petent authorities may discuss possible modifications to tion may guarantee the application of the constitutional

the tax treaty. The Constitutional Court has not raised any principle of substance-over-form in cases that are of sig-

objections to such anti-abuse clauses. 58 nificant economic and legal importance to Colombia. No further specifications are given in regard to defining or

4.6. Capital gains

clarifying this last provision. Until recently (December 2012), capital gains resulting

At the tax treaty level, Colombia has introduced the term from the sale of (fixed) assets held by corporations (foreign beneficial owner for dividends, interest and royalties in

or domestic) and non-resident individuals for a period the tax treaties with Canada, Chile, Spain and Switzerland.

longer than two years were subject to a tax rate of 35% In addition, following the OECD Model, Colombia has

(articles 313 and 316 of the Tax Code). Law 1607 reduces made use of other anti-abuse clauses in some tax treaties.

the capital gains tax rate to a single flat rate of 10% for all Accordingly, article 26 of the Canada-Colombia (2008)

companies and individuals whether or not resident for tax and article 27 of the Chile-Colombia (2007) Income

purposes in Colombia.

and Capital Tax Treaties provide for the following anti- abuse clauses: (1) a limitation on benefits (LoB) clause, 56 In principle, the Canada-Colombia (2008), Chile-Colom- except where the transaction is undertaken for commer-

bia (2007), Colombia-Spain (2005) and Colombia-Swit- cial reasons; and (2) a main purpose test. These provi-

zerland (2007) Income and Capital Tax Treaties contain sions have been partially followed in other tax treaties, for

a capital gains provision that follows the OECD Model. However, the Canada–Colombia (2008) and Chile–

Colombia (2007) Income and Capital Tax Treaties intro-

54. J. Paniagua-Lozano, Jorge & H. Mayorga-Arango, Colombia, Form and

duced additional provisions to article 13(4) that deviate

substance in tax law, IFA Cahiers de Droit Fiscal International vol. 87a, sec.

from the OECD Model. Article 13(4) of the OECD Model

2. (SDU Uitgevers 2002), Online Books IBFD. 55. Law 1607 introduces new rules that aim to tackle the abuse of tax havens

gives the taxing right to the source state in respect of gains

(art. 117 amending art. 260-7 Tax Code). Law 1607 allows the government

derived by a resident of a contracting state from the alien-

to identify tax havens based on one of the following criteria: (1) low or

ation of shares deriving more than 50 per cent of their

no tax; (2) lack of effective exchange of information; (3) lack of transpar- ency; and (4) lack of real activity or economic substance. The government may also use international standards as a reference to determine what is a tax haven. However, there is no further definition of international standards or reference to the OECD. The reason may be the position of

57. See, for example, Decision C 295/12 (18 Apr. 2012), regarding the the Constitutional Court with regard to the list of tax havens as defined

Can.-Colom. Income and Capital Tax Treaty, at para. 9.5.18 and Decision by the OECD. See CO: CC, 12 Aug. 2003, Decision C-690.

C 577/09 (26 Aug. 2009), regarding the Chile-Colom. Income and Capital 56. LoB clauses “generally provide a ‘ safe haven’ test based on share ownership

Tax Treaty, at para. 6.2.3.

by treaty country residents coupled with restrictions to insure that the 58. See, for example, Decision C 295/12 (18 Apr. 2012), regarding the corporation has not reduced its tax base in the residence country through

Can.-Colom. Income and Capital Tax Treaty, at para. 9.5.18 and Decision deductible payments”. P. McDaniel, H.J. Ault & J. Repetti, Introduction to

C-577/09 (26 Aug. 2009), regarding the Chile-Colom. Income and Capital United States International Taxation 5th ed., p. 183 (Kluwer L. Intl. 2005).

Tax Treaty, at para. 6.2.3.

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The International Tax Treaty Policy of Colombia

value directly or indirectly from immovable property situ- and is approved by the Constitutional Court, the OECD ated in the other state.

Commentaries could be used in interpreting tax treaties. If so, the question would be whether or not Colombia

The Canada-Colombia Income and Capital Tax Treaty would adopt a static or a dynamic approach to the use of (2008) adds to article 13(4) two additional provisions. The the OECD Commentaries for the purpose of interpreting following gains derived by a resident of one state may be

tax treaties. 62

taxed in the source state: (1) an interest in a partnership, trust or other entity, deriv-

It is submitted that the approach would most likely be ing more than 50 per cent of its value directly or indi-

static based on the traditional approach (see section 3.) rectly from immovable property situated in the source

of the Constitutional Court regarding the interpretation state; or

of OECD Model provisions and for the following two (2) shares or other rights in the capital of a company that

reasons. First, the Constitutional Court has accepted, in is a resident of the source state, where the resident of

respect of the Canada-Colombia (2008) and the Chile- the first-mentioned state (residence state) owned, at

Colombia (2007) Income and Capital Tax Treaties, that in any time within the 12-month period preceding the

regard to abuse of treaty provisions, the parties may agree alienation, directly or indirectly 25 per cent or more

on changes to the tax treaty, but has not said anything of the capital of that company.

regarding the use of the latest version of the OECD Com- mentaries to introduce those changes. Second, the Consti-

The Chile-Colombia Income and Capital Tax Treaty (2007) tutional Court attaches great importance to the principle introduces to article 13(4) a similar provision as that of the

of reciprocity in its constitutional review of tax treaties Canada-Colombia Income and Capital Tax Treaty (2008)

and, therefore, the outcome of such a consideration would for capital gains on shares or other rights in the capital of

run counter to the principle of reciprocity. The argument

a company (provision (2) above). However, in this case, the is that it would be against the principle of reciprocity to percentage of direct or indirect participation in the capital

make use of a dynamic interpretation that could bring of the company is 20% (instead of 25%). The provision was

about results that had not been agreed by the parties. not included in the Chile-Colombia Tax Treaty.

The tax treaties concluded by Colombia with Canada, Furthermore, the Chile-Colombia Income and Capital

Chile, Spain and Switzerland refer to a mutual agreement Tax Treaty (2007) states that the percentage of taxation

procedure (MAP) between competent authorities. The at source for the capital gains on shares (provision (2))

Constitutional Court has agreed with such an approach, should not exceed 17% of the total amount of the gain.

stating that the MAP is part of the settlement of disputes Until now, the Constitutional Court has held that such

between parties given the bilateral nature of a tax treaty. 63 additional provisions in article 13(4) are in accordance

59 Colombia has not, however, included the use of binding with the Constitution. arbitration with regard to a taxpayer in accordance with

article 25(5) of the OECD Model in its tax treaties. Article

4.7. Arbitration and the dynamic interpretation of

25(5) provides for a MAP and, if it is not possible to reach

agreement within two years, there is a possibility for (binding) arbitration at the request of the taxpayer. The Constitutional Court, in reviewing the Colombia- 64 Switzerland Income and Capital Tax Treaty (2007), stated that reference to the Commentaries on the OECD Model is not mandatory either for the purpose of interpretation

treaty provisions

62. The dynamic approach results in the application of the OECD Model:

of a tax treaty in regard to international tax disputes or in

Commentaries existing at the time that a tax treaty is applied, whereas the

regard to interpretation by the tax authorities or taxpayers static approach results in the application of the OECD Model: Commentar-

ies at the time that a tax treaty is concluded.

in domestic tax disputes. At that time, the Court stated that

63. See, for example, Decision C 295/12 (18 Apr. 2012), regarding the

to make the OECD Commentaries mandatory would go

Can.-Colom. Income and Capital Tax Treaty, at para. 9.5.16 and Decision

against the principle of legality, as the OECD Commentar- C-577/09 (26 Aug. 2009), regarding the Chile-Colom. Income and Capital

Tax Treaty, at para. 6.2.3.

ies do not have the force of law. This has been reinforced by

64. Article 25(5) of the OECD Model Tax Convention on Income and on

the fact that the OECD Commentaries are derived from

Capital (22 July 2010), Models IBFD reads as follows: “Where, a)

an organization, i.e. the OECD, of which Colombia is not under paragraph 1, a person has presented a case to the competent

authority of a Contracting State on the basis that the actions of one

a member. 60

or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of this Convention,

However, it may be argued that this approach could

and

change in the future, as Colombia is seeking to become

b) the competent authorities are unable to reach an agreement to

an OECD member country. resolve that case pursuant to paragraph 2 within two years from 61 If membership is granted

the presentation of the case to the competent authority of the other Contracting State,

any unresolved issues arising from the case shall be submitted to arbitration if the person so requests. These unresolved issues shall not,

59. See, for example, Decision C 295/12 (18 Apr. 2012), regarding the however, be submitted to arbitration if a decision on these issues has Can.-Colom. Income and Capital Tax Treaty, at para. 9.5.11 and Decision

already been rendered by a court or administrative tribunal of either C 577/09 (26 Aug. 2009), regarding the Chile-Colom. Income and Capital

State. Unless a person directly affected by the case does not accept the Tax Treaty, at para. 6.2.3.

mutual agreement that implements the arbitration decision, that decision 60. Decision C-360/10 (16 June 2010), regarding the Colom.-Switz. Income

shall be binding on both Contracting States and shall be implemented and Capital Tax Treaty, at para. 5.3.2.

notwithstanding any time limits in the domestic laws of these States. 61. Law 1479 of 2011 of 28 September 2011, approved by Decision C 417/12

The competent authorities of the Contracting States shall by mutual (6 June 2012).

agreement settle the mode of application of this paragraph.”

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5. Recommendations Regarding International Treaty Policy

Colombia has, to a great extent, made use of the OECD Model in concluding tax treaties with countries like Canada, Chile, Spain and Switzerland. These tax treaties have been the subject of constitutional review by the Con- stitutional Court, which occurs after the tax treaty has been signed. Sometimes, as result of the constitutional review, it may take one or two years for a tax treaty to enter into force. The Constitutional Court approves tax treaties primarily on the basis of the principles of legality and reciprocity.

The approach of the Constitutional Court has changed in the last 10 years. In analysing Law 788 of 2002, the Consti- tutional Court declared that a provision regulating low-tax or tax haven jurisdictions introduced by means of Law 788

of 2002 was incompatible with the Constitution. 65 In order

to define these jurisdictions reference was made by the leg- islature in Law 788 to the areas considered to be such by the

OECD. The Constitutional Court held, at that time, 66 that

this provision was incompatible with the Constitution, as Colombia was not an OECD member country and, there- fore, the provisions did not have any effect in Colombia.

This approach changed in 2005 when Colombia started negotiating tax treaties. The Constitutional Court now favours the OECD Model even though Colombia is not yet an OECD member country. Colombia is currently seeking OECD membership and, therefore, the government has made use of the OECD Model and definitions in its tax treaties and domestic law, for example, the PE concept in accordance with OECD standards and the place of effec- tive management rule to determine the residence of cor- porations.

It is arguable that the main source for analysing the in- ternational tax policy of Colombia is the decisions of the Constitutional Court and the constitutional reviews of tax treaties. However, these decisions have evolved since the constitutional review of the Colombia-Spain Income and Capital Tax Treaty (2005). This article, therefore, has pro- vided a short overview of the tax treaties concluded by Colombia and approved by the Constitutional Court.

It should also be pointed out that the negotiation of tax treaties is a recent development in the international tax policy of Colombia.

The introduction of transfer pricing rules in 2003, in force as of 1 January 2004, resulted in an increase in the inter- est of the government in introducing further rules in ac- cordance with international tax law developments, such as rules amending the free trade zone regime, the repeal of the remittance tax and the deduction of expenses incurred abroad in obtaining Colombian-sourced income.

65. This Law introduced transfer pricing rues into Colombian tax law. Accordingly, entities carrying out transactions affecting transfer pricing in low-tax or tax haven jurisdictions are deemed not to have carried out their transaction in accordance with the arm’ s length principles. For an explanation of the transfer pricing provisions see Mosquera Valderrama, supra n. 2. 66. CO: CC, 12 Aug. 2003, Decision C-690.

However, it is the author’ s opinion that these rules are rare and do not reflect a consistent international tax policy.

Until recently (December 2012), international tax law pro- visions were rare in the Tax Code, for example, the lack of

a PE definition. The Tax Code did not contain anti-abuse provisions that may be applied in domestic and cross-bor- der situations.

Law 1607 introduced substantial changes to the Tax Code effective 1 January 2013. These changes include the intro- duction of a PE definition and new criteria in respect of the residence of individuals and companies that, to a great extent, accord with the OECD Model. These changes rep- resent a significant step forward towards aligning Colom- bian tax rules with international tax standards. Colombia has also decided to take steps to counter abuse by means of anti-abuse rules for tax purposes, which include thin capitalization rules, a general anti-abuse clause and a spe- cific fraus legis clause, and by making it possible for the gov- ernment to define tax havens and to effectively exchange information.

It is submitted that all of these changes are positive and that they should be introduced. However, Law 1607 still requires constitutional review. Further, regulations from the tax administration to implement the provisions of Law 1607 are expected. In the meantime, Colombia continues to negotiate and conclude tax treaties. The questions will then be whether the changes will have an effect on the tax treaties that are currently at an advanced stage of negotia- tion, for example, the Colombia-Netherlands Income Tax Treaty and whether Colombia will be willing to recom- mence negotiations in respect of the tax treaties that have not yet been signed or simply to make use of the amend- ments in future negotiations.

Third, it may be argued that the economic starting point is not determined by Colombia, but, rather, is imposed by the countries with which Colombia has concluded tax treaties,

i.e. Canada, Chile, Spain and Switzerland. The two issues in respect of which Colombia may have a strong position relate to (1) the construction PE clause, which, in contrast to the 12-month period in the OECD Model, is six months, as in the UN Model, and (2) the introduction of article 14 of the UN Model in respect of independent personal ser- vices. Examples of the strong position of other countries are treaty provisions that provide for a 0% withholding tax on dividends on substantial shareholdings (20% or 25%), an MFN-type provision in respect of interest and royalties, and the introduction of treaty anti-abuse clauses, such as LoB clauses and a main purpose test clause.

It is the author’ s opinion that the objective of the Colom- bian government should be to negotiate tax treaties that increase Colombia’ s revenue and not that only provide concessions. It is clear that tax treaties may vary depend- ing on the negotiations between two countries, but, in this case, it is submitted that Colombia must still clearly specify what concessions it can make to the other party and what domestic tax provisions Colombia must address to prevent abuse of tax treaties, tax evasion and tax avoidance. To date, the direction that Colombia has taken has been deter-

The International Tax Treaty Policy of Colombia

mined by the other contracting states, i.e. Canada, Chile, bia will apply in the future. Accordingly, further research Spain and Switzerland. These countries have more experi-

is recommended in respect of the domestic tax policy of ence in concluding tax treaties than Colombia, which only

Colombia and, more specifically, regarding the tax pro- started concluding tax treaties in 2005. The concern is that,

visions that must be addressed in tax treaties and on the once a tax treaty has been concluded, it will be difficult to

effect of tax treaties on investment in Colombia. amend it and, therefore, the conditions agreed by Colom-

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