Crucial Court Ruling Could Lead to Higher Taxes for Mining and Oil Firms in Colombia

Colombia’s highest court for administrative matters has issued a ruling that could force oil and mining companies in the country to pay millions more dollars in income tax next year. Currently, however, various stakeholders in the nation continue to have differing interpretations on the ruling’s actual impact.

In October, the State Council or Consejo de Estado, struck down a decree that said all oil and mining companies working in the country can deduct royalties from their taxable income.

The recent decision by the State Council says that it was illegal for DIAN to allow every company in the country to deduct royalties by decree.

The decree, issued in 2005 by Colombian tax agency DIAN, had been issued with the aim of promoting investment and creating a level playing field between private firms and Colombia’s state-controlled oil company Ecopetrol.

But in 2013, a group of academics and leftist senators, including current presidential candidate Jorge Robledo, challenged DIAN’s decree on royalties in Colombian courts, saying that companies were benefiting from a “legal loophole” that was costing the Colombian state massive amounts of money.

According to Alvaro Pardo, an economist who backed the lawsuit, the Colombian state was losing around $1.2 billion per year by allowing oil and mining companies to deduct royalties from their taxable income.

The recent decision by the State Council says that it was illegal for DIAN to allow every company in the country to deduct royalties by decree. The court ordered the taxation agency to work with each company and decide on a case-by-case basis whether they could deduct royalties from their taxable income.

Colombia’s National Oil Association (ACP) a trade group, argues that while the court’s ruling eliminates the DIAN decree on royalties, it does not touch a crucial article of Colombia’s tax code that could still enable companies to deduct royalties.

Nohora Celedon, a spokeswoman for ACP, told Finance Colombia that Article 107 of Colombia’s tax code enables companies to deduct “obligatory costs” from their taxable income. Celedon believes that this part of the law applies to royalties, because they are a cost that companies are forced to pay when they do business in Colombia.

“You would have to make a very strange legal argument to deny a company that pays royalties the chance to deduct those costs from their (annual) income,” Celedon told Finance Colombia. “I think the norm (on deductions) is very clear, and it fits companies paying royalties like a glove.”

Colombia’s National Oil Association, meanwhile, is maintaining its argument that Article 107 of the tax code will still enable companies to deduct royalties.

But as often happens in Colombia, this is a legal issue that is open for debate.

Guillermo Rudas, a prominent economics professor who backed the lawsuit, wrote recently that royalties cannot be counted as “costs.” Rudas argues that royalties should be defined as the income the state gets from participating in a joint oil or mining venture, as it shares its underground resources with companies.

“The royalties are the earnings that the state gets (from a joint venture) after it supplies its natural capital,” Rudas wrote in a recent article for Razon Publice.“Therefore royalties are not a cost for a mining and oil firm, as DIAN’s decree had erroneously argued 12 years ago.”

Rudas told El Espectador that the State Council’s ruling, as it stands, does not give the Colombian government the power to charge companies retroactively for money that was “lost” as royalties were deducted from taxable income. But he hopes that Colombia’s Comptroller General takes action on the matter.

Colombia’s National Oil Association, meanwhile, is maintaining its argument that Article 107 of the tax code will still enable companies to deduct royalties.

“Royalties are a resource that belongs to the state,” the ACP said in a statement. “It wouldn’t make sense for companies to pay taxes on a product that does not belong to them.”

Oil companies operating in Colombia give up anywhere from 8% to 25% of their yearly production in royalties, while mining firms are on a scale that varies according to their product and how much its price changes in international markets.

ACP says oil companies have paid the Colombian state more than $200 billion in royalties, taxes and drilling rights over the past 10 years.