I. General Agreement on Trade in Services (GATS)

The General Agreement on Trade in Services - GATS of the World Trade Organization - WTO, comprises four modes for the supply of services, namely:

1) Cross-border trade. From the territory of one member to the territory of any other Member.

2) Consumption abroad. In the territory of a member to a consumer of services of any other Member.

3) Commercial presence. By a service supplier of a member through commercial presence in the territory of any other Member.

4) Presence of natural persons. By a service supplier of a member through the presence of natural persons of a member in the territory of any other Member.

The GATS was inspired by the General Agreement on Tariffs and Trade-GATT, to the extent that several of the elements of the GATT are present in the GATS, as is the case of the principles of most-favored-nation treatment (MFN) and national treatment.

International trade in services has shown a notorious increase due to the new technologies that have emerged with the fourth industrial revolution, which have made rapid inroads in all spheres of the global socio-economic conglomerate, particularly due to the current COVID-19 pandemic, which has led to the migration of many activities to the virtual universe.

This growth of global services brings with it a series of challenges that are cross-cutting for their optimal development, such as the applicable legal framework, cybersecurity, direct and indirect taxes arising from transactions, among others.

The multiplicity of challenges present in cross-border services undoubtedly requires the confluence of supranational governing bodies in the various areas of global trade, in order to carry out holistic analyses to generate specific solutions for each area, but which, in turn, have the possibility of being connected as links in the same chain to which they belong.

In this context, the Twelfth Ministerial Conference of the WTO (WTO12) to be held from November 30 to December 3, 2021, in Geneva, Switzerland, will probably be the ideal scenario to delve deeper into the current and future challenges of international trade in services, and its conclusions will surely be key to the analyses being carried out by the other governing bodies in each of their disciplines of action.

II. VAT treatment applicable to exports of services in Colombia

The increasing dematerialization of business, supported by virtuality, allows that nowadays a service provider does not need to have a physical presence in the different territories where it operates.

This new reality poses structural challenges regarding the taxation associated with international services, where the traditional criteria of source, residence and permanent establishments must be reformulated, and the principle of destination taxation applied to indirect taxes, both issues on which the Organization for Economic Cooperation and Development (OECD) has been developing studies of the utmost relevance.) viene desarrollando estudios de la mayor relevancia.

In this opportunity, we will specifically address the VAT treatment of service exports from Colombia, based on the GATS cross-border trade mode, and in future publications we will refer to related aspects.

For this purpose, it is worth recalling what was stated in our previous column on electronic commerce in free trade zones, since Colombia has established a regulatory framework aimed at promoting exports of services with special emphasis on those with high added value. columna anterior sobre el comercio electrónico en las zonas francas, toda vez que Colombia ha establecido un marco normativo orientado a impulsar las exportaciones de servicios con especial énfasis en aquellos de alto valor agregado.

Within this regulatory framework, the Tax Statute contemplates a VAT exempt treatment in the rendering of services from Colombia, if the requirements established by law are met.

Specifically, literal c) of article 481 of the Tax Statute establishes that services rendered in the country and used exclusively abroad by companies or persons without business or activities in Colombia will be exempt from VAT with the right to a bimonthly refund.

The article in question was regulated by Decree 2223 of 2013, compiled in articles 2.10.2.6.11 and 2.10.2.6.12 of Decree 1080 of 2015, which deal with services in general, and refers to services directly related to film and television production and software development that are protected by copyright.

Within the regulation, the following are established as requirements for exports of services exempt from VAT:

1. To be registered as an exporter of services in the Single Tax Registry - RUT (Registro Único Tributario – Taxpayer Identification Number).

2. To keep the following documents:

a) Invoices or equivalent documents issued in accordance with the provisions of the Tax Statute and regulatory provisions.

b) At least one of the following three documents evidencing the export:

i. Commercial offer of services or quotation and its corresponding acceptance.

ii. Contract executed between the parties.

iii. Purchase order/service order or letter of intent and acknowledgement of receipt of the service.

c) Certification of the service provider or its legal representative, stating that the service was rendered to be used or consumed exclusively abroad and that such circumstance was notified to the importer of the service.

Regarding the requirement that the purchaser of the services does not have business or activities in Colombia, the regulation states that companies or persons without business or activities in Colombia are understood as those who, being residents abroad and notwithstanding having some type of economic link in the country, are direct beneficiaries of the services rendered in the national territory, to be used or consumed exclusively abroad.

Thus, in the case of exports of services between related parties, it is an indispensable requirement for the VAT exemption to apply, that the affiliate, subsidiary, branch, permanent establishment, representative office, head office or any other type of economic related party in the country, of the person or company resident or domiciled abroad that contracts the provision of services rendered from Colombia, does not receive any benefit from the contracted service.

The aforementioned is in line with the doctrine of the Colombian Tax Authority, which has referred to the subject on several occasions, stating:

"According to the above-mentioned Offices, the criterion of "economic linkage" is a limiting factor for the applicability of the tax benefits provided in paragraph c) of Article 481 of the Tax Statute when the beneficiary of the service is domiciled in Colombia or is economically linked to the person or company domiciled abroad that contracted the provision of services from Colombia." Oficio 905512 of October 1, 2020.

In the same direction, the Council of State, in its capacity as the highest Body of the Contentious Administrative Jurisdiction, has pronounced in its Judgment of September 25, 2019, filed 22861, C.P. Stella Jeannette Carvajal Basto, stating the following:

"The Chamber reiterates that, in accordance with the aforementioned rule, "the exemption for export of services shall not apply when whoever benefits from the service provided from Colombia is an economic related party, located in Colombia, of the contracting entity abroad. This formula restricts the possibility that the exemption covers services that, directly or indirectly, are used by the contracting party in the Colombian territory; but in no sense does the provision prevent that between the contracting party abroad and the service provider in Colombia there is an economic relationship".

Thus, according to the provisions of the aforementioned rules, we can conclude that the export of services exempt from VAT is configured if the service is provided in Colombia, its use is carried out exclusively abroad, by persons or companies that although they have related parties in the country, these do not benefit from the contracted service, and comply with the provisions of the regulations.

III. Exchange treatment applicable to exports of services in Colombia

The exchange regime in Colombia establishes in an exhaustive manner the operations that are considered of mandatory channeling those in which the obligated parties must resort to the exchange market to transfer or reintegrate the foreign currency derived from the operation.

Mandatory channeling operations do not include services; therefore, they belong to the free market.

Thus, in the case of exports of services, service providers in Colombia may receive payments in foreign currency from purchasers located abroad, directly in accounts opened in foreign financial entities.

Likewise, they may voluntarily resort to the foreign exchange market to monetize the foreign currency and transfer it to accounts opened in financial entities in Colombia.

IV. Conclusions

The various countries of the world, together with supranational organizations, have taken on the task of continually evaluating the effects of international trade in services.

As a result of these evaluations, considerations and consensual decisions, cross-border instruments on services have been issued, among which the WTO's GATS stands out.

International trade in services has been growing exponentially given the advances arising from the fourth industrial revolution and the ever-increasing virtual activities adopted during the current pandemic.

This growth brings with it challenges that must be addressed from a holistic perspective in order to build a global environment of legal certainty, tax neutrality, facilitation and promotion of new technologies.

In the specific case of Colombia, the National Government implemented a plan to promote exports of services that includes support programs for the business sector, special tax treatments, organization of international business fairs, among others.

At the tax level, specifically about VAT, the Colombian Tax Statute establishes the possibility of treating as exempt the provision of services to third party purchasers located abroad, provided that the provisions of the applicable regulations are complied with.

With respect to foreign exchange, the Colombian Regime places services as free market operations, which gives it broad flexibility in the management of foreign exchange from services exports.

As can be seen, international trade in services is advancing at a speed once unimaginable, which will increase more and more, as new technologies present realities that are perceived as fiction at present, and that will undoubtedly lead to the need to reformulate the traditional approaches that have governed its various areas so far.

Best regards.

Erwin