Article published on February 5th at bloombergtax.com
Autor: Juan Esteban Sanín Gómez
Colombia’s Congress enacted the country’s latest tax reform (Law 2010/2019) on December 27, 2019. This reform, which had not been planned to take place in 2019, was rushed through the legislative bodies in the later months of the year, given that the Constitutional Court had declared the 2018 tax reform as unconstitutional, due to procedural errors in its transit through Congress.
Initially, the government’s aim was to replicate the 2018 tax reform, but several amendments were made in Congress as a result of political agreements.
This article highlights the most relevant aspects of Colombia’s tax reform, focusing mainly on direct taxation issues.
Corporate Income Tax
Corporations were the taxpayers who benefited most in the latest tax reform, as the government acknowledges the importance of companies as the main employers and providers of social prosperity in the country. In this context (and continuing the policies set out in the previous tax reform), the tax rate for corporations was gradually reduced from 33% for 2018, to 32% in 2020, 31% in 2021, and finally to 30% 2022 and onward.
In addition, an accelerated termination of the alternative presumptive income taxation system (by which individuals and corporations are deemed to have had a minimum income in accordance with the value of the equity they possess) was approved, reducing the base for 2020 to 0.5% (from 1.5% in the previous reform) and to 0% from 2021 onward.
Tax exemptions granted by the 2018 tax reform for creative industries and for investment in the agriculture and hotels and tourism industries were confirmed and extended. Incorporating a company to undertake activities in certain creative industries (which was extended to sports, leisure and recreational activities), once the government approves the proposed project and the relevant conditions are met (mainly hiring a minimum number of workers and having a minimum investment), is eligible for a seven-year income tax exemption, and in the case of agricultural investments, a 10-year income tax exemption.
The latest tax reform also indicated that companies incorporated for the purpose of investing in agriculture need not have their principal place of business in the areas where the agricultural investments were made, therefore allowing them to incorporate in major business centers, regardless of whether they have a presence in these areas.
For the hotel and tourism industries, the 9% tax rate for 20 years was maintained for hotels constructed in municipalities with less than 200,000 inhabitants, and a 10-year benefit was granted to those constructed in municipalities with a population larger than that. As stated by the Constitutional Court in a recent decision, companies that had opted for a 30-year tax exemption in the past will maintain that benefit but their shareholders will receive a taxable dividend.
An amendment to the “mega-investment” regime, by which projects whose investments reach approximately $323 million benefit from a favorable tax rate (27%), no dividend tax or presumptive income tax and fiscal stability, was extended to projects undertaken in free trade zones as well as to the emerging technologies sector (in which the direct employment requirement was reduced from 400 new jobs to 250).
The tax reform also extended the regional tax exemption regime applicable to the areas adjacent to the Venezuelan border and the capital cities with a higher rate of unemployment (called the Special Economic and Social Area exemption—ZESE) to the health and tourism sectors, thereby invigorating investment in such sectors.
The tax reform confirmed and adjusted the creation of an equity tax for the years 2020 and 2021. This tax is triggered by the possession of a net fiscal equity equivalent to 5 billion Colombian pesos ($1.5 million) held by individuals, foreign entities or corporations, and permanent establishments of the latter. The applicable rate to this tax is 1% over the net fiscal equity determined on January 1, 2020 and january 1, 2021. From the taxable base, taxpayers can exclude 50% of the value of the disclosed assets (see “Asset Disclosure Tax” below) that have been effectively repatriated to Colombia and permanently invested in the country. Finally, 75% of the collected funds will be allocated to finance investment in the agricultural sector.
Considerable changes to dividend taxation were made by the tax reform. These include:
- a reduction (as discussed below) of the dividend tax rate for individuals (from a maximum rate of 15% to a maximum rate of 10%);
- an exemption (existing in the past budget law) of withholding taxes on non-taxable dividends distributed to parent companies that have registered their control situation with the chambers of commerce;
- an increase (from 7.5% to 10%) on the tax rate on dividends payable to nonresident individuals, companies or entities, as well as permanent establishments of nonresident individuals or entities.
Individual Income Taxation
Positive adjustments for individual taxation were made in the tax reform. These changes include:
- a substantive reduction of the dividend tax rate (from a maximum rate of 15% to a maximum rate of 10%) on dividends that have been subject to tax on the distributing company and whose distribution has been approved to take place from 2020 and onward;
- a clarification on the taxing of payable life insurance policies, so that 10% capital gains tax will only be levied on payments that surpass a threshold of approximately $130,000;
- a clarification was made—because of recent decisions adopted by the Constitutional Court— on the right of individuals to deduct, in the general tax bracket for individuals, costs and expenses related to their professional services related income;
- a reduction of withholding tax on labor income was approved;
- the tax benefits (special premiums for foreign living expenses) for diplomats that depend on the country’s chancellery were extended to Colombian diplomats rendering their services overseas that depend on other government agencies;
- a revival of a substantive tax benefit that exempted from taxation the inflation component on financial products;
- a gradual reduction (from 2020 to 2022) of the monthly social security contributions from pensioners was approved, in order to improve their financial situation;
- a tax benefit consisting of deducting the interest paid on student loans made by the government student loan agency was introduced; and
- a special provision for High Court judges and prosecutors, that allows them to take the equivalent of 50% of their salary as tax exempt representation expenses (for ordinary judges this percentage amounts to 25% of their salary).
Asset Disclosure Tax
The tax reform extended for an additional year the tax amnesty in effect for the last four years and which aims to tax residents’ non-declared assets (either in Colombia or abroad) and/or non-existent financial liabilities, in existence on January 1, 2020 (and payable on September 25, 2020). These will be taxable at 15%, a slight increase from the tax rate of previous years.
Simplified Taxation Regime
The latest tax reform confirmed the existence of the Simplified Taxation Regime (STR) created by the 2018 tax reform, introducing only minor adjustments. This is a voluntary tax model aimed at simplifying compliance for small and medium-sized enterprises, by substituting income tax, consumption taxes and municipal industry and commerce taxes, and integrating employers’ contributions to the pension system, by means of a tax credit. This tax, applicable to corporations and individuals that meet certain conditions, has a favorable rate depending on the gross income bracket and on the taxpayer’s activity, and is levied over its gross income.
This regime was challenged before the Constitutional Court for violation of territorial autonomy, because of the municipality right to tax individuals with industry and commerce taxes. By decision C-368/19, the Court abstained from rendering a decision on the merits of the case, because the Court considered that the lawsuit did not meet the formal requirements.
The adjustments made by the latest tax reform include an increase in tax rates (the highest tax rate applicable being 14.5% for professional, consulting and scientific services, as opposed to a maximum alternative tax rate of 32% for corporations and 39% for high net worth individuals) and the obligation for taxpayers subject to this regime to adopt an electronic invoicing system within two months following their adoption of this model.
Annual Foreign Asset Disclosure Form
Several changes regarding the obligation to present this form were made in the last tax reform. Only foreign assets with a fiscal value of around $22,000 are to be disclosed in the form. A relief for extemporaneous compliance is also set out, by which sanctions that were calculated as a percentage of the value of the non-disclosed assets are substantially reduced.
Tax Procedural Amendments
On procedural issues, several adjustments were made by the latest tax reform, mainly to clarify and to make new regulations consistent with the pre-existing tax regulations. To this end, a three-year period for amending tax forms was introduced (previously it was two years) in order to harmonize with the three-year general statute of limitations period. Also, a clarification was introduced so that taxpayers with fiscal losses, or subject to transfer pricing regimens, were subject to a five-year exceptional statute of limitations period.
The “auditing benefit” (i.e. an expedited six-month statute of limitations for taxpayers who increase their taxes at least 30% in relation to the previous year) was confirmed by the tax reform for the years 2020 and 2021. If the increase amounts to 20%, the statute of limitations will be 12 months. Also, an extension of the settlement facilities for ongoing judicial tax disputes, in which taxpayers can reduce penalties and accrued interest, was determined.
Lastly, in compliance with a recent decision issued by the Constitutional Court (that provided an overall definition of the word “law” as a complete body of rules, regulations and legal concepts), the latest tax reform stated that, even though opinions issued by the tax authorities were only binding on tax inspectors, taxpayers could structure their defense based on the law.
Amendments to Indirect Taxation (VAT and Consumption Taxes)
Most amendments to VAT and consumption taxes benefit taxpayers by reducing taxes on assets or activities which are key for governments purposes, such as reducing inequality, enhancing commerce, improving mobility in cities, and improving the environment. In this context, the purchase of goods such as bicycles and skates (electrical and mechanical), as well as electric scooters with a value of less than $540, was made exempt from VAT. If the value is higher than $540, a 5% VAT will be applicable in lieu of a general 19% VAT rate.
A three-day tax holiday was also created on strategic dates of the year (before Christmas, before starting school and at mid-year) during which VAT will not be applicable on certain items such as home appliances, sporting goods, toys, clothes, schoolbooks and other related items. A system to compensate or return VAT to the most impoverished sector of the population was structured.
As regards consumption tax, the most relevant change was the elimination of this tax on the transfer of immovable property. This tax had proven not to be efficient and was detrimental for the construction and realty sectors, and on December 5, 2019, was also declared unconstitutional by the Constitutional Court because it triggered the fairness and justice principles of taxation.
Additionally, the tax reform stated that the funds collected by the consumption tax on medical cannabis would be allocated for eliminating illegal plantations in Colombia.
The tax reform created several new taxes and contributions which lack the minimum conditions for them to be considered as constitutional. A tax on the premerger notification and merger review process before the antitrust authority was created. A tax was presented as a “consideration” for the commercial use of beaches and seaside properties. Another partially retroactive tax was levied for airport concessions and public/private partnerships that have executed (or that execute) construction contracts for building, maintaining or rehabilitating state-owned airports.
Also, a three basic point surcharge on income tax has been applied to financial institutions, increasing their level of taxation in comparison to other taxpayers. This surcharge has been challenged by the author before the Colombian Constitutional Court and a judicial decision is anticipated soon.
The tourism tax for social investment, which was triggered by foreigners entering the country, was amended in that it will not only be applicable to the actual entry to the country but also to the purchase of airplane tickets made outside of Colombia. A flat rate of $15 was established for this tax.
Lastly, a tax of $1 on exiting the country by air travel was modified to be applicable not only to foreigners but also to Colombian citizens. It is also stated that the collection of this tax is to be made by the Colombian Family Welfare Institute and the proceeds will be allocated for programs to prevent the sexual exploitation of minors.
A new definition of “beneficial owner” was introduced, in which any individual that possesses, controls or benefits (directly or indirectly) from a corporation or structure, and that meets certain criteria (such as possessing more than 5% of the voting capital or being entitled to more than 5% of the assets, profits or interest of the structure, among others) is considered as such. Also, a public registry of beneficial owners, to be administered by the tax authorities, was created.
An amendment to the crime of tax fraud was implemented, to the effect that it does not require criminal or malicious intent in order to exist. However, negligent misconduct in these types of crimes is not punishable by Colombian criminal law, so discussions as to its application may arise. A change was also introduced to allow the cessation of criminal action whenever tax declarations have been corrected and full payment has been made, regardless of the sum owed.
Final Thoughts and Conclusions
The tax reform, that aimed to confirm the 2018 tax reform, and incorporated as permanent several temporary benefits included in the 2019 budget law, is a clear example of how to use fiscal policies in order to turn around economic results in a country.
In the midst of a complex continent, marked by social protests, economic instability and political uncertainty, Colombia has risen and has been identified by Ernst & Young as the second most attractive country in which to invest, surpassing countries such as Canada, Germany and the U.K. While economic growth in the region was negative or lower than 1%, Colombia had 3.3% growth in 2019 (compared to 2.6% in 2018 and 1.4% in 2017). This increase in growth comes from a stimulus to the economy by the government, by implementing tax incentives that generate massive labor recruitment, and hence more family expenditure.
Centro de Estudios Empresariales ISB
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