The Newest Tax Bill in Colombia. 24 Reforms since 1998.
By Monica Reyes
Posted: 26th November 2018 11:46The new Colombian government is facing a problem: While Ivan Duque Marquez, the President, promised throughout his political campaign to reduce income taxes imposed on the corporate sector, his Finance Minister is dealing with a tax deficit that has caused the first diminishment in the credit rating of the country in 15 years.
The Finance Minister has been clear that the tax deficit must be reduced to 2.4% of the gross domestic product from the present 3.3% of the GDP. The Minister accepts that taxes on the corporate sector are very high and that the current tax burden affects national growth, but insists that individuals should be taxed on a wider basis and that Value Added Tax (at present applying at a 19% rate), must be extended to additional goods and services with specific exemptions and refunds for the poorest sectors.
While the Government is still dealing with the Tax Bill to be filed before Congress, another political party – which suffered a dramatic defeat at the recent Presidential elections – has used the programs it proposed in campaign to lead most of the changes in Congress. Cambio Radical turned the shameful outcome in the Presidential elections into an unexpected victory in Congress where it positioned the representatives of the party in all the commissions dealing with the main subjects in the 2018 legal agenda. With regards to taxes, Cambio Radical managed to file its proposal ahead of the Governments’. This means that any other proposal by the Government will have to be accumulated to the initial project and discussed simultaneously. The Tax Bill that has been filed in Congress includes the following measures:
Control on tax evasion and contraband: Cambio Radical agrees that the final purpose of the New Tax Bill must be to increase revenue collection from sectors that have remained informal and do not contribute to the public revenues, by fighting evasion and contraband while abolishing preferential treatments and unjustified tax incentives.The goal would be to reduce tax evasion from 40% to 20% in the following four years by implementing one million tax audits annually from 2019 to 2022 on sectors that traditionally have been eluding taxation.
Reduction Corporate Rate: The corporate income tax rate would be reduced to 30%.
Taxation Exempt Sectors: Hotel, touristic and agricultural activities traditionally covered by tax incentives would be subject to a 10% income tax rate for the following 30 years.
Exclusion Foreign Portfolio Investments: The Tax Bill proposes a total exclusion from income tax for foreign portfolio investment by non-resident investors who are currently subject to a 14% income tax rate.
Total deductibility of costs and expenses: The abolishment of any restrictions regarding the deduction of other taxes and levies from income tax, and the exclusion from the restrictions applying on thin capitalization rules of all loan transactions taking place locally between related entities located in Colombia, are also included.
Current thin capitalization rules in Colombia have a very wide scope and apply without any technical support on all types of loans generating interest payments, including loans from independent financial entities operating locally or abroad.
Abolishment of income tax withholding on dividends: While withholding taxes on dividends has been implemented very recently, as of 1 January 2017, the Tax Bill contemplates the exclusion from income tax for any distribution of profits. It reinstates the provisions established in the Colombian Tax Code in force before the last Tax Reform which contemplated the exclusion from taxes of profits that had already been taxed at the company level, and additional measures that purport for the abolishment of double taxation on distributions abroad that are subsequently sent back to Colombia.
Exclusion from income tax of profits from the sale of stock in the Stock Market and of distributions to shareholders deriving thereof: This incentive is in place and is extended to distributions by investment companies to its shareholders.
Incentives referring to tax deductions: Tax deduction of depreciation expenses for taxpayers that are not required to keep accounting books.Two-year depreciation allowance for new investments in capital goods (machinery and equipment).
Restriction of Income Tax Exemptions: Abolishment of all income tax exemptions, except for exemptions from labour earnings and exemptions with a fixed duration, to avoid violating acquired rights.
Provisions on deductions for losses: The Tax Bill contemplates the reestablishment of the possibility that companies had to carry-forward losses indefinitely.It includes the possibility for individuals to compensate losses with future earnings of the same nature, which does not exist at present.
Abolishment of the minimum income tax: The Tax Reform project provides for the elimination of the Minimum Alternate Tax System (Sistema de Renta Presuntiva).
Income Tax Credit for Industry and Commerce Tax: Industry and Commerce tax is a municipal tax applying on gross earnings from industrial commercial and services activities. The income tax credit is established to exclude the Industry and Commerce Tax (Impuesto de Industria y Comercio) from adding up to tax burden of the taxpayers.
Changes to the Bank Debit Tax: The Tax Bill proposes that the Bank Debit Tax (Gravamen a las Transacciones Financieras), currently applicable at 0.4% on any transfers from bank accounts, is transformed into an income tax withholding for companies, which would have a right to credit any Bank Debit Taxes paid throughout the year against the final income tax liability.
Exclusion from tax for the inflationary component of interest and financial yield: The inflationary component of interest is partially excluded from tax at present. The Tax Bill extends the exclusion to 100% of the inflationary component and proposes that the distribution of such component to shareholders is also excluded from income tax on dividends.
100% Value Added Tax credit for VAT paid on the purchase of capital goods: The taxpayer may opt between applying an income tax credit or a credit from VAT for taxes paid on the purchase of capital goods.
Abolishment of other income tax credits: The Tax Bill eliminates all current tax credits with the exception of credits for taxes paid abroad on foreign source income, credits for donations and the aforementioned VAT credit for the purchase of capital goods. It replaces the former incentives with the possibility of crediting Industry and Commerce and Bank Debit taxes.
Changes to the current structure of the Colombian Tax Administration: The Tax Bill proposes that the entity in charge of the official interpretation of tax regulations operates independently.
Proportionality of penalties: The draft project proposes that penalties are not statutorily graduated, but that the tax authorities are empowered to determine the value of each penalty to preserve the proportionality between any damage incurred by the Tax System from the specific tax infraction and the respective sanction.
Tax Refunds: The Tax Bill contemplates the automatic refund of tax balances in favour of the taxpayer within six months following the filing of the tax return that generates the credit balance.
The Governments’ Tax Bill will be filed before year end. It will be interesting to see which of the two prevails and which of the promoters has the strongest political muscle.We will keep you informed.