On September 8, lawmakers in Colombia passed a new tax reform intended to raise $4 billion annually in an effort to help overcome economic turmoil caused by the global pandemic.
The Colombia tax reform represented a revision of an earlier reform that sought to raise $6.5 billion, and which caused widespread public protests until finally being withdrawn in April (all figures in USD).
The revised Colombia tax reform reportedly included 80 revisions from the original version, and passed through both houses of the Colombian legislature in lightning speed, after senators and representatives were called to vote on the bill at 4pm the day beforehand.
The opposition boycotted the vote, saying that not enough time had been allowed to study the new bill thoroughly, however the governing coalition led by President Ivan Duque’s Democratic Centre party had enough votes to push it through.
The new Colombia tax reform is an expansive document running to 180 pages, however below some of the key takeaways for business and investors are considered.
The Colombia tax reform at a glance
While one of the most striking — and concerning — elements of the Colombia tax reform for businesses and investors is a 4% hike in the corporate income tax (CIT) rate to 35%, a range of other notable provisions are included.
They include a more streamlined tax declaration system, as well as measures to encourage taxpayers to declare overseas assets and repatriate them to Colombia.
Additionally, the legislation entails more extensive requirements for identifying the final beneficiaries of tax paying entities.
The Colombia tax reform also includes provisions to encourage youth employment via wage subsidies.
Meanwhile, in an effort to encourage uptake of the new law, it also establishes some significant incentives to comply with its provisions, including the massive reduction of interests and penalties for those who act swiftly.
A deeper look at the Colombia tax reform
Changes to taxes
On top of the general CIT hike, the new Colombia tax reform adds an additional 3% to financial sector companies between 2022 to 2025, meaning such entities will pay 38% in CIT.
As well as that, the 50% reduction in Industry and Commerce tax (ICA) currently enjoyed by foreign entities based in the country will be slashed in half — rather than being eradicated as set out in the original reform bill.
With regards to the calculation of CIT, a system of automatically calculating a company’s burden will be introduced as of the current fiscal year (which runs from January 1 to December 31), based on invoicing reported by the company and information gathered from third parties.
This should significantly reduce the work involved in declaring taxes, with taxpayers previously having to prepare their returns from scratch.
With regards to value-added tax (VAT), that will remain the same for both individuals and companies, while the government will continue to declare three VAT-free days per year for a wide range of individual consumer goods — an initiative that has previously been implemented and proven to be wildly popular with the general public.
Incentives and support
The Colombia tax reform introduces a new incentive to hire employees under the age of 28 years old, essentially subsidising between 10% and 25% of an eligible employee’s payroll. Certain positions, such as directorships, are excluded from this provision.
In practice, the higher figure will amount to covering social security contributions for that employee. There will also be tax incentives for hiring female heads of households.
Meanwhile, a program to help companies deal with the turmoil of the pandemic by offering 25% subsidies on a portion of salaries equivalent to the minimum wage (which is approximately $237 per month in 2021) is extended under the new reform.
Income generated in certain creative industries, as well as the agro-industrial sector and hotels and parks industries, will also be subject to additional incentives and tax reductions.
Assets and compliance
The definition of the final beneficiary of company profits is made significantly more precise by the new Colombia tax reform, so that rather than naming direct and indirect controllers, it will now be necessary to name an individual who is responsible for meeting tax obligations.
Where a structure does not have one individual beneficiary, the directing committee, legal representative, or board of directors will be held responsible.
Colombia taxes its residents on overseas assets and global sources of revenue, and the new tax reform establishes a scheme to normalize unregistered overseas assets.
That will see taxpayers avoid penalties for past failure to declare them, and will pay a rate of 17% on those assets. Where those assets are brought back to the country, the rate is halved to 8.5%.
A similar amnesty is declared on non-existent registered passives — effectively allowing taxpayers to admit past efforts to reduce their tax burden through the declaration of phony passives without fear of penalty.
Moreover, outstanding penalties and interest due to tax authorities can be reduced by 80% if they are settled by the end of the current fiscal year, on 31 December 2021.In the event a taxpayer is unable to meet that obligation, they will be able to negotiate a payment plan and be eligible for reductions that could still reach 80%.
Meanwhile, another provision of the Colombia tax reform is the ability for tax authorities to negotiate mutual agreement in order to avoid a disputed tax determination process going to court.
Notably, for 2022 and 2023, if companies file tax returns that see them pay at least 35% more in CIT compared to 2021, the statute of limitations for tax authorities to dispute those declarations will be reduced from seven years to just six months — vastly reducing the likelihood of a company being audited.
Biz Latin Hub can assist you in Colombia
At Biz Latin Hub, our bilingual team of accounting & taxation experts is on hand to help you understand what the new Colombia tax reform means for your business and help you take advantage of every new benefit it introduces.
As well as tax advisory, we offer a comprehensive portfolio of back-office services, that also includes company formation, visa processing, hiring & PEO, due diligence, and legal services, meaning we can provide a tailored package of integrated services to meet your individual needs.
Contact us now to discuss how we can support you doing business in Colombia, or any of the other 17 markets around Latin America and the Caribbean where we have teams in place and offer our services.
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