The Colombian government has recently submitted a new tax reform to the Congress of Colombia that is intended to help it raise funds in support of economic reactivation following the disruptions of the global pandemic. The new Colombia tax reform seeks to raise approximately $15.2 billion (all figures in USD), both by increasing taxation and by clamping down on tax evasion.
A previous iteration of the reform sparked widespread public protests, forcing the government to redesign the legislation into its current form, which sees less of the financial burden fall upon individual taxpayers and more affecting companies.
While the tax reform is still subject to modifications, having to pass through both houses of Congress before being enacted into law, the ruling Democratic Centre party leads coalitions with majorities in both the Chamber of Representatives and the Senate, meaning it is unlikely that profound changes will be sought before the legislation is passed.
The reform introduces a range of measures to stimulate job creation, as well as encouraging consumption by establishing three “VAT free days” each year for a wide range of consumer goods. However, for investors the most significant changes will be those related to taxes and dealing with foreign assets.
Below, four aspects of the Colombia tax reform that are most relevant to investors are highlighted. Though, if you already know you need support from an accounting firm in Colombia, or any other back-office service, go ahead and contact us now.
Colombia tax reform: 4 key changes to consider
Among the measures established in the new Colombia tax reform are a rise in corporation tax, a so-called normalization tax intended to overcome underreporting of foreign assets, a change in the definition of a beneficial owner for tax purposes, and measures to prevent tax evasion. Below each is considered:
- Corporate income tax rises, remains lower than 2017 level
From 2022, corporate income tax (CIT) will rise to 35%, where it currently sits at 32%, with larger financial institutions subject to an additional 3% surcharge between 2022 and 2025, taking their CIT burden up to 38% during those four years.
However, that is still lower than it has been in recent years, with CIT set at 40% as recently as 2017.
Under the new Colombia tax reform, the opportunity to reduce CIT by discounting 100% of industry and commerce tax (ICA) payments is watered down, with only 50% of ICA paid now discountable from CIT burden.
Meanwhile, withholding tax will be slashed to 0% in 2022, from its current rate of 5%, for foreign portfolio investments in public or private fixed income securities or financial derivatives over fixed income securities.
- Normalization tax seeks to expose undervalued assets
From 2022, a normalization tax is introduced to allow more accurate reporting among taxpayers who have previously under-reported foreign assets or over-reported liabilities to increase relief.
From January 1, 2022, this measure will see the elimination of structures employed to reduce taxes via transfer to entities or vehicles with lower cost basis, with the applicable tax base calculated based on underlying assets.
Meanwhile, the tax basis for non-existent liabilities will be its tax value or the values reported in the most recent income tax return. The applicable rate for this normalization tax will be 17%.
Taxpayers who have previously under-reported assets or over-reported liabilities, will be given the opportunity to update their assets and liabilities, with the additional taxable base subject to the abovementioned rate.
In the event that assets are repatriated and invested in Colombia, that tax base will be cut to 50% of the omitted amounts.
- Beneficial owner definition tightens
The new Colombia tax reform establishes a new definition of beneficial owner that is applicable for all tax purposes, setting forth requirements for individuals to be deemed as the beneficial owner of both legal entities and special vehicles (such as trusts).
Under the new definition, based on recommendations issued by the Financial Action Task Force (FATF), the beneficial owner must be the final or real beneficiary of a given entity. If no individual is identified as participating in the share capital or having control of the entity, a legal representative must be named.
A process of Registration of Beneficial Owner (RUB) will be established and overseen by the Colombian tax authority, DIAN.
Failure to comply with this registration process, or failure to do so correctly, will result in potentially hefty penalties established under Article 658-3 of Colombia’s Tax Code.
- New mechanisms introducted to combat tax evasion
In an effort to combat tax evasion, a number of measures are being introduced as part of the new Colombia tax reform. Those include the mandatory use of a DIAN-managed georeferencing system by Public Notaries in order to accurately determine the commercial value of real estate.
The reform also provides the DIAN with the opportunity to register individuals who are — based on available information received from specified government registries — subject to tax obligations.
It also establishes an enforceable billing system that stipulates certain documents that taxpayers are obliged to submit, while requiring the validation of the DIAN for the recognition of e-invoices.
The Colombia tax reform also establishes a process by which the DIAN can pursue outstanding taxes, as well as a process by which taxpayers can dispute perceived errors in the DIAN’s calculations, as well as a penalty system for non-compliance.
Biz Latin Hub can help you doing business in Colombia
At Biz Latin Hub, we have the people and expertise needed to make sure your market entry and ongoing operations run smoothly in Colombia, or any of the other 17 markets around Latin America and the Caribbean where we have teams in place. With our comprehensive portfolio of back-office solutions, including accounting & taxation, company formation, legal services, and tax advisory, we can be your single point of contact for doing business in the Americas and beyond.
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