If you are interested in understanding tax compliance in Colombia because you operate in the market or are planning to launch there, you will need to seek out reliable taxation advisory services to minimize your tax burden while ensuring full compliance with local regulations. Understanding value-added tax (VAT) and other local taxes in Colombia will be crucial to guaranteeing the success of your commercial venture in Latin America’s fourth-largest economy by gross domestic product (GDP).
Table of contents
- Local taxes in Colombia: how does VAT work?
- Local taxes in Colombia: VAT rates
- Difference between exempt and excluded goods or services
- Local taxes in Colombia: VAT refunds
- Other essential aspects of VAT in Colombia
- Local taxes in Colombia: VAT compliance duties
- VAT returns overview
- VAT withholding agents
- Local taxes in Colombia: territoriality of VAT
- VAT risks, penalties, and other aspects to consider
Local taxes in Colombia: how does VAT work?
As in most countries around the world, local taxes in Colombia include the imposition of VAT on the commercialization of goods or the rendering of services within its territory.
Known as impuesto al valor agregado (IVA) in Colombia, VAT is a national tax, imposed on local residents or on applicable entities or individuals located abroad, which must be paid by the final beneficiary of the good or service that generates the tax.
The general VAT rate in Colombia is 19 percent, however some products and services are taxed at a rate of 5 percent, while some goods are entirely exempt from the tax.
Local taxes in Colombia: VAT rates
General 19 percent VAT rate: In Colombia, most goods or services are taxed at a general rate of 19 percent unless specifically listed as an exception as ordered by Article 468 of Colombia’s National Tax Code.
Special 5 percent VAT rate: Article 468-1 of the National Tax Code lists a series of products taxed at a rate of 5 percent, which includes the likes of flowers, coffee, basic hygienic products, and machinery for agricultural use, among many others. It is important to consult article 468-1 before applying a 5 percent rate to ensure the products or services to be commercialized are included.
Exempt goods taxed at a 0 percent VAT rate: Article 476 of the National Tax Code lists the goods which are subject to VAT, but are currently liable at a zero rate, which includes medical and dentistry services, education services, and some transport and communication services, among many others listed.
The purpose of this special category is to allow the providers of the included goods and services to seek the return of the VAT paid for the goods and services required to provide the service.
Excluded goods which are not VAT liable: Article 424 of the National Tax Code describes the goods and services which are not liable for the tax at all and due to that situation the producers or providers of said goods or services will not be required to fulfill any VAT related duty, nor will be able to claim back the VAT paid during the production process if any. Many of the goods are foodstuffs, including meat and live animals destined for consumption.
Difference between exempt and excluded goods or services
Understanding the difference between exempt and excluded goods for VAT purposes is a key motive for seeking taxation advisory services. In general, the main characteristics for each are as follows:
- Exempt goods and services are taxed and generate full VAT duties for the providers, this includes the obligation to present a VAT return with the periodicity ordered according to specific taxpayer category. On the other hand, excluded goods or services are not taxed with VAT at all so providers will not have VAT duties at all.
- Exempt goods or services will allow for the provider to request the return of any VAT paid during the process. Meanwhile, excluded goods or services will not allow for the provider to ask for the paid VAT in return and instead said VAT will be a higher cost for tax purposes.
- In theory the final price for the consumer should be affected as exempt goods or services will have back the VAT paid for primary goods or services required for its formation or rendering, generating savings which should translate to a lower final price. For their part excluded goods must increase the final cost by including the paid VAT.
Local taxes in Colombia: VAT refunds
VAT refunds for exempted goods and services: Providers of exempted goods and services, and exporters of taxed goods and services can request from the National Tax Authority the return of VAT paid in the process of the production of goods or rendering of services through a brief administrative process.
The taxpayer will be returned amounts below approximately $10,000 (all figures in USD), or granted securities named TIDIS when requesting amounts above that threshold. TIDIS can be then used to pay other national taxes, or commercialized through the security markets to other taxpayers to be used to pay their taxes.
VAT refund for tourists: Tourists visiting Colombia can request the return of the VAT paid when acquiring the following goods:
- Leather goods
- CD´s and artistic goods
- Electronic goods
- Hardware store goods
Other non-listed goods may also be eligible for this VAT return, so for that reason it is advised to seek taxation advisory, especially when acquiring high-value goods.
VAT refund for the lower income people: A scheme aimed at lower income people in Colombia, allows a refund of up to $20 monthly for VAT paid for goods or services, applicable to any individual included in said income bracket.
Other essential aspects of VAT in Colombia
For understanding and processing taxes, they are commonly broken down into five characteristics, known as “essential aspects.” Those include, active subject, passive subject, taxable event, rate, and taxable base. The corresponding essential aspects of VAT are shown below:
- Active subject: the active subject is the entity in charge of levying the tax. In the case of VAT, as it is a national tax, the corresponding entity will be the National Tax Authority (Dirección de Impuestos y Aduanas Nacionales, or DIAN). The final beneficiary of VAT will be the National Government’s treasury.
- Passive subject: the passive subject is the person or entity which supports the financial burden of the tax. In the case of VAT, the passive subject is the final acquirer of the good or service, meaning the person that will enjoy for itself or for its designees the goods or services acquired.
- Taxable event: The taxable event for VAT in Colombia will be the commercialization of goods or services to be enjoyed within the national territory. This means that even if a provider is abroad, it may generate VAT responsibilities for itself or for the beneficiary party in Colombia.
- Rate: rates for VAT in Colombia, as stated in the corresponding section previously detailed, range from 19 percent to zero.
- Taxable base: The taxable base will be the final price of the good or service being commercialized without taxes.
Local taxes in Colombia: VAT compliance duties
Every corporation and individuals developing activities in Colombia with taxed goods or services and with a revenue above approximately $34,000 will have to fulfill VAT compliance duties, which include:
- Having a Tax ID number
- Keeping accounting books according to applicable standards
- Issuing an invoice for each transaction
- File a VAT return according to its particular characteristics, as described below
- Make withholdings if considered a VAT withholding agent, as described below
VAT returns overview
Any person or entity with VAT obligations must file a VAT return periodically, which can be every two or four months, depending on the entity type.
Every four months is the general period for most entities and individuals. However, it is every two months for providers of exempted goods or services regardless of their income, taxpayers with a revenue above approximately $900,000, and hand-picked taxpayers labeled by the National Tax Authority as “Large Taxpayers.”
Is to be noted that Colombia has a simplified taxation regime which substitutes income tax, VAT, and other local taxes for taxpayers that apply to the program and who have less than approximately $770,000 in total yearly revenue. It is worth noting that participants will have to file a VAT return once per year.
VAT withholding agents
VAT is mainly levied over withholdings and self-withholdings made by the designated agents listed by law in Article 437-2 of the National Tax Code, and including:
- The provider of the good or service, unless one of the parties is included in one of the next categories.
- National or public agencies and offices.
- Large taxpayers as designated by the National Tax Authority.
- Local entities or individuals responsible for VAT when acquiring taxed goods or services from foreign entities or individuals.
- Credit and debit card providers for the transactions of their affiliates.
- Credit and debit card providers for digital services rendered by a non-resident.
- Those VAT responsible when acquiring goods or services from taxpayers from the simplified taxation regime.
VAT Withholding agents will have additional duties, mainly related with the filing of a separate VAT withholding return.
Local taxes in Colombia: territoriality of VAT
Another common motive for seeking consultation on VAT and local taxes in Colombia is related to the territoriality of the tax. This is especially true for the rendering of services, as is not always clear where a service is being rendered or enjoyed for legal purposes.
Territoriality for the commercialization of goods: In general, physical goods located in Colombia at the moment of sale are taxed with VAT, including imported goods, will generate the tax at the moment of the introduction of the goods to the national territory. Meanwhile, goods acquired abroad to be enjoyed outside the national territory by Colombian residents will not generate the tax.
Territoriality in the rendering of services: The rule of thumb is that if the beneficiary of the service is located in Colombia, the service will be taxed with VAT regardless of the physical location of the provider. Nevertheless, it is important to analyze this on a case by case basis, especially for large transactions, as it is possible for a Colombian resident to be the beneficiary of a service abroad, or for a local provider to render the services abroad, thus not causing the tax in either situation.
VAT risks, penalties, and other aspects to consider
VAT related penalties will be imposed for failure to comply with relevant regulation. This includes not filing a return, filing late, or filing incorrectly. The National Tax Authority will investigate, process, and sanction any misconduct related to VAT.
It’s important to remember when dealing with VAT — and especially VAT withholding duties — that the amount collected for VAT purposes is the National Treasury money, thus making any misconduct more serious than with other amounts, with VAT withholding misconducts eligible for criminal prosecution.
Economic penalties regarding VAT are in essence limitless, as they will mainly be based upon the amount over which the infraction was committed.
Biz Latin Hub can help you manage local taxes in Colombia
Understanding the Colombian VAT system can be challenging without the help of an expert tax advisory. Our teams of taxation, legal, and accounting specialists at Biz Latin Hub are fully equipped to assist you in your commercial operations in the market, including with expert advice on local taxes in Colombia.
Contact us today so we can start to help you improve your tax compliance in Colombia and generate value for your operations from taxes.
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