Tax and Accounting Requirements in Colombia: When a company considers moving into a new market, one key factor to consider in the decision-making process is Colombia’s accounting tax. Factors such as corporation tax rate, value added tax (VAT) rates, and double taxation relief must all be taken into account. Additionally, it is important to understand the country’s financial reporting framework: Is a local accounting standard applied or are International Financial Reporting (IFRS) permitted?
This article provides an overview of the taxation and accounting regulations in Colombia. The type of company created in Colombia may give rise to different tax treatments, the frequency of tax declarations, pension and health contributions required.
Corporate Tax and Accounting Requirements in Colombia:
For most people, the first thing that comes to mind when you think of accountants is taxes. Whether you are an individual living in Colombia or an executive who is managing a multinational, you need to understand Colombian tax law to protect your interests.
Accounting Standards – NIFF / IFRS in Colombia
You will need full compliance with International Financial Reporting Standards (IFRS), also referred to as Normas Internacionales de Información Financiera (NIFF). If you are using an accountant in Colombia ask if they are certified in this process. Be sure to take these steps seriously because fines will be up to $200 USD minimum salaries (a minimum salary is about $220 USD). That comes out to close to $45,000 USD for maximum fines, and that’s considering the high price of the US dollar.
Doing Business in Colombia – Double taxation
Double taxation Is not permitted under Colombian law. Colombian tax deductions and calculations are very different from other countries. The debate on allowing US deductions for money earned in the USA is interpreted differently by various Colombian accounting and legal firms. Each person and company have a unique set of circumstances which should be studied by a professional before drawing any conclusions. In some situations, the difference of percentages of taxes not paid in one country must be paid in another country.
If you are running a corporation in Colombia, you will be required to file tax reports on a monthly basis (once you create your first bill). From cash flow reports to monthly, quarterly, and annual reports you don’t want to fall behind. Payroll (Nominal) requires monthly reports issued to employees receiving benefits to stay compliant. Minimum filing requirements are quarterly for inactive companies or companies which are still in a start-up phase. Missing filings result in heavy fines imposed by the DIAN.
In Colombia, it is very important to pay employees with benefits. This is true whether you hire a maid or someone referred to you by a friend who works on an hourly basis. A Colombian worker will expect you to pay their liquidation upon terminating the working relationship.(Mondaq.com, 2017)
Reporting Requirements in Colombia
The Superintendency of Corporations, the Superintendency of Securities, the Superintendency of Banks, the Tax and Customs Administration, and other Colombian government agencies issue rules and statements on accounting principles.Colombian generally accepted accounting principles (GAAP) are contained in decrees. GAAP must be followed when financial statements are produced for any entity involved in income-producing activities in Colombia. These financial statements are expected to give a true and accurate view of the financial status of the entity, irrespective of tax requirements.
Colombian generally accepted accounting principles (GAAP) are contained in decrees. GAAP must be followed when financial statements are produced for any entity involved in income-producing activities in Colombia. These financial statements are expected to give a true and accurate view of the financial status of the entity, irrespective of tax requirements.
Also, standard formats must be complied with when recording any operation, according to the Unique Plan of Accounts (Plan Unico de Cuentas).
Under Colombian corporate laws, accounting records have to be maintained in Colombian pesos and in Spanish. Face values of nonmonetary assets, non-monetary liabilities, and net worth also must be adjusted for inflation and devaluation, using the percentage of adjustment for the fiscal year, a variation of the Consumer Price Index.
Joint stock corporations that list their shares on the stock exchange or issue liabilities, as well as all business entities that operate in the financial sector, must publish their annual financial statements in a local newspaper. (Medellin Living, 2017)
Accounting Principles and Standards in Colombia
It is not unusual for Colombian subsidiaries and branches to issue two sets of financial statements. The first set of financial statements is for Colombian shareholders and local legal purposes, prepared in accordance with Colombian GAAP. The second set of financial statements is prepared in accordance with the accounting principles generally accepted in the headquarters’ country.
Separate financial statements do not need to be filed for corporate income tax purposes. Financial statement adjustments used to arrive at the taxable profit (net income before tax) are listed in a tax computation schedule. Financial statements must be prepared once a year for tax purposes. Shareholders are free to prepare financial statements on additional dates. All companies are required to use the calendar year for reporting purposes, but certain entities, such as banks, must file monthly financial statements with the Superintendency of Banks.
The basic financial information consists of the balance sheet, the statement of income, the statement of retained earnings, the statement of changes in shareholder equity, the statement of changes in financial position, and the statement of cash flows.
Notes explaining the accounting policies of the company and additional information about items in the financial statements are considered to be an integral part of the basic financial information.
Capitalization of Interests
The cost of an asset should include all of the costs or expenses incurred in enabling the asset to function prior to the date of the actual use of the asset. Interest incurred, prior to the date of the actual use of the asset, on debts directly related to the asset should be capitalized. Once the asset is completely ready to be used, the interest should not be capitalized.
The classification of a leasing contract is determined by the circumstances surrounding the transaction. As a rule, the lease should be recorded as a capital lease. In only a few cases, prior to compliance with certain legal requirements, can such leases be classified as operating leases in the records.
- Merger Accounting
- Assets and liabilities of the merged company are recorded at book value.
- Inventory Valuation
The most common methods for valuing inventory are the First-in, first-out (FIFO); last in, first out (LIFO); and weighted-average methods. The methods used to determine the ending inventory and the cost of sales are the perpetual inventory system, periodic inventory system, and retail system methods.
The standard cost method in financial reporting is acceptable for accounting purposes and may be used if adjustments are made to reflect current conditions. Tax law does not accept the standard cost method for establishing the cost of sales.
Dividends are registered as a liability of the company when they are declared on the basis of financial statements previously approved at the general shareholders’ assembly. In accounting for dividends declared, retained earnings are decreased and the dividends are included in current liabilities.
Consolidated Financial Statements in Colombia
The parent or holding company must prepare and make known consolidated financial statements presenting the financial position of the company, the result of the operations, the change in the net worth, and the cash flows of the parent or holding company and its subsidiaries. Investments in subsidiary companies that are not consolidated must also be recorded in the books of the parent or holding company through the equity method.
Unusual items must be disclosed. In practice, significant gains or losses that are not recurrent and that result from transactions other than the company’s normal activity are included separately in the statement of income.
Understanding Colombian Accounting:
While basic principles are the same for accounting in Colombia as in other parts of the world, you will find substantial differences in Colombian accounting reports and tributary laws. It is much more than simply a matter of translating titles of reports and keywords within the reports. It takes experienced Colombian accountants to ensure you get the important information you need with the high standards you are accustomed to.
For example, corporations have to file taxes on a monthly basis, and personal taxes are filed every August and September in Colombia. The dates for filing different corporate taxes depend on the last two digits of the corporate ID and the last two digits of the Colombian ID card for personal income tax filings. To make things even more complicated, the dates are constantly changing. You will find that an important part of living in Colombia stress-free is to find an experienced and qualified Colombian Accountant to help you out.
From our Accounting team – What should I do next?
If you do not have all the documentation and know exactly how to fill in corporate tax reports you don’t really need an accountant. Yet the Colombian taxation system can have its complications and can end up being a great source of stress and time loss. Completing the return outside of the established dates can lead to large penalties. If you have any questions or need help completing your Fiscal Auditing, Internal Audit or you need advice in analyzing budgets and forecasts before starting up in Colombia, contact Biz Latin Hub. Our team of accountants in Colombia can help you with your tax reporting through the provision of tailored and affordable accounting services. Get in touch with David here for more information.
If you want to learn about the opportunities of doing business in Colombia, check out this video: