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Colombian Government proposes structural tax reform

Executive summary

Colombia’s Ministry of Treasury sent a tax reform bill to Congress on 19 October 2016, proposing a structural change to the Colombian tax system to increase tax collection, redistribute the tax burden and reduce tax evasion.

The tax reform bill proposes modifications to the income tax of both legal entities and individuals, the dividends tax rate, the Value Added Tax (VAT) rate and other tax provisions that affect income tax and VAT. The bill also proposes additional modifications to the consumption tax, transfer pricing, municipal taxation, and tax avoidance and evasion control measures. Additionally, the bill proposes a simplified tax (monotributo in Spanish) for certain taxpayers, as well as a consumption tax on sugary beverages, a carbon tax and a fuel tax.

If enacted, the bill would increase taxes and penalties. It also would create a new regime for controlled foreign corporations.

Detailed discussion

Income tax – legal entities

Rate

The bill would combine the income tax and income tax for equality (CREE) into one single tax. The rate would be 32% for 2016, with higher rates of 34% and 33% for 2017 and 2018, respectively.

In addition, the bill would establish a surtax of 5% and 3% for 2017 and 2018, respectively, which would apply to taxpayers with taxable income greater than Colombian Pesos (COP) 800 million (approx. US$266,000).1

If a taxpayer made an advance payment of the CREE in 2016, the taxpayer may use that payment to offset the surtax to be paid in 2017. If the bill is enacted, companies will need to consider the new tax rates when determining deferred tax assets and liabilities.

The bill would also increase the free trade zone (FTZ) income tax rate. The new FTZ rate would equal the corporate income tax rate, minus 10%. The new FTZ rate, however, would not apply to taxpayers with a legal stability contract (i.e., a contract with the Government that establishes a fixed tax rate). The FTZ rate would be the rate contained in the contract. The bill would not exempt taxpayers with legal stability contracts from payroll taxes.

Taxable base

The bill would increase the taxable base for assessing presumptive income tax from 3% to 4% of the taxpayer’s net equity as of 31 December of the year prior to the one for which the presumptive income tax is being assessed. Presumptive income tax is an alternative minimum tax in which the taxable base is a percentage of the net tax value of the taxpayer’s assets as of 31 December of the prior year. Whenever the presumptive income of the taxpayer is higher than its ordinary income, the tax should be assessed on the presumptive income.

The bill would require income, deductions, assets and liabilities to be determined based on Colombian financial information rules. As such, and with some exceptions set forth in the tax bill, they would have to be accrued following accounting rules.

For the sale of shares not listed on the Colombian stock exchange, or on international exchanges, as determined by the tax authorities, the bill would include a presumption that the share’s sales price is not lower than the share’s intrinsic value, plus 15%. The same rule would apply when transferring rights through investment vehicles, such as trusts and collective investment funds.

Costs, expenses and deductions

The bill would allow VAT paid on the acquisition or importation of capital goods to be treated as a tax deduction in the year of acquisition or import.

Under the bill, the depreciation deduction would be the lesser of depreciation as determined under accounting rules and that determined by the Government. The Government would set, through a regulation, the maximum annual depreciation rates at 4% to 33%. In the absence of a regulation, the maximum annual depreciation rate would be 5%, calculated on the asset’s tax cost minus its residual value.

The bill would require taxpayers to support the useful life of depreciable assets with technical studies, a user’s manual and reports, as well as other documentation. Supporting documents provided by experts also would be allowed. Therefore, temporary differences would rise for book vs. tax depreciation differences.

The bill would include the following transition rules for depreciation and amortization:

  • As of the date the new rules become effective, the unamortized portion of assets not subject to a special amortization regime would be amortized over five years under the straight-line method.
  • Goodwill balances existing before enactment of the law and pending amortization as of 1 January 2017, would be amortized over five years under the straight-line method.
  • A company whose shares, quotas or interests were acquired or entities resulting from a merger, spinoff or liquidation would not be allowed to deduct amortization expense for goodwill acquired before enactment of the bill.
  • Non-amortizable goodwill would be considered as part of the tax cost of the investment.

Withholding tax

The bill would subject to a 15% withholding tax payments made directly or indirectly to nonresident parent companies or home offices for administrative and management expenses, regardless of the place where the activity is rendered. The same rate would apply to technical, technical assistance and consultancy services provided by nonresidents, regardless of where the service is rendered.

Tax losses

The bill would allow net operating losses to be carried forward for eight years, counted from the year following the one in which they originated. The statute of limitations for the returns in which net operating losses (NOLs) were originated or offset would be eight years (instead of the current five years). Income tax and CREE tax NOLs accrued through 2016 may be amortized beginning in 2017.

Tax credits

The bill would establish a 20% tax credit for investments made for monitoring or improving the environment. The bill also would allow a 20% tax credit for research and development investments (investigation, technologic development and innovation), in addition to the tax deduction.

Donations to non-profit organizations qualified in the special income tax regime and non-taxpayers as described in Articles 22 and 23 of the Colombian Tax Code (CTC) would not be deductible. The bill would, however, allow a tax credit for 20% of the amount donated in the tax year.

Income tax – individuals

The bill would also make the following changes to the income tax for individuals:

Topic

Current regulation

Tax Reform

Classification

Individuals classified as employees and others

A new tax system would be created in which individuals are classified according to the nature of their income:

  • Labor income
  • Pensions
  • Working capital
  • Non-labor income
  • Dividends and participations

Tax Systems

Ordinary, IMAN (Minimum Alternate Tax) and IMAS (Simplified Minimum Alternate Tax)

IMAN and IMAS disappear, and the only system is the ordinary one

Rates

0%, 19%, 28%, 33%

0%, 10%, 20%, 30%, 33% and 35%

Non-taxable income

 

 

  • Dividends
  • Inflation over yields
  • Gains from sale of shares

 

  • Dividends
  • Inflation over yields
  • Gains from sale of shares
  • Mandatory health contributions
  • Mandatory pension contributions

Exempted income

 

 

  • Labor exempted income with a 25% annual limitation
  • Voluntary and mandatory pension contributions and AFC accounts (Accounts for fostering housing construction): Up to 30% is exempt, but exempt amount cannot exceed 3,800 Tax Value Unit –UVT)

 

  • When income is from more than one individual, the exempted income of each will be subtracted
  • Labor and pension income: Up to 35% would be exempt, but exempt amount could not exceed 3,500 Tax Value Unit –UVT
  • Working capital and non-labor income: Exempted income Up to 10% of the basis would be exempt, but could not exceed 1,000 Tax Unit Value –UVT
  • Voluntary and mandatory pension contributions and AFC accounts: Up to 30% would be exempt, but could not exceed 3,800 Tax Value Units –UVT)

Topic

Current regulation

Tax Reform

Donations

Deduction up to 30% of the net income

Tax credit: 20% of income tax

Deductions

 

 

 

 

 

  • Dependent
  • Household interests
  • Donations
  • Prepaid medicine
  • Health contributions
  • GMF (levy on financial transactions)
  • Dependent
  • Household interests
  • Prepaid medicine
  • GMF (levy on financial transactions)

Dividends tax

The bill would re-establish the dividends tax for dividends distributed to resident individuals and to nonresident legal entities and individuals. Distributions would follow the rules in Articles 48 and 49 of the CTC. Dividend distributions to foreign legal entities would be subject to a 10% tax if paid out from profits that were previously taxed at the company level. Dividends paid out from profits that were not subject to taxes in the hands of the company distributing them would be first subject to a 35% withholding tax, and then subject to a 10% withholding tax on the amount to be distributed, net of the 35% withholding tax.

Dividends distributed to a resident individual would be subject to a withholding tax that would increase from 0% to 5% or to 10%, depending on the amount of dividends the individual is paid. In addition, dividends paid to resident individuals from profits that were not subject to taxes in the hands of the company distributing them would be subject to a 35% withholding tax; the 0%, 5% or 10% withholding tax rates would apply on the distributed dividends, net of the 35% withholding tax.

The dividend tax would apply to profits obtained beginning in 2017.

VAT

The bill would extend “taxable event” for VAT purposes to intangibles and immovable goods, unless expressly excluded. The bill would not subject immovable goods to VAT. The first home sale, however, would be taxed at a 5% VAT rate, provided the sale price exceeds 26,800 UVT (Tax Value Unit), which is approximately COP 800 million (approx. US$266,000).

The bill would apply VAT to services rendered in Colombia or abroad, unless expressly excluded. The transfer of rights included as a part of a service would be taxed with VAT.

Additionally, the bill would treat services and intangibles acquired or licensed from abroad as if they were rendered and acquired in Colombia. In these cases, VAT would be triggered if the direct user or beneficiary of the service and license is a tax resident, or a permanent establishment in Colombia, or if the user or beneficiary’s place of economic activity is in Colombia.

The bill would establish territorial rules to define when a service is deemed to be rendered inside Colombia for VAT purposes. The bill would generally set the VAT rate at 19%, but would provide a 5% rate for certain goods and services.

The bill would require credit and debit card issuers, sellers of prepaid cards, cash collectors, and others designated by the tax authorities to withhold VAT when a payment or book entry is made to foreign suppliers of digital services.

The bill would increase the time to request input VAT from two to three two-month periods following the accrual period.

The bill would require VAT returns to be filed every two to four months.

Consumption tax on sugary beverages

The bill would create a new consumption tax on sugary beverages. The consumption tax would apply to the production and subsequent sale of sugary beverages (which include energy drinks, sweetened drinks and in general any beverage that includes added sugars or caloric sweeteners), as well as extracts, syrups and powders that, after mixture or dilution, make sugary beverages.

The bill would impose the tax on the producer, importer of record, and related parties of each of the latter. The taxable basis would be the total liters or related equivalent and the tax rate would be COP 300 for each liter (1000 cubic centimeters or equivalent). The bill would require the consumption tax to be reflected on the invoice along with any VAT also imposed.

The tax collected would be designated for the health system.

Fuel tax

The bill would re-establish the fuel tax (created by Articles 69 and 70 of Law 1739 of 2014 and ruled unconstitutional in Decision C-726 of 2013).

A ”taxable event” would be the sale of gasoline and/or diesel by refiners and importers. The sale between refiners would not be subject to the tax. The Ministry of Mines would control, audit, liquidate, assess, discuss and collect the tax.

Green tax/Carbon tax

The bill would create a “carbon tax” that would be imposed on the carbon content of all fossil fuel, including all oil derivatives and all types of fossil gas used for energy purposes. The rate would be based on the release-of-carbon-dioxide (CO2) factor for each fuel, which would be expressed as the volume or weight of the fuel. Some rates would be based on the nature of the oil derivative (e.g., gasoline COP 135 per gallon).

Modifications to tax administration, procedure and penalty regime

The bill would modify the provisional assessment of existing taxes. The provisional assessment would apply in cases of tax omission or inaccuracy of tax, advance payments or withholding returns, including omitted or inaccurate penalties in tax returns. Provisional assessment would extend the statute of limitations for six months.

The bill also would change the amount of the balance in favor (i.e., the refund amount) needed for a taxpayer to file withholding returns with no payment. It could change from 82,000 UVT (COP $2,439,746,000 approximately US$813,250) to a balance in favor that is equal to or greater than two times the amount of the withholding due. A withholding return filed with no payment before the deadline would be considered accepted, as long as the total payment is made before the end of the two-month period following the filing deadline.

The bill would extend from two to three years the statute of limitations of tax returns. For returns in which losses are originated or deducted, the statute of limitations would extend from five to eight years. Returns filed by taxpayers that have made transactions subject to the transfer pricing regulations would have a statute of limitations of six years.

The bill also would modify penalties, such as the inaccuracy penalty and the penalty for failing to file a return, and would create a criminal penalty for omitting assets or including non-existent liabilities.

Exchange of information and controlled foreign entities

Exchange of information

The bill would allow the Colombian tax authorities’ director to set forth, through a resolution, the entities that must provide information for automatic exchange purposes.

Controlled foreign entities (CFE) regime

The bill would create a regime for CFEs. A foreign entity would be controlled by a Colombian tax resident when the Colombian tax resident, directly or indirectly, holds a stake equal to or greater than 10% of the capital in the foreign corporation. CFEs would include investment vehicles, such as trusts, collective investments funds, private interest foundations and other trust businesses incorporated or founded abroad.

The bill would create a new presumption that Colombian tax residents have control over: (1) foreign entities domiciled abroad, incorporated or in operation in a jurisdiction that does not cooperate with the exchange of tax information and is a jurisdiction with low or no taxation; and (2) foreign entities that benefit from a preferred tax regime.

Under the CFE regime, passive income obtained by a CFE2 would be taxed in the hands of the controlling Colombian residents in the same year in which it is obtained by the CFE in a proportion equivalent to their participation in the CFE’s capital. Allowable costs and expenses related to the passive income would be deductible by the controlling Colombian residents in that same proportion.

Dividends and benefits that are distributed by a controlled entity abroad and arise from profits subject to taxation under the unearned income rules would not be subject to income or capital gains taxation. The same tax treatment would apply to the transfer of shares or participations of a controlled entity abroad that were subject to taxation under the unearned income rules.

Disclosure of aggressive tax planning schemes

The bill would create a regime that would make it mandatory for taxpayers to disclose aggressive tax planning strategies. The bill would require the promoter or designer of the aggressive tax planning strategy, as well as the user of the strategy, to report it.

The statute of limitations for income tax returns of promoters would start on the date on which the promoter complies with the disclosure requirement.

The mandatory disclosure regime would be effective beginning 1 January 2019, but the bill would include provisions that would require some strategies to be disclosed before that date.

Transfer pricing

Asset operations

The application of the Comparable Uncontrolled Price (CUP) method for the analysis of asset purchases requires the original invoice price to be reduced by total accumulated depreciation. The bill would restrict the use of this approach to tangible assets.

Transactions involving raw materials and commodities

The bill would align the rules on transactions involving raw materials and commodities with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Actions 8 to 10 and would establish that the most accurate method for the analysis of transactions involving raw materials and commodities is the CUP method. The bill would allow the use of public quotations as a reference price and for comparability adjustments.

The bill also would require the price setting date to be certified through a duly registered contract. This provision implies that, if the bill is enacted, the Government may issue regulations that make the registration of a written contract a formal requirement.

When the taxpayer does not provide reliable evidence related to the price-setting date or the method for determining the price-setting date is not consistent with market practices, the bill would allow tax authorities to determine the price-setting date by taking into account the international price on the shipment date. Therefore, if this bill were enacted, companies would need to develop internal procedures to ensure that the company contemporaneously maintains all supporting documentation for each transaction.

Financial information

The bill would require financial information used for transfer pricing analysis to be signed not only by an external auditor or public accountant but also by the legal representative.

Levels of documentation

The bill would align documentation requirements with Action 13 of the OECD BEPS report. In that regard, the bill would require taxpayers to have a local file with detailed information on transactions with related parties and a master file with comprehensive information on the multinational group’s transfer pricing policies and practices.

Additionally, for those multinational groups with a Colombian parent, the bill would require the Colombian parent to complete a country-by-country report under the following circumstances:

  • The parent has affiliates, subsidiaries, branches or permanent establishments abroad.
  • The parent is not a subsidiary of another entity resident abroad.
  • The parent is required to prepare, submit and disclose consolidated financial statements.
  • The parent has annual consolidated revenue equal to or exceeding 81 million Taxable Units (approximately US$820 million).

The bill would allow a non-Colombian parent to designate an entity resident in Colombia, or a resident abroad with a permanent establishment in Colombia, as the responsible party for providing the country-by-country report.

The bill does not include any specific examples or instructions relating to the forms, terms or conditions for country-by-country reporting. Those aspects will be subject to regulations to be issued by the Government.

Advance Pricing Agreements (APA)

The bill would clarify that tax authorities have nine months to accept a request for an APA. During that nine-month period, tax authorities would focus on whether to accept starting the negotiation of the APA.

Tax havens

The bill would change the definition of “tax haven” to include “non-cooperative jurisdictions, low or no taxation tax regimes, and preferential tax regimes.” If this bill were enacted, this change in the definition would allow the Government to consider not only the express requirements contained in local regulations, but also internationally agreed-upon criteria.

Penalties

Penalties related to transfer pricing compliance have been considered severe and extremely high since the beginning of this regime in Colombia. In 2012, Law 1607 clarified the punishable acts and reduced some of the penalties.

Currently, the late filing penalty is lower if a return is filed less than 15 days after the deadline. The penalty significantly increases if the return is 15 or more days late. The bill would amend Article 260-11 of the Colombian Tax Code to eliminate the lesser late filing penalty applicable to returns filed less than 15 days after the due date, and instead impose the higher late filing penalty for all late returns. This change would, in most cases, result in a substantial increase in penalties.

The bill also would make the following changes to the penalty regime:

  • Unify the penalty for inconsistencies in the transfer pricing return and transfer pricing support documentation
  • Increase the penalty threshold for inconsistencies in the transfer pricing report
  • Expand the definition of “omission” to include a full or partial omission in order to clearly distinguish the definition of “omission” from the definition of “inconsistency”
  • Add a penalty for correction of documentation before notification of a special assessment
  • Add a penalty for failure to comply with the transfer pricing report filing

Impact

The bill would make significant structural changes to Colombia’s tax system. Multinationals should assess how the bill, if enacted, might affect them on a short-, mid-, and long-term basis.

Endnotes

1. Exchange rate USD 1 = COP 3,000.

2. Passive income would include, with some exceptions, the following: dividends, interest, income obtained from the transfer of intangible property, income obtained from the transfer or assignment of rights on the assets that produce the passive income, and income obtained from the rental or sale of real estate. If 80% or more of the CFE’s income were passive, all its income would be subject to the CFE rules.

EYG no. 03702-161Gbl

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