I. Main changes to Value Added Tax (VAT)
– Reduction of the General VAT Rate. The general VAT rate goes from 19% to 18% from January 1, 2019 and to 17% from 2021.
– Amendment to the List of Goods “Not Taxed” with VAT: The list of goods Not Taxed with VAT is substantially reduced, affecting consumption of goods belonging to the food sector, mainly due to the taxation on the sale of live animals, products composed of natural components of milk, food products crafted in an artisanal fashion made of milk and guayaba.
In like manner, the sale of electrical power, radioactive material for medical use, contact lenses, and tires would be taxed, as well as chemical raw materials destined for the production of pesticides and insecticides, and that of fertilizers destined for the production of certain medications.
– Amendment to the List of Goods and Services “Excluded” from VAT: The main goods and services that would no longer be excluded from VAT would be the following: Commissions for capitalization insurance and life insurance, Internet connection and access services corresponding to the Stratum 3, while the Internet connection and access services corresponding to Strata 1 and 2 would go from exempted to excluded.
Likewise, some transport services that were excluded would be taxed. In this regard, public maritime transport within the national territory, national and international public and private transport of maritime, river, land, and air freight, the transport of gas and hydrocarbons would be taxed.
Commissions received by fiduciary companies for the management of funds, commissions received by stock brokers for the management of securities funds and by investment management companies would be taxed. In like manner, commissions for the use of credit and debit cards.
Admission tickets to movies and sporting and cultural events, hosting services, cloud computing, as well as intermediate production services.
– VAT on the Sale of Real Estate. It is proposed that the VAT exclusion on the sale of real estate be eliminated and, therefore, any sale made on these assets would be taxed at the general tax rate.
On the contrary, the first sale of new housing units up to a value of 26,8000 UVTs (COP $ 888,581,000 year 2018), is included as a sale excluded from the tax.
– VAT Deductible in Income Tax for the Acquisition of Capital Goods: With the reform, the benefit of deductible VAT for the acquisition of Capital Goods would be extended to all sectors of the economy, and not only to the hydrocarbon sector.
– Increase in the Rate of Withholding at the Source by way of VAT: The general rate of withholding at the source by way of VAT could be increased by the Government from 15% to 50% of the value of the tax to be paid.
In like manner, the possibility of reducing the rate of withholding tax by way of VAT, when credit balances have been obtained in the last 2 periods, would be eliminated.
These foregoing measures would imply a substantial increase in credit balances that would remain in the State coffers, affecting taxpayers’ cash and liquidity.
In case of acquisition of goods and services from people not responsible for VAT, the withholding tax would correspond to 100% of the tax.
– Substantial Change to the System of Those Responsible for VAT: Through the change it is intended to simplify the system of those responsible for VAT, eliminating the reference to the common and simplified system of the tax.
– Additional Regulation for Service Providers from Abroad Responsible for VAT: It is clarified that service providers from abroad shall use the TRM (Spanish acronym for Representative Market Exchange Rate) of the day of the tax return and payment, and that tax returns filed without full payment have no effect.
Additionally, the possibility is established for certain service providers from abroad to opt for being taxable persons of the withholding at the source by way of VAT, instead of being treated as persons responsible for such tax.
– Bimonthly Compensation for each Lower Income Household: To offset the burden generated by the VAT on items in the family basket, from 2019 a compensation corresponding to a value of 3 UVTs would be paid to lower income households.
II. Relevant Changes to Income Tax for Individuals
-Taxation on Pensions: The payment of pensions is included as income taxable with Income Tax.
-Elimination of 25% of Exempted Labor Income: With this elimination, not only the basis of withholding at the source for work payments would be increased but, correlatively, there would be an increase in the taxation of workers and other individuals who receive labor income.
– Increase in Income Tax Rates for Individuals: Even though the proportionality system of labor income is maintained, the applicable marginal rates for each range are increased.
– Increase of the Basis of Withholding at the Source and Withholding Rates: Not only the income cap not subject to withholding tax at the source earned by individuals would be lowered, since the withholdings would begin to be applied to income exceeding 85 UVTs (COP $ 2,818,000 taxable year 2018), but additionally for payments between 640 to 1140 UVTs (between COP $ 22,220,000 and COP $ 37,798,000 ), the marginal withholding rate would increase to 35% and with respect to payments exceeding 1140 UVTs (COP $ 37,798,000 taxable year 2018), the rate would correspond to 37%.
– Reduction of the Rate for Income earned from Dividends: Retroactively (as of dividends distributed even since 2017), the income tax rate is reduced to 0%, in relation to dividends distributed from profits distributable as non-taxable, and the rate of article 240 of the Tax Statute on dividends distributed from profits distributable as taxable.
– Changes to the tax assessment procedure of Income for Individuals: Even though the Basket System remains for determining the tax for individuals, the tax assessment is not performed separately or independently for each basket, but the entire Basket Net Income. Exempted income ceases to be limited, and costs and expenses can be subtracted from the basis at a value equivalent to 35% of the net income after exempted income. However, costs and expenses cannot exceed 240 UVTs.
– Realization of Income for Severance and Severance Interest: Income for these concepts shall be understood at the time of direct payment to the worker or at the time of deposit to the severance fund.
III. New Tax on Equity
– Tax: The extraordinary tax on equity is created for taxable years 2019 and 2020.
– Taxpayers: i) Individuals, illiquid inheritances, taxpayers of income tax and complementary taxes, ii) national or foreign individuals who do not reside in the country, iii) illiquid inheritances of decedents with no tax residence in Colombia at the time of their death in respect of their equity held in the country, and iv) foreign entities that are not taxpayers of income tax in Colombia. (In the case of foreign entities, the shares are exempted, without express mention being made to holdings/interests).
– Taxable event: The event accruing the tax is the possession of equity in Colombia equal to or greater than COP $ 3,000,000,000 as of January 1, 2019 and 2020.
– Taxable Basis: The basis for calculating this tax would be the gross equity, minus the debts owed by the taxpayer at that date.
– Rate: The rate will be 0.5% and 1% if the basis exceeds the value of COP $ 5,000,000,000.
– Exclusions: From this basis, the following may be excluded: i) for individuals, the first 13,500 UVTs of the equity value of their residential house or apartment, and ii) the equity value of goods subject to the fiscal standardization tax declared in 2019.
– Deductibility: This tax would not be deductible from the income tax.
IV. New Fiscal Standardization Tax (Normalización Tributaria)
– Creation: Only for the year 2019.
– Taxpayers: Shall be levied on taxpayers of the income tax who have omitted assets or nonexistent liabilities.
– Tax return: Shall be declared, settled and paid in an independent tax return, which shall be filed on September 25, 2019.
– Taxable Event: Possession of nonexistent assets or liabilities as of January 1, 2019.
– Taxable Basis: Is the value of the historical fiscal cost of the assets omitted or the commercial self-appraisal established by the taxpayer with technical support (shall correspond at least to the fiscal cost of the omitted assets). In the case of nonexistent liabilities, it shall be the value of such liabilities as established in the Tax Statute or the one reported in the last tax return.
When the taxpayer takes as basis the market value of the foreign assets, and within the year following the entry into force of the tax reform repatriates those assets to Colombia, the basis shall correspond to 50% of the value of the omitted assets. This same basis shall apply when the foreign assets standardized are invested with vocation of permanence in the country.
– Rate: The rate shall be 13%
– There shall be no Presumptive Income Tax by way of tax return of omitted assets or nonexistent liabilities.
V. New Taxation on Dividends in Favor of Colombian Companies
As of the taxable year 2019, dividends and holdings/interests paid or credited to an account to companies resident in the country, from profits that would have been considered as not constituting income or capital gains, shall be taxed at the rate of 5%.
Dividends received from foreign companies and entities would be taxed at this same rate.
This taxation shall not apply to entities qualifying as “Colombian Holding Companies”.
VI. Unified Tax under the Simple Taxation System.
– Tax: As of January 1, 2019, a unified tax is created which shall be paid under the simple taxation system – SIMPLE, in order to reduce formal and substantial burdens, promote formality, and simplify and facilitate compliance with the tax obligation of taxpayers who voluntarily avail themselves of this system. This tax replaces income tax and supplementary taxes, consumption tax, industry and commerce tax and its complementary tax on advertisements and boards for taxpayers who avail themselves of this system.
– Accrual: Is accrued annually and paid bimonthly.
– Taxable Event: Obtaining income likely to produce an increase in equity.
– Taxable Basis: Is composed of all the gross, ordinary and extraordinary income earned in the respective taxable period.
– Taxpayers: Individuals or legal entities that meet all the necessary conditions to apply to the SIMPLE system.
– Rate: Depends on annual gross income and business activity, and ranges between 2.6% and 13.6%.
VII. Relevant Changes to Article 90 of the Tax Statute on Market Value in Operations on Goods and Services.
Article 90 of the Tax Statute mainly regulates the minimum values and conditions that must be taken into account for purposes of determining the income tax in the sale of, and other operations on, goods and services.
The main changes to such rule would be the following:
(i) The market value agreed on by the parties in transactions MUST correspond to the “Average Market Price”,
(ii) The net income for purposes of income tax, for rendering services, must equally be determined taking into account the “Average Market Price”,
(iii) In relation to real estate, express reference is made to the fact that these cannot be disposed of at a price lower than the cost, cadastral appraisal or self-appraisal. Additionally, they cannot be transferred at a value lower than the “Average Market Price”,
(iv) If there are price lists or databases or offers of the real estate to be transferred, taxpayers must refer to such lists, bases or offers for the determination of income, for purposes of income tax,
(v) The parties to the Public Deed of disposal shall state under oath that the price agreed on in the deed is real, and that they have not made private pacts. In case of failing to make the affidavit, taxes generated by the transfer shall be determined on a basis equivalent to four times the value of the deed.
(vi) As of January 1, 2019, payments that have not been disbursed through financial entities shall not constitute a fiscal cost due to the purchase of real estate.
(vii) In relation to sales on shares or holdings/interests in Colombian companies, unless proven otherwise, the selling price cannot be lower than the intrinsic value increased by 30%, notwithstanding that the DIAN may resort to accepted valuation methods, such as cash flows discounted at present value or that of multiples of EBITDA.
VIII. Relevant Changes in International Tax Matters
– Implementation of Income Tax for Indirect Sales: The indirect transfer of companies or assets located in Colombia, through the sale of shares or rights in foreign entities, would be taxed as if the disposal would have been made directly on the “target” or underlying asset. The foregoing, unless the assets located in Colombia represent less than 20% of the book or commercial value of all assets of the divested foreign entity. In case of non-compliance, the buyer shall be jointly and severally liable for the taxes, interest and penalties, without prejudice to the right of recourse against the seller.
– Higher Taxation of Permanent Establishments in Colombia: (i) permanent establishments would be taxed, not only for income and profits from a Colombian source, but also in relation to income and profits from a foreign source, (ii) financial expenses and interest attributed to a permanent establishment shall not be treated as deductible expenses, unless such have been subject to withholding at the source.
– Implementation of the System for Colombian Holding Companies (CHC): Colombian companies holders of securities or shares from abroad, which have a direct or indirect holding/interest in at least 10% of the capital of the foreign company or entity, and have at least three employees in Colombia, may apply to the following tax benefits:
(i) Dividends distributed by foreign companies in favor of a CHC shall be exempted income.
(ii) Dividends paid by the CHC to a resident in Colombia shall be taxed but shall be entitled to the discount of taxes paid abroad.
(iii) Income arising from the sale or transfer of shares held by a CHC abroad shall be exempt from income tax, except for the part corresponding to the value of the profits obtained for activities carried out in Colombia
IX. Income System for Mega-Investments.
– System: As of January 1, 2019, taxpayers of the income tax that generate at least 50 direct jobs, and new investments in Colombian territory, with value equal to or greater than 50,000,000 UVTs in any industrial, commercial or service activity, shall be subject to this special system:
– Investments must be made in property, plant and equipment that are productive or have the potential of being such. Investments must be made within a maximum period of five (5) taxable years.
– The income tax rate, whether they are individuals or legal entities, shall be 27%, without prejudice to the existence of special rates.
– Individuals or legal entities, residents or not, may depreciate their fixed assets within a minimum period of two years, and shall not be subject to the presumptive income system set forth in Article 188 et seq. of the Tax Statute.
– If the investments are made by national companies or permanent establishments, the profits shall not be subject to the tax on dividends. If the dividends correspond to profits that would have been taxed (Articles 48 and 49 of the Tax Statute), such shall be subject to the rate of 27% of the value paid or credited to an account.
– Mega-Investment projects shall not be subject to the equity tax or to those that are created after the effective date of this reform.
– Tax stability contracts on new Mega-Investment projects that are developed in the national territory are established.
X. Public Infrastructure for taxes:
– Payment mechanism: This is a payment mechanism that proposes that individuals or legal entities, obliged to keep accounting, taxpayers of income tax, who in the previous taxable year or period have earned minimum gross income of 33,610 UVTs, may enter into agreements with national public entities for which they shall receive in exchange negotiable securities for the payment of income tax. The implementation of projects of economic and social significance in the ZOMACs is maintained as a condition for accessing this mechanism. Investment commitments may not exceed 30% of the taxpayer’s equity.
– Validity: The mechanism of public infrastructure for taxes brought by Law 1819 of 2016 shall remain in force only for taxpayers who have availed themselves thereof before the entry into force of the article of works for taxes that the Financing Law (tax reform bill) seeks to add to the Tax Statute.
XI. Deduction of Taxes Paid
The reform proposes the deduction of 100% of taxes paid which have a causal relationship with the economic activity.
50% of the ICA and GMF shall be deductible from the income tax, as of 2022 the discount would be made on 100% of the value of the ICA and GMF paid.
XII. Presumptive Income
The percentage of presumptive income would be reduced to 3% in the taxable year 2019, to 1.5% in the year 2020 and to 0% in the year 2021.
XII. Increase in the Withholding Rate for Payments Abroad
The rate for payments abroad, by way of income from capital and work, would be increased from 15% to 20%.
The payments for assigned reinsurance premium, made to persons not resident or not domiciled in the country, shall be subject to withholding at the source by way of income tax at a rate of 1%.
XIV. Exempted income.
From January 1, 2019, notwithstanding the exempted income from Article 206 of the Tax Statute and those recognized in international agreements, the only exempted income shall be those set forth in Article 235-2 of the Tax Statute:
1. Income from the development of industries with technological added value, and creative activities, for a term of 5 years, provided that certain requirements are met, and the activities are those exhaustively indicated in Article 235-2 of the Tax Statute.
2. Income from investments that increase productivity in the agricultural sector, for a term of 10 years, provided that certain requirements are met.
3. The sale of electrical power generated based on wind energy, biomass or agricultural residues, solar energy, geothermal or ocean energy, carried out only by generating companies, for a term of 15 years, from 2017, provided that certain requirements are met.
4. Profit in the first disposal of social interest and/or priority interest housing, provided that some requirements are met.