TAX REFORM BILL 2021

SOCIAL INVESTMENT LAW

OBJECTIVES

The purpose of this tax reform is summarized in the following points:

• Adopting a set of fiscal policy measures that operate in an articulated manner, in terms of expenditure, austerity and efficiency of the State, fight against tax evasion, income and fiscal sustainability.
• Contributing to the economic upturn, job creation and fiscal stability of the country, for the purpose of protecting the most vulnerable population against the increase in poverty.
• Preserving the business fabric and strengthening the credibility of public finances.

1. FISCAL STANDARDIZATION TAX SUPPLEMENTARY TO THE INCOME TAX

• It is created for 2022 as a tax supplementary to the income tax, whose chargeable event consists in the possession of omitted assets or non-existent liabilities on the date of entry into force of the law.
• Taxable persons will be the taxpayers of the income tax or its substitute systems and the tax base for omitted assets will be their historical fiscal cost or the commercial self-appraisal, and for non-existent liabilities it will be the fiscal value thereof.
• The taxable base of the goods subject to normalization will be made up of their acquisition price to determine the fiscal cost.
• The base may be reduced by half (50%) if the resources are repatriated before December 31, 2022 and if they remain in the country for two years.
• The tax rate will be 17%.
• 50% of the tax would be paid as an advance payment in 2021 and the remaining balance on February 28, 2022 when the return is due.
• The omitted assets or non-existent liabilities will not generate income by equity comparison, or a penalty in income tax, its substitute systems, VAT, transfer pricing, exogenous information or in the annual filing of assets abroad.
• Those who have declared assets subject of the previous normalizations at a value lower than the market value may update their value, including the additional amounts as taxable base of the normalization tax.
• This tax shall not be deductible from income tax.

2. INCOME TAX – LEGAL ENTITIES

• It is proposed that starting in 2022 the general income tax rate be 35% (for 2022 and subsequent years it would decrease to 30%).
• Financial institutions having taxable income higher than 120,000 UVT (Spanish acronym for Unidad de Valor Tributario: Tax Value Unit) (COP $ 4,356,960,000 for 2021) would be required to pay a 3% surcharge until 2025.
• The withholding tax rate would be reduced from 5% to 0% starting in January 1, 2022 on the yields generated by fixed income securities and financial derivatives with this kind of underlying values.
• The tax discount of ICA (Spanish acronym for Impuesto de Industria y Comercio: Industry and Commerce Tax) paid during the year will remain at 50% (in 2022 it would amount to 100%).

3. MECHANISM FOR THE FIGHT AGAINST EVASION

Commercial value of real estate

• To determine the commercial value of real estate, notaries shall make use of the georeferencing system that will be established by DIAN (Spanish acronym for Dirección de Impuestos y Aduanas Nacionales: National Tax and Customs Administration). In like manner, they shall inform those involved in the titling process and the Tax Administration should the price fail to meet the rules on commercial value.

Registration ex officio in the RUT

• The DIAN may register ex officio any individual in the RUT (Spanish acronym for Registro Único Tributario: Single Tax Register) who, according to the information available, is subject to obligations managed by said entity.

Official assessment of income tax by way of invoicing

• The Tax Administration may establish by way of invoicing the official assessment of income tax and supplementary taxes, which will provide direct enforcement. The invoice will be notified by way of insertion on the DIAN website or through any mechanism set forth in the Tax Code (“ET”, for its Spanish acronym).
• The taxpayer may declare and pay the tax according to what is established in the invoice or appeal it within 2 months after its notification. The DIAN will regulate the matter.

Final beneficiary

• Concept: shall be the individuals who ultimately hold or control, directly or indirectly, a customer and/or the individual on whose behalf a transaction is carried out. This shall also include the individuals who exercise the effective and/or ultimate control, directly or indirectly, on a legal entity or other structure without legal status. This definition shall apply to the concept of real and effective beneficiary.
• This concept shall be interpreted in accordance with the updated recommendations of the International Financial Action Task Force -FATF- and their corresponding interpretative notes.
• A list of the final beneficiaries of the legal entities and those legal vehicles without legal status will be included. 
• Additionally, the following will be created: (i) the Single Register of Final Beneficiaries -RUB- (for its Spanish acronym), which will form an integral part of the Single Tax Register -RUT- (for its Spanish acronym), and (ii) the Identification System of Structures Without Legal Status under the responsibility of the DIAN.

4. AUSTERITY AND EFFICIENCY IN SPENDING.

Limit to expenditure

• During 10 years, since the validity following the enactment of the reform, the annual growth of the entities that make up the General Budget of the Nation may not exceed the annual inflation within the medium-term fiscal framework.

Likewise, these entities shall:

• Progressively reduce their expenses for travel allowances, travelling, stationery, printing, advertising, purchase of vehicles and fuel, until reaching a 50% savings with respect to what was executed in 2019, adjusted for inflation.         
• Refrain from acquiring cell phones and mobile phone plans, internet and data for public servants of any level; gradually canceling the services currently contracted, apart for some exceptions related to citizen attention services and equipping of security personnel.         
• Implement measures to reduce lease expenses, considering the current work-at-home situation generated by the pandemic.         
• Progressively reduce the signing of contracts for the provision of technical or professional services, unless there are no plant personnel with the capacity to carry out the required activities, until reaching a saving of 10% in relation to 2019.     
• Not generate costs or generate savings when they change their staff during the following 10 years from the date of the enactment of the reform.         
• Extraordinary powers shall be conferred on the President of the Republic so that within the 6 months following the publication of the reform, he issues rules to abolish, merge, spin off, restructure, modify, dissolve and liquidate public entities of the national order, mixed economy, indirect decentralized companies and associations of entities.

5. SOLIDARY INCOME PROGRAM

• The solidary income program will remain in force until December 2022.
• Extraordinary transfers may be made. Unconditional cash transfers may be executed from FOME resources or from other sources of financing considered in the General Budget of the Nation.
• The Equity Board, taking into account the most recent poverty indicators, may modify the targeting criteria of the Solidary Income Program, considering in any case the data recorded in the SISBÉN IV or the instrument that takes its place.
• Starting in July 2022, the amount of the transfer shall consider the number of members that make up each household, and the SISBÉN IV classification group, in accordance with what is established in the program’s operating manual and in accordance with the guidelines of the Equity Board.
• For households classified under condition of vulnerability, a fixed transfer amount shall be maintained per household, which may not be higher than that for single-person households in conditions of poverty.

6. MEASURES FOR THE ECONOMIC UPTURN

Program for the support of formal employment

• It is extended from July 2021 to December 2021 only for those potential beneficiaries who, for the contribution period of March 2021, would have had a maximum of fifty (50) employees.
• Beneficiaries may apply for the state contribution granted by the program once on a monthly basis for the payrolls of the months from July to December 2021.

Incentive for the creation of new jobs

• An incentive is created for the generation of new jobs that will allow financing labor costs such as social security and parafiscal payments.
• It will target employers who create new jobs by hiring additional workers as follows:
• In the case of additional workers that correspond to young people between 18 and 28 years of age, the employer will receive as an incentive a state contribution equivalent to 25% of 1 current legal monthly minimum wage (SMLMV, for its Spanish acronym) for each of these additional workers.         
•  In the case of additional workers who do not correspond to workers in those age ranges, and who earn up to 3 SMLMV wages, the employer will receive as an incentive a state contribution equivalent to 10% of 1 SMLMV for each of these additional workers.         
• The incentive will be valid until August 2023.

VAT-free days:

• The benefit of the 3 VAT-free days will be incorporated again by means of which the moveable goods sold in Colombia, specifically singled out in article 28 of the reform, will be exempt from this tax on the days established by the National Government.
• To benefit from this exemption, the limits in Tax Value Units -UVT- and the definitions applicable to each type of good shall be taken into account.

Requirements:

• The goods shall be located in Colombia, be sold at retail and directly to the individual who is the final consumer.         
• An invoice or equivalent document shall be issued in accordance with current tax regulations.
• Payment shall be made using debit or credit cards, or any electronic payment mechanism.         
• Only up to 3 units of the same good covered with the exemption may be purchased from the same seller.         
• The seller shall deduct the value of VAT from the sales price of the good.         
• When any of the aforementioned requirements is not met, the benefit will be lost and the sellers shall make the relevant corrections in their tax returns, assessing the penalties and interests that may arise.

Author: Juan Fernando Díaz I [email protected] I Tax Law / Luis Felipe Paredes I [email protected] I Tax Law