By María Helena Padilla, partner at Pinilla, González y Prieto Abogados, Bogota Colombia
The Colombian government tabled a tax reform bill on July 20, which includes an increase in the corporate tax rate, new anti-tax avoidance measures and an electronic income declaration system. The reform aims to address public revenue deficits amid an economic crisis in the country.
The tax reform is now entering the legislative discussion phase in which changes are made, although structural changes are not expected.
The reform efforts open up an opportunity to strengthen the Colombian market as a place that continues to offer opportunities for investors in sectors such as telecommunications, finance, new technology and real estate.
Economic and political context
Colombia is facing the most drastic economic crisis in its history. The Covid-19 pandemic has exposed the vulnerability of health systems and various political, economic and social regimes.
The public health crisis came amid the implementation of peace agreements which, in addition to the social and political challenges, required an increase in public spending as they provided temporary universal incomes for the returnees, combined with a context of devaluation that had lasted for several years Years.
As in the entire region, poverty rates in Colombia have risen due to the pandemic. It is estimated that around 20% of the population in the country live in poverty, with extreme poverty being close to 6%. The Venezuelan population should be emphasized, estimated at around two million people, most of them in a precarious economic situation.
The situation described is difficult to measure in an economic context in which informality prevails, in which the “scavenging” economy stands out alongside social security, the payment of taxes and the regularization of payroll. This is a sector outside of the legality.
The Colombian government implemented a variety of social programs in 2020. PAEF, or payroll assistance, seeks to provide stability to employees. The solidarity income provided three million households with a basic income. In addition, VAT refunds were granted for the most vulnerable populations, extraordinary bonuses for health care workers and a 50 percent wage subsidy for the tourism sector. New programs in the areas of education, pensions and housing benefits have been added to the existing programs. Social spending rose to just under 7% of GDP.
The pressure on public spending was initially countered with internal and external financing.
However, the national government has now presented the draft law on tax reform, which not only focuses on debt collection, but also includes measures to reduce and increase the efficiency of public spending at national and local level. The reform is supposed to cover the needs of the social expenditure created and use the difference to pay off the national debt.
Increase in the corporate tax rate
In Colombia, unlike in OECD countries, income taxation rests on the shoulders of entrepreneurs rather than individuals through corporate income tax.
The first proposed measure of tax reform is to increase the nominal corporate tax rate from 30% to 35% in FY2022. It should be noted that while this is the proposed nominal rate, effective rates in Colombia vary by sector. In addition, many sectors, such as construction, enjoy tax advantages such as the tax exemption for income from the sale of affordable housing (VIS for its Spanish acronym).
Other sectors – such as hotels, new technologies, investments in renewable and efficient energy sources, afforestation, transportation, etc. – enjoy benefits that require the investor to analyze the effective tax rate of each sector and the benefits of local legislation considered in the business of his interest. Likewise, 50% of the amount for industrial and trade tax (municipal tax on gross income) applies as a rental discount, which in itself means that the effective rental price is below the proposed nominal 35%.
The corporate income tax rate of financial companies is temporarily 38% until 2025 (ie the income tax rate of 35% plus an additional tax rate of 3%).
Tax avoidance measures
Another pillar of tax reform is the fight against tax evasion, which is estimated at 30% of total annual income. Tax evasion is due to a number of factors including high levels of informality in the economy and, of course, corruption, which keeps the public from paying taxes.
In this regard, the reform accelerates the introduction of the electronic invoicing system, changes the definition of the final beneficiary – including participants in structures with and without legal status (fiduciary systems) – and creates the register of final beneficiaries linked to the tax register. In addition, a new normalization tax allows for the legalization of omitted assets and the cleanup of non-existent liabilities, especially those that are overseas.
Electronic income tax return
In the case of electronic income tax returns, the tax authorities are responsible for preparing the return and forecasting the payment annually with regard to national taxes. The approving taxpayer pays according to the invoice received. Otherwise, the tax must be assessed within the regulatory period.
Previous tax reform efforts
This is the second tax reform project that the national government is working on in 2021. The first failed attempt sparked a social reaction with stern protests and blockades that did more damage to the economy, but undoubtedly led the government to embark on a path of concessions and fiscal adjustments to public spending.
The first project sought to make significant changes to VAT by abolishing the exemption for property, increasing individual rental rates, abolishing income tax breaks, and introducing a wealth tax for 2022–2025. It would also have introduced green taxes, such as taxes on carbon and the use of pesticides and single-use plastics.