On September 8, lawmakers in Colombia passed a new tax reform intended to raise $4 billion annually in an effort to help overcome economic turmoil caused by the global pandemic.
The Colombia tax reform represented a revision of an earlier reform that sought to raise $6.5 billion, and which caused widespread public protests until finally being withdrawn in April.
The revised Colombia tax bill included 80 modifications to the original version. It passed through both houses in the Colombian legislature lightning fast, after senators were called to vote on the bill at 4:00pm the day before.
The opposition boycotted the vote, saying that not enough time had been allowed to study the new bill thoroughly, however the governing coalition led by President Ivan Duque’s Democratic Centre party had enough votes to push it through.
Although the new Colombia tax reform is a long document, it runs to 180 pages. Below are some key takeaways that investors and business can benefit from.
The Colombia tax reform at a glance
While one of the most striking — and concerning — elements of the Colombia tax reform for businesses and investors is a 4% hike in the corporate income tax (CIT) rate to 35%, a range of other notable provisions are included.
These include a simpler tax declaration system as well as incentives to encourage taxpayers abroad assets to be repatriated to Colombia.
The legislation has more stringent requirements to identify the beneficiaries of tax paying entities.
The Colombia tax reform includes provisions to encourage youth employment through wage subsidies.
To encourage adoption of the new law, the legislation also includes significant incentives, such as the massive reduction in penalties and interest for those who act quickly.
A deeper look at the Colombia tax reform
Changes to taxes
On top of the general CIT hike, the new Colombia tax reform adds an additional 3% to financial sector companies between 2022 to 2025, meaning such entities will pay 38% in CIT.
As well as that, the 50% reduction in Industry and Commerce tax (ICA) currently enjoyed by foreign entities based in the country will be slashed in half — rather than being eradicated as set out in the original reform bill.
With regards to the calculation of CIT, a system of automatically calculating a company’s burden will be introduced as of the current fiscal year (which runs from January 1 to December 31), based on invoicing reported by the company and information gathered from third parties.
This will significantly reduce the amount of work required to declare taxes. Previously, taxpayers had to prepare their returns from scratch.
With regards to value-added tax (VAT), that will remain the same for both individuals and companies, while the government will continue to declare three VAT-free days per year for a wide range of individual consumer goods — an initiative that has previously been implemented and proven to be wildly popular with the general public.
Incentives and support
The Colombia tax reform introduces a new incentive to hire employees under the age of 28 years old, essentially subsidising between 10% and 25% of an eligible employee’s payroll. This exclusion does not apply to directorships.
In practice, the higher number will cover employee social security contributions. Incentives for female household heads will also be provided by the tax department.
The new reform extends a program to assist companies in dealing with the chaos caused by the pandemic. It offers 25% subsidies on a portion equivalent to the minimum wage, which is approximately US $237 per monthly in 2021.
Additional incentives and tax cuts will be available for income generated in certain creative sectors, as well the agro-industrial sector, hotels and parks industries, and other agro-industrial sectors.
Assets and compliance
The definition of the final beneficiary of company profits is made significantly more precise by the new Colombia tax reform, so that rather than naming direct and indirect controllers, it will now be necessary to name an individual who is responsible for meeting tax obligations.
If a structure does have more than one beneficiary, the directing committee or legal representative, as well as the board of directors, will be held responsible.
Colombia taxes its residents on foreign assets and global sources revenue. The new tax reform creates a scheme that normalizes unregistered overseas assets.
This will allow taxpayers to avoid penalties for failing to declare assets in the past and will result in a 17% tax on those assets. The rate of 8.5% is applied to assets that are returned to the country.
A similar amnesty is declared on non-existent registered passives — effectively allowing taxpayers to admit past efforts to reduce their tax burden through the declaration of phony passives without fear of penalty.
If the outstanding penalties or interest due to tax authorities are paid by 31 December 2021, the taxpayer will be eligible to negotiate a payment schedule and receive reductions up to 80%.
Another provision of the Colombia tax reform allows tax authorities to reach a mutual agreement to avoid a dispute tax determination proceeding to court.
Notably, for 2022 and 2023, if companies file tax returns that see them pay at least 35% more in CIT compared to 2021, the statute of limitations for tax authorities to dispute those declarations will be reduced from seven years to just six months — vastly reducing the likelihood of a company being audited.
Biz Latin Hub can assist you in Colombia
At Biz Latin Hub, our bilingual team of accounting & taxation experts is on hand to help you understand what the new Colombia tax reform means for your business and help you take advantage of every new benefit it introduces.
As well as tax advisory, we offer a comprehensive portfolio of back-office services, that also includes company formation, visa processing, hiring & PEO, due diligence, and legal services, meaning we can provide a tailored package of integrated services to meet your individual needs.
Contact us now We can help you do business with Colombia or any other market in Latin America and the Caribbean.
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