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COLOMBIA: An Introduction to Tax

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Colombian macroeconomic policies are based on a flexible exchange rate, an inflation targeting regime and a fiscal rule. Due to the continuity of said policies, the Colombian economy is considered one of the most stable in Latin America and an ideal environment for investment.

According to the Doing Business report from the World Bank, Colombia is the first country in Latin America within the Investor Protection Index as well as a pro-business reforms implementer.

In the past decade, the Colombian economy grew. In 2018 was at 2.6% and in 2019 at 3.3%. In 2020, economic growth was showing signs of acceleration until COVID-19 affected the economy. Indeed, there were good dynamics in consumption and private investment, as a result of the recovery after the fall of the oil price between 2014 and 2016, tax incentives and migration. Although inflation was above the target due to temporary factors, mainly due to food prices, it was converging towards the goal of 3%; and the external deficit was relatively high, more than 4% of GDP, mainly due to the strength of consumption and investment.

With COVID-19 preventive health measures and the closure of economic sectors, production collapsed, and income and cash flows dropped. Consequently, Colombia increased its necessity of liquidity and credits at all levels (companies, banks, households). Thus, there was an impact on employment and in the financial health of companies. There is no doubt that 2020 will close with a drop in GDP and an increase in unemployment.

To counter the effects of COVID-19 crisis, the Colombian Government took measures of about USD3.7 billion (1.5% of GDP), including the suspension of the fiscal rule for 2020 and 2021 (allowing a greater deficit to the Government), cash transfers for low-income people, the postponement of the filing and payment of tax returns, VAT rebates and financing support for SMEs.

In recent months, the Colombian economy showed early signs of COVID-19 recovery. As of October 31st, the Board of Directors of Colombia's Central Bank “noted a slight improvement in growth projections for 2020, though still in the context of significant economic contraction.” Nonetheless, further regulations and policies are expected to be adopted and implemented to overcome the economic downturn. Currently, the Colombian Central Bank has kept the reduction on the benchmark interest rate at 1.75%, but also holds the inflation target at 3%.

Concerning tax matters, 2020 started with a new tax bill, since the Colombian Constitutional Court ruled that Law 1943 of 2018 (the previous tax bill) was unconstitutional. Therefore, on January 1st, 2020, Law 2010 of 2019 entered into force reenacting surtax applicable to financial institutions with taxable income exceeding approximately USD1 million, the decrease of the corporate income tax rate and tax benefits.

Currently, the main tax novelties remain:

- Tax benefits to The Orange Economy, also known as The Creative Economy (integrated by almost everything related to goods, services and activities that have cultural, artistic or patrimonial content). To name a few of the tax benefits: (i) income tax exemption during the first 7 years for new companies in the sector (the investment must amount to USD50,000 within three years, create at least 3 jobs related to R&D, and have the approval of the Ministry of Culture), (ii) investments or donations to some projects related to the Orange Economy generate a 165% income tax deduction of the amount invested or donated for the fiscal year in which it was made (without having to comply with a requirement of causal link amongst the investment or donation and the taxpayer’s income-producing activity).

- Tax regime of “Colombian Holding Companies" (CHC) of securities, investment, shares or participations in Colombian companies or abroad, or the administration of said investments. As long as the CHC owns at least 10% of the equity in 2 or more Colombian and/or foreign entities for a minimum of 12 months, and has human and capital resources to achieve its corporate purpose, it will have income tax exemption for (i) dividends distributed by foreign entities to the CHC; (ii) dividends distributed by the CHC to nonresident shareholders resulting from profits of foreign entities; (iii) profit on the transfer of shares held by the CHC in foreign companies; and (iv) profit from the transfer of shares owned by a nonresident in the CHC, in proportion to the profit attributable to the value of the participations held by the CHC in foreign entities.

- Large-Scale Investment Regime: investments of minimum USD300 million within 5 years, creating more than 250 direct jobs and having the approval of the Tax Authority will have a special income tax rate of 27% for up to 20 years, with the possibility of entering into a legal stability agreement.

- Agroindustry: companies investing minimum USD283,000 will have a 100% income tax exemption during the first 10 years.

On international taxation, Colombia has had major improvement, principally since the country entered the process of becoming an OECD member. With over 13 double convention taxation treaties signed, and 3 exchange of information treaties in addition to the MLI adherence, Colombia began to modify its international taxation regime (especially regarding transfer pricing) to be more in accordance with the OECD long before becoming a member.

In April 2020, Colombia officially became an OECD member, which will lead the country towards benefits derived from the compliance with best practices and global policies, but also facing many challenges as Colombian GDP is far from the OECD average, which is only one of the many differences existing between the rest of the OECD members and Colombia.

Due to COVID-19, the Colombian Government has already announced a new tax bill for early 2021, that is expected to also include an income tax to digital economy actors, taking into account that Colombia taxes them with VAT since 2016, through a withholding at the moment of payment practised by the issuing entities of credit and debit cards, the sellers of prepaid cards, the cash collectors in charge of third parties, and others that the authority designates at the time of the corresponding payment or credit account to providers from abroad. With said mechanism, in 2019 Colombia collected COP253.678 million, and from January to October 2020, COP209.887 million (the Economic Commission for Latin America and the Caribbean – ECLAC, estimates a VAT collection on digital economy of USD381.2 million in the region).

The foregoing is even more relevant considering that the world has its eyes fixed on issues such as COVID-19 and the digital economy, in which latter issue Colombia is deeply involved. Colombia ranks third in the Digital Government Index (DGI) 2019 of the OECD, an initiative that rates the digital transformation policies of 33 countries measuring the transition from e-government to digital government, according to the 'OECD Recommendation on Digital Government Strategies', through six dimensions: digital by design, data-driven, acts as platform, open by default, user-driven and proactive.