COLOMBIA: An Introduction to Tax

Colombia: An Introduction to Tax

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, growth stood 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 in oil prices between 2014 and 2016, tax incentives and migration. Although inflation was above the target due to temporary factors, mainly food prices, it was moving towards the goal of 3%. 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 saw increased demand for liquidity and credit at all levels (companies, banks, households). Therefore, there was an impact on employment and on 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 the COVID-19 crisis, the Colombian government took measures worth about USD3.7 billion (1.5% of GDP), including the suspension of the fiscal rule for 2020 and 2021 (granting the government a greater deficit), 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 has shown early signs of 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 has also held 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, re-enacting surtax applicable to financial institutions with taxable income exceeding approximately USD1 million, the reduction in 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 (made up of 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 five years for new companies in the sector (the investment must create at least three 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 tax year in which it was made (without having to prove a causal link between the investment or donation and the taxpayer’s income-producing activity).

- Incentives for agricultural development were also implemented, promoting investment in this sector with income tax exemption for ten years.

- 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 two 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 an income tax exemption for (i) dividends distributed by foreign entities to the CHC; (ii) dividends distributed by the CHC to non-resident 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 non-resident 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 at least USD300 million within five 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 ten years.

On international taxation, Colombia has seen major improvement, principally since the country entered the process of becoming an OECD member. With over 13 double taxation treaties signed, and three information exchange treaties in addition to the MLI, Colombia had begun 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 will also bring many challenges as Colombian GDP is far from the OECD average. This is also just one of many differences between the rest of the OECD members and Colombia.

In addition, Colombia has a network of international investment agreements that protect, promote and secure binational and international relations and commerce, positioning Colombia in relative terms as an investment destination.

Mostly as a result of COVID-19, the Colombian government tried to implement a new tax bill for the first half of 2021, but some measures, such as increasing the amount of individuals paying income tax and broadening goods and services taxed with VAT, resulted in large protests that led to the withdrawal of the bill.

With the aforementioned considered, a new bill passed in the middle of September, which contains measures such as maintaining an ICA discount at 50%, reducing by the same amount part of the 100% currently set out in law but set to apply from 2022. Corporate income tax rose to 35%, giving Colombia one of the highest rates in the OECD for such tax. A measurement that kept the financial sector surcharge until 2025, for three percentage points. Further, it included the provisional enlargement of the simple taxation regime, raising the limit corresponding to the income that companies can obtain annually from 80,000 to 100,000 UVT (to 2021 COP3,630,800,000 – USD946,561). Its purpose is to preserve employment and companies. 

The bill included yet again a provisional tax designed to be an opportunity for persons with omitted assets or with a record of non-existent debts, to “normalise” said situation by paying up to 17% of said debts or assets.

The bill did not include changes that imply broadening the base of natural persons in the income tax, or changes in the way pensioners contribute, in order not to affect the middle class or pensioners.

Other measures included the extension for the tourism sector of the exemption on the surcharge or special contribution for electricity until 2022. There are also plans to strengthen the Single Registry of Final Beneficiaries to identify the owners or beneficiaries of the companies, as a BEPS measure, and defining the category as the individual who ultimately owns or controls, directly or indirectly, a customer and / or the individual on whose behalf a transaction is carried out. It also includes the individual who exercise effective and / or final control, directly or indirectly, over a legal person or other structure without legal personality, or any person participating in a trust.

Regarding procedure, the bill incorporates a new system according to which the tax authority will issue certain income tax returns based on electronic billing and information exchanges, in order to improve efficiency in administrative procedures.

No changes to digital regulations have been announced, other than new regulations on electronic billing. This matter is very relevant considering that the world's eyes are fixed not only on COVID-19 but also on the digital economy, in which Colombia is deeply involved. In fact, 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'. The six dimensions considered are: digital by design, data-driven, acts as platform, open by default, user-driven and proactive.