Structural Tax Reform Bulletin (Law 1819 OF 2016)

Income tax

  1. Natural persons

1.1. Law 1819 of 2019 (the “Reform”) eliminated the categories of natural persons created by Law 1607 of 2012 (employees, self-employed and other taxpayers), as well as the IMAS and IMAN regimes.

1.2. From the Reform, the taxation of natural persons will be based on the nature and origin of each of their income.

1.3. To that extent, the determination of income tax shall be made through five units, in which income, non-income income, costs, deductions and exempt income (the “Debt Factors”) shall be classified according to their origin and nature. The units are:

  1. A) Work income: This will include the Debt Factors associated with salaries, fees, commissions, social benefits, travel expenses, and in general, the compensation associated with the provision of personal services.
  2. B) Pensions: It will include the Debt Factors that are associated with pensions of retirement, disability, old age, survivors and occupational risks, as well as those arising from pension substitution allowances or pension savings refunds.
  3. C) Capital income. It will include Debt Factors associated with interest, financial income, leases, royalties and exploitation of intellectual property
  4. D) Non-labor income. It will include the Debts Factors that should not be classified in other units and, in particular, the fees received by natural persons who provide services, and who contract or bind for at least 90 continuous or discontinuous days, 2 or more workers or contractors associated with the activity.
  5. E) Dividends and shares. This unit, in turn, will be divided into two sub-units: (i) the first, which will include dividends coming from national societies, and which already taxed at the head of the society that distributed them; And (ii) the second one, made up of dividends from national companies, which did not tax at the head of the company that distributed them; and dividends from foreign companies.

1.4. The Debt Factors of each unit must be done individually and independently, so that (i) the Debts Factors cannot be simultaneously recognized in more than one unit; and (ii) losses incurred within a unit can only be offset against the income of the same unit, taking into account the limits and conditions established by the Law for each case.

1.5. Once each unit has been analyzed, the rate corresponding to each registration fee must be applied.

Thus, labor and pension income will be subject to the following tariff ranges:

On the other hand, non-labor and capital income will be subject to the following ranges:

Finally, the dividends distributed by national companies and that originated in profits that were already taxed at the head, will be subject to the following tariffs:

On the other hand, a 35% rate will be applied on dividends originating from non-taxable profits headed by the company that distributed them, or distributed by foreign companies. Once this rate is applied, the tariff ranges in the previous table will be applied, once the 35% tax has been reduced.

  1. National and foreign legal persons who receive income through branches and permanent establishments

The Reform totally modified the income tax for national legal persons, and for foreigners who receive income through branches and permanent establishments. Among the many modifications introduced, we highlight the following:

2.1. The Income Tax for Equity (CREE) was repealed and its surtax.

2.2. As a consequence of the elimination of the CREE, the general income tax rate was increased. This went from 25% to 34%, by 2017. Starting in 2018, the tariff will be 33%. However, special rates were established for certain incomes and for certain taxpayers. For example:

  1. A) Income derived from hotel services rendered in new or refurbished hotels shall be taxed at a rate of 9%, for the term initially granted exempt income under Article 207-2 of the ET.
  2. B) The companies that benefited from the benefits of Law 1429 will be subject, at least, to a rate of 9%. For its part, the rate will increase – from 9% to the general rate – according to the progressivity benefits established in Law 1429.
  3. C) The tariff of the industrial users and services of Free Zone will be of 20%.

2.4 On the other hand, the rules governing the determination of the tax base of income tax were amended to harmonize them with IFRSs, with certain peculiarities and exceptions. Let’s see:

2.4.1 Beginning in 2017, taxpayers who are required to keep accounts must determine the value of their assets, liabilities, income, costs and expenses in accordance with IFRS, when the Tax Law is expressly referred to them or when it does not regulate the matter.

2.4.2 In accordance with the foregoing, revenues, costs and expenses shall be declared when they have been accrued accounting. However, the following exceptions shall apply:

  1. A) Dividends will be subject to income tax when they are paid as collateral.
  2. B) Income and expenses arising from the application of the equity method will not have tax effects.
  3. C) The income, costs and expenses accrued by the measurement at fair value, with changes in the results, will not have fiscal effects.
  4. D) Income from reversals of provisions associated with liabilities will not be subject to income tax, when no deductible expense has been generated in prior periods.
  5. E) The revenues, costs and expenses that must be reported in the other comprehensive income shall not have tax effects until they are reclassified to the income statement or when a tax gain or loss is generated as a result of the transfer, settlement or write-off of assets or liabilities.
  6. F) Except for certain exceptions, the provisions associated with obligations of uncertain amount or date will not have fiscal effects.

2.4.3 Since the Reform, for an intangible to be amortized it is necessary that (i) it was not formed by the taxpayer; (Ii) can be measured and identified as an asset under IFRS, (iii) has a defined useful life; And (iv) the acquisition of the intangible has generated income tax for the Colombian resident tax resident at market values. However, intangible assets acquired from affiliates located in a free zone or as a result of transactions subject to the transfer pricing regime shall not be amortized.

As regards to the basic cost of amortization, this will be determined according to the form in which the intangible was acquired: (i) separately, (ii) in a business combination, (iii) Or as a result of improvements in operating lease. Finally, the amortization method will be determined according to the accounting technique, provided that the annual rate does not exceed 20% of the tax cost.

2.4.4 On the other hand, special rules are established for the amortization of investments according to their nature:

  1. A) Expenses paid in advance will be deducted periodically as long as the services are received.
  2. B) Reimbursements per establishment will be deducted by the straight-line method, in equal proportions, for the term of the contract, from the generation of income. In any case, the annual rate may not exceed 20% of the fiscal cost.
  3. C) The expenditures for research, development and innovation will be deducted, as a rule, from the moment the project ends, whether successful or not. The amortization will be made in equal proportions for the term in which income is expected, and in any case, the annual rate cannot exceed 20% of the fiscal cost.

2.4.5 The Reformation modified the depreciation rules for assets. To that extent, the depreciation basis will be the tax cost of the asset, not including (i) the VAT paid on its acquisition when it has been treated as a discount or deduction; And (ii) the residual value.  For these purposes, the accounting technique will determine the useful life of the asset, the depreciation methods and the residual value.

In any case, the National Government will establish maximum annual rates of depreciation, ranging from 2.22% to 33%. In any case, the Reform establishes provisional maximum rates while the Government regulates this matter.

2.4.6 The Reform established that tax losses might be offset within 12 years after the period in which they were generated, without the latter being subject to the tax adjustment.

Losses generated in the CREE and income tax until 2016 may continue to be offset, without a time limit, but cannot be adjusted as from 2017. For the purposes of compensation, a formula was created that takes into account the ratio between  (i) the pre-reform income tax and the CREE, and (ii) the income tax rate as of 2017.

2.4.7 On the other hand, the Reform established special rules for certain sectors and taxpayers. For example, the tax treatment of:

A) Concession contracts and public private partnerships in which the stages of construction, administration, operation and maintenance are incorporated.

  1. B) The amortization of investments in the extractive industry.
  2. C) Treatment of financial instruments measured at fair value.
  3. D) Construction services.

2.4.8. In addition, the presumptive income tax rate was increased to 3.5%.

2.4.9. Finally, the Reform established a transition regime in relation to different elements of the determination of taxable base. We highlight the following:

  1. A) Assets pending amortization, as of December 31, 2016, will be amortized by straight line, during the period of time that was being amortized, in accordance with the rules prior to the Reform.
  2. B) Assets pending depreciation, as of December 31, 2016, will continue to be depreciated over the remaining useful life of the asset, as was done prior to the Reform.
  3. C) The balances in favor of the income tax and the CREE (i) can be attributed, as of 2017, in the income tax return; or (ii) may be requested to be returned or compensated
  4. D) The excess of presumptive rent of the income tax and the CREE (generated before 2017) can be compensated in the income tax, proportionally, taking into account the rate of each tax.

 

  1. Tax on dividends distributed by national companies.

3.1. Another of the most important changes introduced by the Income Tax Reform is related to the tax treatment of dividends distributed by national companies.

3.2. Note that the treatment of dividends will depend on who receives them (natural person, national society, or foreign company), and their origin (if they come from profits not subject to taxes in the head of the company that distributes them, or not).

See below:

 

Note that these rules are applicable only to dividends that are distributed with charge to profits generated from the taxable year 2017.

  1. Foreign legal persons and non-resident natural persons.

4.1. Among others, the Reformation modified the rates on the income tax at the source on payments to the outside in the following concepts:

  1. A) Withholding at source for fees, leases, royalties, services and commissions was reduced from 33% to 15%.
  2. B) Withholding at source for interest on contracts with duration of less than 1 year was reduced from 33% to 15%.
  3. C) Withholding at source for technical assistance, consultancy and technical services increased from 10% to 15%.
  4. D) A withholding tax of 1% was established on reinsurance premiums.
  5. E) A withholding tax of 15% was established for administrative or management services, which will be applicable irrespective of whether they are provided in Colombia or abroad.
  6. F) Withholding at source for interest arising from contracts with duration of 1 year or more increased from 14% to 15%.
  7. G) Withholding tax on other items increased from 14% to 15%.

4.2. On the other hand, the Reform establishes additional limitations to the deduction of payments abroad. For example:

  1. A) The deduction of payments to foreign agents for the purchase or sale of goods will be limited to 15% of the net income (before computing the expense), when no withholding must be practiced.
  2. B) For the purposes of the deductibility of expenses for technology importation, the contract that originates the expenses must be registered within the 6 months following its subscription. In case of modifications to the contract, the registration must be made within 3 months after the modification.
  3. C) The following are not deductible: (i) royalties paid to foreign economic partners or free zones when the intangible was formed in the national territory, and (ii) royalties associated with the acquisition of finished products.

 

  1. Transfer- Pricing

5.1. In terms of reporting obligations under the transfer-pricing regime, two changes were made within the framework of the OECD BEPS Project:

According to the OECD guidelines, the master report should include (i) the organizational structure of the group; (Ii) description of its businesses, including the supply chain, and major intra-group transactions; (Iii) the general description of the group’s intangibles and the licenses granted; (Iv) the Group’s financing activities; And (v) the group’s financial and tax position (including consolidated financial statements).

  5.1.2. Secondly, starting from the taxable year 2016, certain taxpayers will be required to submit a country-by-country report, which will contain information on the overall allocation of income and taxes paid by the multinational group, together with indicators relating to their economic activity Global level.

Said report must be sent in the means, formats, terms and conditions established by the National Government. It is important to be aware of the issuance of this regulation, as the wording of the Reform seems to indicate that the first country-by-country report should be submitted in 2017

  1. Sales tax and national consumption tax

6.1. As for the VAT, the general tax rate was increased to 19%. In addition, the taxable event was extended to the following events:

  1. A) The sale or assignment of rights on intangible assets associated with industrial property.
  2. B) The provision of services from abroad, when the direct user or recipient of the same has his fiscal residence, domicile, permanent establishment, or the headquarters of his economic activity in the national territory.
  3. C) The first sale of new housing with a value higher than 26,800 UVT, even when realized through assignment of fiduciary rights for equivalent amounts. Other transactions on real estate will be excluded from the tax.

6.2. On the other hand, as from 2017, the discount of two VAT points on the acquisition or importation of capital goods is eliminated. This discount is replaced by a deduction of 100% of the VAT paid at the general rate, which can be taken on the income tax return of the year of purchase / import.

In any case, the discount of VAT paid on the acquisition and importation of heavy machinery for basic industries is maintained (Article 258-2 of the ET), which cannot be used concurrently with the aforementioned deduction.

6.3. As regards to the national consumption tax, establishments that provide restaurant, cafeteria, bakery, greengrocers, etc. services that operate under a franchise, royalty or any form of exploitation of intellectual property shall be subject to this tax (and not VAT).

  1. Anti-abuse, anti-evasion and anti-deferment measures

7.1 The Reform redefined the criteria for considering a conduct to be “abusive.” In general terms, this will occur when a legal act or business (i) does not have commercial and business purposes, and (ii) generates a tax benefit (elimination, reduction or deferral of tax, increase in the balance for or loss of tax; and the extension of tax benefits or exemptions).

In addition, a special (and simplified) procedure was established for the declaration of conduct as abusive. Under this procedure, the DIAN may ignore the effects of abusive behavior, and re-characterize them, according to their true nature.

7.2. On the other hand, the Reform introduced the Foreign Controlled Entities Regime (“ECE”), aimed at counteracting the deferral of taxes through the interposition of entities from abroad (companies, funds, trusts, trusts, etc.).

For this purpose, a foreign entity will be considered as an ECE (and will therefore be subject to the regime), if (i) it is controlled by one or more Colombian tax residents, under certain specific grounds established in the transfer pricing rules, and (ii) has no fiscal residence in Colombia.

Under the regime, Colombian tax residents holding more than 10% of the ECE’s capital, or its results, must declare the total amount of the passive income received by the ECE (interest, dividends, royalties, leases, etc.), with Whether they have been distributed, or not.

7.3. Finally, following the issuance of the Reform, it will be possible to penalize those taxpayers who, intentionally, affect their income tax by (i) omission of assets or an inaccurate declaration thereof; Or (ii) inclusion of non-existent liabilities. In all cases, the omitted, inaccurate or non-existent value must exceed 7250 SLMV.

In addition, it will also be punished criminally (i) those responsible for the national consumption tax that do not record the sums collected within 2 months after the date set by the national Government; and (ii) those responsible for the national consumption tax and VAT, and withholding agents, who do not collect and collect the taxes to which they are bound.

  1. Territorial tax

8.1 In relation to ICA, among others, the following modifications were adopted:

  1. A) The ICA taxable base is redefined for all municipalities and districts of the country (other than Bogota) to resemble that of the latter city. Also included, within the taxable base for said municipalities, the income obtained by financial income and commissions.
  2. B) For the purposes of determining the taxable base of the ICA, an express reference is made to the income tax regulations, as amended by the Reform (Article 28 of the ET).
  3. C) Territoriality rules are established in the ICA for (ii) commercial activities (including special rules for on-line sales, by mail and catalog), (ii) services (including exceptions for transport services, internet and telephony), and (Iii) financial activities (investment).

8.2. The rules applicable to the public lighting tax are modified:

  1. A) In the first place, its generating fact is defined as “the benefit for the provision of public lighting”, leaving the municipalities and districts the competence to define the other elements of the tax (taxable base, tariff, taxable person).
  2. B) Second, it is established that the value of the tax to be collected (i) will be limited to the estimated costs of providing the service, which must be supported in a technical study; and (ii) will be exclusively for the provision, improvement, modernization and expansion of the service.
  3. C) Finally, it is established that municipalities and districts, instead of establishing this tax, may choose to set an additional tax on the property tax to the public lighting service. The maximum rate of the surcharge will be 1 per thousand of the value of the property.

8.3. On the other hand, the tax reform created, among others, the following new taxes:

  1. A) National carbon tax. It is a monophasic tribute, which is caused by the sale of fossil fuels (derived from petroleum, natural gas and liquefied petroleum gas) within the national territory, which has been gathered for own consumption and importation. In the case of liquefied petroleum gas, the tax will only be levied on the sale to industrial users; and in that of natural gas, in the sale to the oil refining and petrochemical industry.

The taxpayers of this tax are: (i) those who acquire fossil fuels, from the producer or importer; (Ii) the producer when making withdrawals for own consumption; and (iii) the importer when making withdrawals for own consumption. In any case, they will be responsible for the tax, producers and importers of petroleum products, regardless of whether they carry out the generating event.

Finally, the tax rate is determined by each cubic meter (for natural gas) or gallon (for petroleum products), depending on the type of fuel.

  1. B) The national assessment contribution, as a mechanism to recover the costs of works of public interest or infrastructure. It will be applicable to the owners or possessors of the real estate that benefit from the infrastructure project, in terms of mobility, accessibility or greater economic value.

GMF

9.1. In relation to this tax, the Reform:

  1. A) Reversed its phasing out. This will be a permanent tax, with a rate of 4 per thousand.
  2. B) Maintained non-deductibility of 50% of its value; and
  3. C) Exempted foreign exchange transactions for the sole purpose of repatriating portfolio investments.

10 Procedure and penalty regime.

10.1 The Reform extended the terms of the declarations, in accordance with the following table:

10.2 On the other hand, taxpayers may submit directly the corrections that reduce the tax burden or increase the balance in favor, without having to submit an application to the DIAN (as previously). However, this new procedure will only take effect as soon as the DIAN has enabled its information systems, and no later than 1 January 2018.

10.3 In terms of penalties, the Reform repealed article 197 of Law 1607, which enshrined the principles governing the imposition of tax penalties. Instead, criteria for sanctions were established, which do not depend on an analysis of the damage caused by the conduct or the subjective conditions of the taxpayer, but rather that the taxpayer is placed in the position of the administration.

In addition, the Reform modifies different sanctioning norms of the Tax Code, with two purposes: (i) to reiterate that, as a rule, the application of any type of gradualism depends on the taxpayer accepts the position of the administration; And (ii) to establish new punishable acts.

In relation to the second point, for example, extends the application of the penalty for inaccuracy to include deductions, costs, expenses, and “inaccurate” exemptions. Likewise, the “difference of criteria regarding the applicable law” is eliminated as the reason for the exclusion of said sanction. From now on, it only excludes the application of the sanction “a reasonable interpretation as to the applicable law”.