Colombia's Commission of Experts for Equality and Tax Competitiveness, appointed by the government, presented to the Ministry of the Treasury and Public Credit their report with recommendations for tax reform in Colombia. The Commission focused on developing short- and long-term recommendations for tax reform, which are summarized below.

Direct taxes

Legal persons

The Commission generally proposes: (1) replacing the direct taxes with a single tax that possibly would be based on accounting profits; (2) reducing statutory rates to be equivalent to international standards; and (3) expanding the tax base by eliminating or reducing tax privileges.

Recommendations

The Commission proposes creating a new tax that would be levied on all corporate profits from transactions carried out during the year and would replace the current income tax, the income tax for equality (CREE tax) and its surtax.

Taxpayers that would be legal persons would include permanent establishments and foreign company branches, as well as other corporate forms, communities, and commercial establishments, even if they were not legal persons independent of their members or were not residents of Colombia. Funds, temporary unions, trusts, and other business cooperation contracts also would be considered legal persons. Annual profits would be treated as dividends for tax purposes.

The tax base would be IFRS accounting profits¹ before tax, and the following adjustments would be allowed: (1) adjustments to ensure uniform treatment when the IFRS rules allow discretion; and (2) other adjustments limiting the use of payments for tax purposes when those payments are not related to the generation of profits or are difficult to control, as well as payments made for purposes of tax avoidance.

The Commission would maintain the equity method of comparison for determining profits.

Additionally, the Commission would create a single tax rate ranging from 30% to 35% for all legal entities, depending on whether all or a majority of the recommendations for company profits, dividends and individuals are adopted.

The Commission also would allow a tax credit for: (1) foreign taxes paid; (2) 20% of the expenses for Investigation, Development and Innovation, Reforestation and Environmental Protection; and (3) 30% of the donations to nonprofit entities (which are not deductible from corporate income tax).

The Commission would treat capital gains as taxable income. Capital gains would be calculated as the difference between income and the cost of goods.

The Commission recommends that the Government study eliminating contributions to the general health system, to the Colombian Institute for Family Wellfare (ICBF for its initals in Spanish), to the National Apprenticeship Service (SENA for its initals in Spanish), and to the Family Compensation Funds. The Commission would impose a fixed value (calculated as an average of the last two or three years) indexed for inflation, plus a fraction of the GDP growth exceeding 4% annually for the health system, ICBF and SENA. The Commission would also include a provision in the annual budget for the Family Compensation Funds that would establish the value of such funds as the value of the subsidy paid.

Individuals

The Commission recommends: (1) expanding the tax base to include more individuals in the system; (2) streamlining tax benefits to increase collection and improve income distribution; and (3) simplifying the tax and unifying the tax treatment based on the type of income received and under a regime that has stricter limits on deduction, rebates and exemptions.

For tax purposes, the Commission proposes adopting a classification system based on the type of income: (1) income from employment; and (2) other income.²

The Commission would tax high pensions, but a majority of retired person would not be taxed.

The Commission also would modify the income tax table and tax rates to:

— Include a fifth income tax range

— Modify the income limits for each range, depending on the type of taxable income and the limit on benefits

The Commission would limit deductions, exemptions and special treatment to 35% of salaries and other compensation derived from work contracts and 10% for other net income, provided the income does not exceed 4,500 of UVT (approximately USD 41,938 for 2016). If only employment income is received, the income limit would be 1,286 UVT (approximately USD 11,985 for 2016).

For individuals with a combination of employment income and other income, the percentage limit would be a weighted average of the limits on each type of income.

Payments in cash would not be deductible for transactions in which any of the parties is a taxpayer of any tax and the value of the costs equals or exceeds 500 UVT (Approximately USD 4,699 for 2016).

Additionally, the payments in cash could not be greater than 30% of the costs, deductions or VAT tax credits reported on the tax return for the year. The Commission would implement this provision gradually.

Capital gains

The Commission would maintain the current capital gains rates of 10% for inheritances and gifts and 20% for lotteries, raffles and gambling. The Commission would increase the capital gains rate to 15% for sales of property and other assets.

Presumptive income

The Commission would propose eliminating the wealth tax and replacing it with a presumptive income regime with tax rates that increase incrementally from 3% to 4%. The Commission would exclude from the tax base income from investments in shares and contributions to domestic corporations.

Tax on nonresidents

The Commission would create a tax that would be levied on legal entities and individuals who received or had attributed to them domestic-source income and are taxed on the activities conducted in Colombia. The maximum tax rate would be the same rate applied to corporate profits or individuals, accordingly.

Dividends

The Commission would include dividends in the ordinary income of individuals, closed companies and foreign companies, but would allow a tax credit of up to 20% of the dividends received by legal entities and individuals (but thetax credit would not be more than the tax rate applicable to individuals). If dividends are distributed to closed and foreign companies, the Commission would establish a 15% withholding tax on those distributions.

Indirect taxes

VAT

Generally, the Commission would make the following modifications to the value added tax (VAT): (1) increase the tax base; (2) revise the rate structure; (3) re-evaluate the treatment of capital goods; (4) improve the simplified regime; (5) eliminate inequalities between similar goods and services; (6) implement the use of electronic invoicing; and (7) adopt procedural changes and strengthen the control of the tax administration over tax evasion.

Recommendations

The Commission would expand the application of VAT to transactions of intangibles (in addition to tangible movable goods and services) and commissions charged by the financial sector. The Commission also would establish five VAT rate categories: (1) nontaxable; (2) taxed at 0%; (3) 5%; (4) 10%; and (5) 19%.

The nontaxable goods category would be limited to health services, education, public transportation and vital public utilities services. The 0% rate would be limited to exports.

Because of the negative treatment of capital goods, the Commission would allow a credit for the VAT paid on the acquisition of capital goods, which could be claimed over three to five years.

The Commission would redefine the simplified regime and impose control mechanisms to curb the abuse under the current system. Specifically, the Commision would reduce the thresholds for inclusion in the simplified regime.

For all free trade zones, the Commission would include the aggregate value incorporated in the zones. The Commission also would apply the VAT on voice services provided by cellular companies to different data services and any other services provided by those companies.

The Commission would eliminate the explicit exemptions or the application of VAT to trusts and nonprofit entities.

When sales of taxable goods and services are conducted through electronic commerce, the Commission would require the seller to retain the VAT paid on the taxable good or service and the seller would be allowed to claim the retained VAT and credit.

For temporary imports, the introduction of raw materials (according to Decree 444 of 1967) and the introduction of goods of diplomatic agents, the Commission recommends the DIAN conduct a review of existing standards and try to reduce the evasion and avoidance mechanisms for these goods.

National consumption tax

The Commission would increase the consumption tax for restaurants and cafes up to 11% and would subject fast food franchises to the rate. Currently, fast food franchises are subject to a 16% VAT rate. The Commission also would increase the consumption tax rate for cellular telephone services to 7% and the consumption tax on sales of cars, motorcycles, aircraft, boats and ships to 17%.

Additionally, the Commission recommends that the Government analyze the possibility of applying a consumption tax of 11% to some services that are currently subject to VAT. Specifically, the Commission would impose the consumption tax on gambling, lotteries, hotels, gyms, entertainment services, movie theaters, call centers, laundries and general services with local establishments.

Debit tax (GMF for its initials in Spanish)

The Commission would maintain the GMF, but would recommend adding a 100% deduction for companies.

Fuel taxes

The Commission would impose the general VAT rate on fossil fuels (coal, oil and their derivatives other than gasoline and Diesel Fuel (ACPM)) and preferential rate of 10% to clean fuels, such as ethanol, biodiesel, natural gas and electricity (predominantly hydraulic). The Commission would increase to 30% the domestic tax on fuel (gasoline and ACPM). The VAT on gasoline and ACPM would include the domestic tax on fuel and would provide a new percentage for the VAT credit.

The Commission also would reduce the surtax on gasoline and ACPM, taking into account the impact on the emission of greenhouse gases.

In addition, the Commission recommends that the Government make progress in dismantling the preferential regimes of the border zone, which have not curbed smuggling due to the large subsidies provided by other countries, such as Venezuela, on the selling price of gasoline.

Territorial taxes

The Commission would adjust the consumption tax on specific items in accordance with international standards. Specifically, the Commission would gradually increase the consumption tax on cigarettes and tobacco, revise the tax structure for beer and liquor, and evaluate the possibility of introducing a tax on sugary beverages.

The Commission would adopt a process for marking domestic and imported products, which other countries have successfully instituted. Additionally, the Commission would review the tax structure applicable to vehicles so that the structure takes into account collection and environmental considerations.

The Commission would conduct a survey to update the property tax in municipalities. For the Industry and Commerce Tax (ICA for its initials in Spanish), the Commission would follow the suggestions of the World Bank and simplify the tax by reducing dispersion rates and unify taxable activities, taking into account differences of profitability. The Commission also would improve the definition of location.

The Commission recommends that the Government adopt measures to eliminate the creation of new stamp taxes and labor contract taxes in municipalities.

For royalties, the Commission also recommends that the Government and Congress study the possibility of establishing a system for new oil and mining projects that responds to the behavior of international prices and corporate profits. The Commission would adopt a royalty regime similar to the Chilean or Peruvian royalty regimes or replace part of the royalty regime with a resource rent tax (similar to the one in Australia) and allow credits for the royalties paid.

The Commission would eliminate the fire department rate, the tax on street lighting, the tax on signs and billboards, among others.

The Commission would increase the total amount of the consumption tax (more specifically the ad-valorem) to 150% in three years and update the consumption tax in relation to the consumer price index.

In addition, the Commission would unify the tax on beer, liquor and wine. The Commission would impose the general VAT rate on all liquor and designate the amount collected for health and education.

The Commission would adopt anti-smuggling policies to identify and track domestic products and those who have paid the tax at the time of importation. The Commission also would amend Law 223 of 1995 to create an electronic invoicing system.

Nonprofit entities

The Commission would treat nonprofit entities as income taxpayers in accordance with the rules applicable to limited liability corporations, except for nonprofit entities that do not qualify as taxpayers under the Colombian Tax Code and are admitted to a special tax regime. To be admitted to the special tax regime for nonprofit entities, an entity must comply with all of the requirements set forth by the DIAN.

To be a nonprofit entity, the Commission would require the entity to meet certain requirements under which contributions would not be reimbursed and they would not be allowed to distribute any surpluses directly, indirectly, during existence or at the time of dissolution and liquidation.

The Commission would limit the activities subject to the nonprofit regime to those of general interest to which the community has access: formal education, health, culture, science, technology and research, amateur sports, trade associations and social development activities.

The nonprofit regime would apply beginning in the period following the date on which the new rules for the nonprofit regime are issued and would replace the current rules.

The Commission would establish a general anti-avoidance clause to control corporate and family foundations and indirect distributions of excess contributions and donations, as well as provide the tax administration with audit tools.

Tax administration

The Commission would reconfigure the DIAN as a state agency and give it more administrative, technical and budgetary autonomy. The Commission also would allow the DIAN to adopt a comprehensive human resources policy and have a technology platform that supports its functions.

The Commission would put the state agency under the control of a board that would follow the rules of corporate governance and the model proposed by the OECD. The Commission also would modernize tax administration by creating an administrative court to resolve appeals against assessments and penalties, establishing a tax code that defines procedures and sanctions, creating a regulation for binding agreements to provide more certainty to taxpayers regarding the taxation of their investments, and establishing an anti-avoidance clause to combat sophisticated tax-planning structures used to avoid taxation in Colombia.

The Commission would increase tax control over international operations by gradually implementing the BEPS plan recommended by the OECD and adapting it to Colombia's conditions.

Additionally, the Commission would have the tax administration adopt a more complete and updated National Tax Registry (RUT by its initials in Spanish), segment taxpayers by size, use more technology (e.g., establishing electronic invoicing), design risk maps, adopt annual plans for audit and collection, and measure productivity of sectional directors.

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ENDNOTES

¹ The tax base for the new tax on corporate profits would be calculated by determining the accounting profits of each legal entity identified in a company's accounting system, which will be the IFRS system beginning in 2015 for group 1 (large entreprises) and 3 (microenterprises) companies and 2016 for group 2 (small and medium enterprises (SME)) companies.

² Income from work would be salaries, commissions, benefits, travel and entertainment expenses, fees, compensation received by a cooperative worker and compensation for personal services. Other income would be income that is not from work.