April 23, 2021
Colombia's Executive branch submits tax reform bill to Congress
The bill would replace the fixed corporate income tax rate with a progressive rate, eliminate the VAT exemption for certain goods and services, and increase the tax on dividends for resident individuals. Taxpayers should continue to monitor the bill's progress.
On April 15, 2021, the Colombian Executive branch submitted to Congress a tax reform bill (the Sustainable Solidarity Act) that would modify the corporate income tax, value-added tax (VAT) and personal income tax provisions. Besides the tax provisions, the proposal also includes rules to increase social expenditures, adjust the government indebtedness rules, and adjust some provisions of the 2021 budget.
Corporate income tax (CIT)
Under Law 2010, the CIT will decrease to 30% from 31% beginning in 2022. The bill would replace that 30% CIT with a progressive rate that would apply as follows:
The bill would require an advanced assessment of the surtax in the year before the year in which the surtax would be due. Taxpayers would have to pay the surtax in two installments (according to the due dates set by the Government).
The bill would exempt income from foreign portfolio investments in public or private fixed-income securities, or financial derivatives with underlying fixed-income securities, from income tax (currently, a 5% income tax withholding applies).
Beginning in 2023, the bill would eliminate the income tax exemption for income from: (1) investments in the agricultural sector, (2) sales of electric energy generated from renewable resources, (3) gains related to low-income housing projects, (4) new forest plantations, (5) river transportation services, and (6) interest accrued on the reserve held by pension funds to guarantee a minimum return to their members. The bill would extend the income tax exemption for companies engaged in the "orange economy" sector to allow companies that start their activities before December 31, 2022, to qualify for the exemption (currently, companies must start their activities before December 31, 2021, to qualify for the exemption).
Although literary creations are part of the "orange economy" sector, the bill proposes to eliminate the tax exemption granted to certain literary creations.1
Income from services
The bill would subject payments to foreign residents for advertising or marketing services to a 20% withholding tax. The withholding tax also would apply to services provided abroad.
Beginning in 2026, the bill would eliminate the 9% tax rate on income from hotel services, theme parks, ecotourism and agritourism parks, new docks, and services provided to senior tourists in care facilities. Instead, the general income tax rate (i.e. 24% or 30%) would apply to income from those activities.
Private equity funds
For private equity funds and collective investment funds, the bill would limit income tax deferral to funds in which no more than 10% is held by the same beneficial owner, investment group or family group. Currently, income tax deferral is allowed, provided no more than 50% of a fund is held by the same beneficial owner, investment group or family group.
The bill would eliminate the VAT exclusion currently applicable to certain goods and services and impose a 19% VAT rate. The 19% VAT rate would apply to personal computers and laptops with a value of up to approximately USD 500, and smart phones and tablets with a value of up to approximately USD 220, among other things. The 19% VAT rate also would apply to public utilities rendered to medium- and high-income housing, software licenses for the commercial development of digital content, website hosting and cloud-computing services.
Under the bill, solar panels, power inverters for solar panels and charger controllers would no longer be excluded from VAT. The bill would impose a 5% VAT on those items.
The bill would characterize certain goods that are exempt from VAT as excluded from VAT, meaning taxpayers would no longer be able to claim a VAT credit for the VAT paid on those goods. This provision would apply to certain foods (meat, chicken, fish, milk, eggs, rice), vitamins, antibiotics and other medicines. It also would apply to scientific books, newspapers and magazines (including online subscriptions to such content).
The bill would allow taxpayers to claim an input VAT credit for the VAT paid on the acquisition, import, construction or formation of productive fixed assets. Currently, taxpayers may credit the VAT paid against their income tax due.
Under the current law, a VAT exemption applies to certain products (clothing, garments, electrical appliances, computers, communication devices, sports equipment, toys and school supplies) three days per year provided the value of those products does not exceed certain thresholds. The bill would extend the three-day VAT exemption to online sales and increase the thresholds.
Personal income tax
Currently, a 10% income tax rate applies to dividends that are paid to individuals resident in Colombia and higher than approximately USD 3,000. The bill would increase the threshold to more than approximately USD 8,000 and the tax rate to 15%.
Additionally, the bill would increase the marginal tax rates applicable to individuals. Under the bill, the maximum applicable rate would be 41% if the net taxable income is more than approximately USD 106,000 for FY 2022 (for FY 2023 the 41% rate would apply to net taxable income of more than approximately USD 101,000). The bill would reduce the thresholds for individuals to be subject to income tax and income tax withholding.
The bill would limit income tax exemptions and deductions to no more than 25% (currently 40%) of the individual's net income. Additionally, some tax benefits (e.g., benefits for voluntary pension contributions and transfers to qualified saving accounts for housing acquisitions (AFC accounts per their acronym in Spanish)) would be eliminated. The bill also would eliminate deductions for interest accrued on loans for housing acquisitions, certain student loans and payments for private health policies, as well as deductions for dependents.
Severance payments (including interest accrued on those payments) would be subject to income tax. Currently, severance payments are exempt from income tax.
The bill would subject retirement, disability, and survivor pensions to income tax on the value that exceeds approximately USD 16,000, annually. Pension payments also would be subject to income tax withholding under the same rules and rates applicable to employment income.
Additionally, for years 2022 and 2023, the bill would allow individuals who receive income belonging to the general (e.g., interest income, employment income) and pension baskets to claim an income tax exemption equal to a percentage of the value of personal goods or services that they acquired during the tax year. The following percentages would apply:
The exemption would apply if: (i) the individual has not claimed another benefit or credit for the acquisition; (ii) the acquisition of the goods and services is supported by electronic invoices; and (iii) the transaction is paid by debit card, credit card or other electronic payment mechanism, among others.
Other tax provisions
The bill would establish a new solidarity tax that would apply from July 1 to December 31, 2021, to individuals who receive monthly payments, such as salaries, self-employment income from services provided public or private entities, and payments from other sources, that are more than approximately USD 2,800. The applicable rate would be 10% of the amount of the payment. The bill would allow individuals to claim the solidarity tax as a tax credit for income tax purposes in future years.
Temporary wealth tax
The bill would establish a temporary wealth tax for 2022 and 2023, which would be levied on the net equity exceeding approximately USD 1.3 million. The wealth tax would apply to assets deemed to be held in Colombia directly by resident individuals and nonresident individuals or through a permanent establishment. The wealth tax would apply to foreign legal entities to the extent they hold immovable property, yachts, boats, artwork, aircraft or mining or oil rights in Colombia. It would not apply to foreign entities owning shares, account receivables, portfolio investments or financial leasing contracts deemed to be held in Colombia. The applicable rate would be 1% on net equity exceeding approximately USD 1.3 million up to approximately USD 4 million and 2% on net equity exceeding approximately USD 4 million.
The bill would modify the environmental tax provisions, as follows:
National carbon tax: The bill would include coal as a fossil fuel subject to the national carbon tax. Beginning January 1, 2022, the tax rate would be approximately USD 5 per ton of CO2eq. The rate would increase annually in February based on the consumer price index of the previous year, increased by 1%. The bill would limit the national carbon tax rate to the value of 3 tax units (currently, the limit is 1 tax unit). For fiscal years 2022 and 2023, the national carbon tax rate applicable to natural gas, liquefied petroleum gas and coal used for electricity generation would be 0%. Beginning in 2024, the applicable rate would be 20% of the full rate and would be adjusted annually by 20% until 2028 when the full rate would apply. The tax would not be levied on exports. These modifications would be effective January 1, 2022.
Tax on single-use plastic products used for packaging: The bill would impose this new tax on the sale, import and self-consumption of single-use plastic products by the producer and the importer of those products. The taxable base would be the weight in grams of the plastic container or package and the rate would be 0.00005 tax units per gram of the plastic container or package. The tax would not apply to single plastic products used to package medicines and hazardous waste. The tax would not be deductible for income tax purposes.
National tax on the consumption of pesticides: The bill would establish an 8% tax on the sale of pesticides classified under subheading 38.08 of the customs tariff. The tax would apply to the final consumer or the self-consumption of the pesticides by the manufacturer or distributor. The taxable base would be the value of the pesticides at the time of sale to the final consumer or its fair market value if it is used for self-consumption. The tax would not apply to bio-based pesticides and would not be deductible for income tax purposes.
Consumption tax: The bill would repeal the consumption tax on the use of plastic bags beginning January 1, 2022.
Rules of procedure
The bill would modify the beneficial owner/ultimate beneficiary definition to allow individuals who effectively control, directly or indirectly, legal entities or other types of structures to be deemed as the beneficial owner/ultimate beneficiary of the entities or structures. To identify the beneficial owner of a legal entity or structure, the new rules would follow the guidance provided by the Financial Action Task Force (FTAF). Furthermore, the bill would create a beneficial owners registry and an identification system for structures with no legal personality (i.e., not characterized as a corporation, partnership, etc.).
Exemption from certain employer obligations: The bill would exempt employers from the payment of social security contributions (health and pensions), payroll taxes and contributions to family compensation funds (as a general rule employers must enroll their employees with a family compensation fund, which will provide family subsidies and access to welfare programs). Therefore, employers would only be subject to the payment of labor-risk contributions (i.e., similar to workers compensation) for existing and new employees that are: (1) younger than 28 years old and for whom this is their first job, (2) individuals who do not receive pension payments, even though they meet the age requirement to receive a pension (provided they have not received a reimbursement of pension contributions or payments in lieu of a pension), (3) individuals with disabilities, or (4) women over 40 years old who have not been formally employed within the prior 12 months. The exemption would apply for employees who earn up to approximately USD 758. For young employees or women over 40 years old, the exemption would apply for two years.
Creating new jobs: By hiring new workers who have not registered contributions with the social security system within the last three months and have earned up to approximately USD 758, employers would be exempt from the payment of pension contributions and the obligation to enroll the employees with family compensation funds. The exemption would apply for four years beginning on the date the employee is hired by the company. This exemption could not be combined with the exemption from employer obligations.
PAEF: The Formal Employment Support Program (PAEF), which provides a subsidy to Colombian entities to help them meet their payroll obligations, would be extended until June 2021.
1 Currently the income tax exemption applies to royalty payments made to authors and translators who are tax resident in Colombia, for scientific or cultural books edited and printed in Colombia. The tax exemption will also apply to foreign authors and translators on the first edition of books edited and printed in Colombia. Following editions have a limited exemption.