The bill would increase the corporate income tax rate, establish a new normalization tax and establish a new income tax invoicing mechanism. Taxpayers should continue to monitor the bill's progress through Congress.

On July 20, 2021, the Colombian Executive branch submitted to Congress a new tax reform bill (the Social Investment Act) that would modify the corporate income tax, value-added tax (VAT) and tax evasion measures. Besides the tax provisions, the proposal also includes rules to increase social expenditures, reduce public expenditures and adjust the 2021 budget.

Corporate income tax

The bill would increase the corporate income tax to 35% (currently the corporate income tax rate is 31% for FY 2021 and decreases to 30% for FY 2022). This rate would generally apply to Colombian entities, permanent establishments in Colombia and foreign income taxpayers that must file income tax returns in Colombia.

For financial institutions with taxable income of more than 120,000 tax units (approximately USD 1.1 million), the bill would impose a 3% surtax on income from 2022 to 2025 (for a total income tax rate of 38%).¹ The bill would establish an advance collection mechanism for the surtax.

The bill also would continue to limit the amount of turnover tax² taxpayers may claim as a corporate income tax credit to 50% (currently, beginning in 2022, taxpayers may claim 100% of the turnover tax effectively paid as an income tax credit).

The bill would exempt foreign portfolio investments in public or private fixed income securities, or financial derivatives with underlying fixed income securities, from income tax withholding (currently, a 5% income tax withholding applies).

Normalization tax

The bill would establish a new normalization tax (i.e., tax amnesty) applicable to income taxpayers that did not declare certain assets or claimed non-existent liabilities for tax purposes, as of January 1, 2022. The normalization tax rate would be 17% (the previous normalization tax rate was 15%). For assets that are repatriated to Colombia before December 31, 2022, and kept in the country for two years, the effective tax rate would be reduced to 8.5%. According to the bill, 50% of the normalization tax would be paid in advance in FY 2021.

In general, the rules would be similar to the ones determined for the normalization tax established in the past. A normalization tax return must be filed and the tax paid by February 28, 2022.

VAT

The bill would establish three days per year in which there would be a VAT exemption for some products, provided the value does not exceed certain amounts. The VAT exemption would cover virtual transactions.

Anti-avoidance mechanisms

New reporting obligation for notaries

The bill would authorize the Colombian tax authorities to implement a georeferenced information system that would be used by notaries at the time real estate is transferred to review the real estate's fair market value. Notaries would be required to report the fair market value established in the system to the parties involved in the transfer as well as to the Colombian tax authorities. Failing to report the fair market value of the transferred real estate would result in penalties.

Income tax billing

The bill would establish an income tax invoicing mechanism. The bill would allow the Colombian tax authorities to issue an income tax invoice based on information reported by third parties. The invoice would be deemed as an official assessment of the taxpayer's income tax liability. Further, the bill would authorize the Colombian tax authorities to enforce the payment of income tax invoices.

The Colombian tax authorities would publish the income tax invoice on their web page. Taxpayers would be notified of the invoice through the regular channels provided by the Colombian tax regulations.

If the taxpayer does not agree with the assessment included in the income tax invoice, the bill would allow the taxpayer to file an income tax return within the two months of the publication of the invoice on the Colombian tax authorities' web page.

Changes to the definition of beneficial owner

The bill would change the definition of beneficial owner and the criteria to determine which individual should be deemed as the beneficial owner of legal entities as well as structures without legal personality (e.g., trusts).

In addition, the bill would create a beneficial owner registry (RUB per its acronym in Spanish) and a system to identify structures without legal personality.

Additional measures

Temporary extension of the payroll subsidy

The bill would extend the application of the payroll subsidy, which was previously established as one of the measures to counteract the impact of COVID-19, from July to December 2021. Depending on the economic indicators, the subsidy would apply until June 30,2022. The subsidy would apply to companies that comply with the requirements to receive the subsidy. In addition to other requirements, companies would be required to have 50 employees or less as of March 2021.

Incentives for the creation of new jobs

The bill would establish a new subsidy as an incentive for the creation of new jobs as follows:

• If the company hires employees aged 18 to 28 years old, the company would receive payments of approximately USD 59 for each new employee.
• If the company hires new employees who are over 28 years old and their remuneration is less than approximately USD 707, the company would receive payments equivalent to approximately USD 24 for each new employee.

This incentive would apply until August 2023. The employer would receive the payments for 12 months.

The bill also would extend the application of the following benefits established to counteract the impact of the COVID-19 pandemic as follows:

• Tourism service providers would not be subject to the special electricity contribution (generally 20% surcharge on the electricity bill) until December 31, 2022 (currently December 31, 2021); to apply for this benefit, the taxpayer must be registered with the National Tourism Registry.
• Hoteling and tourism activities would be exempt from VAT until December 31, 2022 (currently December 31, 2021).

———————————————

———————————————
ENDNOTES

¹ Currently, financial institutions are subject to an income tax overall rate (including surtax) of 34% for FY 2021, 33% for FY2022 and 30% as from FY 2023 (year in which the surtax no longer would apply).

² Turnover tax is a municipal tax levied on the development of industrial, commercial or services activities within the territory of a specific municipality.