August 4, 2022
New Colombian Government expected to propose tax reform
On August 7, 2022, the new Colombian Government, including the elected president Gustavo Petro, will take office and a tax reform proposal is expected to follow shortly.
This Tax Alert discusses the main provisions of the expected tax reform proposal announced by campaign members and the individuals appointed to high positions in the new administration.
More information is expected once the text of the tax reform proposal is submitted to the Congress for approval.
EY will continue to report on the progress of the discussions.
Income tax rates
Income tax rate increases are expected for individuals who earn more than COP 10 million per month (approx. USD 2,5001), but not a lot of detail has been provided. For example, it is unclear whether the applicable rates for the higher-income brackets would increase (currently the maximum rate is 39%), or if higher rates would apply to lower-income brackets.
Additionally, increases in the effective taxation of individuals could be achieved from other adjustments in the determination of the taxable base, such as limitations on exempt income or changes in the current basket system under which individuals are taxed on their income under three baskets — general, pension and dividends. The changes to the baskets are discussed below.
The limit on exempt income and deductions applicable to the general basket (which includes labor and non-labor income, services income, interest, lease income and royalties) is currently 40% of taxable income (without exceeding 5,040 annual Tax Units - UVTs, equivalent to COP 191 million for 2022, approx. USD 47,700). The proposal would limit the exemption to COP 4 million per month (COP 48 million annually, approx. USD 12,000).
Elimination of the baskets system
Before the election, Gustavo Petro's campaign mentioned eliminating the basket system for individuals. At that time, the campaign team indicated that the same tax rate applicable to labor income should also apply to other types of income, such as capital gains and dividends.2
Once elected, however, no further details were issued, and it is unclear whether eliminating the baskets would be the mechanism used to increase income taxes on individuals.
The proposal could increase the 10% reduced capital gains rate applicable to the sale of fixed assets owned for two years or more, inheritances and donations, and other transactions. It is unclear whether a new rate would apply or whether the tax on those transactions would be based on ordinary income rates.
The tax base of certain operations (e.g., donations or inheritances) subject to the capital gains tax could be determined by taking into account "market values" rather than "nominal values" (determined under local rules).
No details, however, have been released on how the "market value" would be determined.
The proposal is expected to reintroduce an equity tax for individuals. The equity tax would apply as follows: (1) 0.25% rate if equity > COP 1 billion (approx. USD 250,000); (2) 0.5% rate if equity > COP 2 billion (approx. USD 500,000); (3) 0.75% rate if equity > COP 3 billion (approx. USD 750,000); and (4) 1% rate if equity > COP 4 billion (approx. USD 1 million). The last time the equity tax was applied was in 2021 under Law 2010 of 2019, and individuals were taxed with net equity exceeding COP 5 billion (approx. USD 1.25 million) at a 1% rate.
Like in the case of capital gains, the taxable base would be determined with "market values," but it is unclear how it would be determined.
In addition, when determining the equity that would be subject to the tax, it is unclear what reductions would be allowed (e.g., in the past there have been some exclusions, such as the value of the home of residence up to certain limits) or if there would be special considerations regarding the treatment applicable to nonresidents.
The proposal would subject pensions over COP 10 million per month (approx. USD 2,500) to taxation. It is not clear, however, what the applicable rates would be. Currently, pensions up to 1,000 UVT per month (COP 38 million for 2022, approx. USD 9,500) are exempt.
Tax on dividends
The proposal would increase the dividend tax (currently 10%), but it is unclear by how much or whether dividend income would be treated as ordinary income.3
Taxation of companies
The proposal could eventually include changes in the corporate income tax rate (currently 35%) for companies that qualify as micro, small or mid-sized (which, according to the new government, make up 95% of companies).
Elimination of benefits
The proposal would reduce the benefits for certain sectors. It is unclear what benefits would be reduced. The proposal could reduce the number of entities that currently are benefiting from the free trade zone regime by setting additional requirements to qualify for this regime (mostly related to export activities).
The proposal would eliminate the value-added tax (VAT) three-day holiday. Otherwise, no significant changes to the VAT are expected.
The proposal would (1) establish a new tax on sugary drinks and ultra-processed foods; (2) increase taxes on carbon emissions; and (3) establish additional environmental taxes.4
Potential increases in taxes on carbon emissions have also been mentioned.
The proposal would establish additional anti-evasion measures, making it easier to bring criminal actions against those who evade tax, and to continue strengthening the national tax authority.
The proposed tax reform is expected to raise approximately COP 50 trillion per year (approx. USD 12.5 billion) in revenue. In the past, however, some estimates have indicated COP 75 billion in revenue. Recently, it was announced that the target revenue amount is expected to be achieved gradually over several years.
1 For purposes of this Tax Alert an exchange rate of COP 4,000 for each USD 1 has been considered, although the exchange rate has fluctuated a lot lately.
2 See page 43 of the government proposal of Gustavo Petro, which can be accessed here.
3 Before the election, the campaign team mentioned that companies would be forced to distribute 70% of their profits each year. It, however, seems unlikely that this proposal will be included in the tax reform.
4 Although there was a discussion about including an additional tax on mobile telecommunication; for now, it has been discarded by the new government.