July 11, 2023 Draft decree provides guidance for nonresidents subject to Colombia's version of digital services tax (Significant Economic Presence)
In a draft decree (decree) issued June 29, 2023, the National Government defined various terms used in the SEP rule, which taxes nonresidents with SEP in Colombia on income from digital services in the country. The decree also specifies when clients or users will be considered located in Colombia and how to elect to file a tax return and pay 3% tax on income from digital services, rather than 10% withholding tax. Interested parties may submit comments and/or recommendations regarding decree until July 15, 2023, before the final regulation is issued. Background Under Law 2277 of 2022, nonresidents selling goods and/or certain digital services (listed in the Law) to clients and/or users in Colombia may trigger a SEP in the country. If a SEP exists, income from those goods or services will be subject to either (i) a 10% withholding tax on gross income, which applies at the time of sale or service, or (ii) a 3% tax on gross income, which must be included on an income tax return to be filed by the non-resident annually. SEP rules will apply beginning January 1, 2024. A SEP would be triggered if the nonresident:
Related parties should be aggregated when determining whether these criteria are met. Nonresidents are presumed to have a SEP when they (i) interact or market to 300,000 or more clients and/or users in Colombia, or (ii) display prices in Colombian pesos (COP), or (iii) allow payments in COP. The SEP rules may not apply under current income tax treaties or under future international treaties on taxation of the digital economy, namely under Pillar One rules. Draft decree Definitions The decree defines terms that the Law does not. These include:
Sales of goods and/or rendering of services in favor of clients and/or users in Colombia The decree considers clients and/or users to be located in Colombia when:
Election to file a return and pay the 3% tax, rather than apply the 10% withholding tax The decree permits nonresident sellers with SEP to elect to file a return and pay the 3% tax on their income from digital services. These nonresidents must submit the election request to the tax authority. To make the request, the nonresidents must already have a Colombian Tax ID. The tax authority will issue an official act granting or denying the election. Nonresidents whose election requests have been accepted should make advance payments on a quarterly basis. These advance payments are based on 2% of the nonresident's net quarterly income from its SEP. These advance payments can be credited against annual SEP income tax liability. Nonresidents with SEP that do no elect to file a tax return and pay the 3% tax will be subject to the 10% withholding tax. A nonresident's other Colombian source income — which differs from SEP income- would be taxed under general sourcing rules. Considerations for Colombian acquirers To deduct cross-border payments, Colombian taxpayers generally must be subject to withholding tax on those payments. A nonresident's election to file a return and pay the 3% tax should not, however, affect the deductibility of the Colombian taxpayer's payment. Other deductibility limitations might, however, apply. Next steps Nonresidents that may be impacted by the decree should consider sending comments and/or recommendations for the final decree. They should also consider consulting with their EY advisors as part of their comment-development process. ———————————————
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor | ||||||||||