Colombia: Tax reform enacted; corporate income tax and VAT changes

Colombia: Tax reform enacted; corporate income tax

A new tax reform law—Act 1819 of 2016—has been enacted in Colombia.

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  • The legislation includes significant changes to certain corporate income tax and individual income tax provisions, including rate reductions and the repeal of certain corporate-level taxes. 
  • The legislation also aims to raise tax revenue mostly by increasing the rate of the value added tax (VAT) to 19% (up from 16%) and through a variety of excise taxes. 

Most of the tax provisions are effective 1 January 2017.

Overview

The legislation is viewed as the most ambitious tax reform in decades, and it includes complex structural changes aimed at:    

  • Addressing tax evasion
  • Providing tax relief to corporations and simplifying the corporate tax regime
  • Simplifying and increasing the progressivity of the tax regime for individuals
  • Simplifying the tax regime for small enterprises
  • Raising revenue by increasing indirect taxation
  • Imposing “green” taxes on fuels
  • Increasing the taxation on cigarettes (to reduce consumption)
  • Strengthening municipal taxation

Tax measures affecting investors

Among the tax reform provisions that may affect investors are measures to address tax evasion by: 

  • Increasing the exchange of information with other countries, including the obligation to report the information about the “ultimate beneficial owner’” of accounts and assets
  • Reinforcing the current anti-tax haven measures and adding anti-preferential tax regimes measures to the rules
  • Creating two new specific criminal offenses: (1) one relating to the omission of assets or the inclusion of false liabilities in income tax returns; and (2) the other relating to the failure to charge, collect, and pay the applicable VAT, consumption tax, or withholding tax
  • Redefining what “abuse” means in tax matters

Corporate income tax changes

The legislation also includes the following provisions that are intended to simplify the corporate income tax system by:

  • Eliminating the “CREE” tax on corporations and the CREE surtax (CREE is the Spanish acronym for the “fairness tax”)
  • Repealing certain deductions, tax credits, and exemptions for corporations
  • Introducing a temporary income surtax of 6% for 2017 and 4% for 2018

Accordingly, with this tax reform, the corporate income tax will have the following rate schedule (applied beyond a limited profit threshold): 

  • 40% in 2017 (34% income tax plus 6% income surtax)
  • 37% in 2018 (33% income tax plus 4% income surtax)
  • 33% in 2019

Companies operating under the free zone regime will be subject to a 20% rate of corporate income tax.

There is an increase in the tax rate on deemed income relating to increases in a taxpayer’s net worth (i.e., the increase in the value of a taxpayer’s assets); the rate is increased from 3% to 3.5%. 

Other changes to the income tax law:

  • Introduce of a controlled foreign companies (CFC) regime
  • Lengthen the statute of limitations with respect to tax returns and assessments
  • Limit loss carryforwards to 12 years
  • Establish rules for the tax treatment afforded “concession agreements” (e.g., an agreement between the Colombian government and a private company to build infrastructure) 
  • Allow for a deduction of VAT paid on certain acquisitions or imports of capital goods when calculating the taxpayer’s income tax liability  
  • Introduce a new withholding tax on dividends—with the applicable rates for non-resident shareholders of: (1) 5% for dividends distributed out of the distributing entity’s previously taxed profits; and (2) 35% for dividends distributed out of the distributing entity’s previously untaxed profits, plus an additional 5% after having applied and deducted the initial 35% withholding 
  • Retain the tax on long-term capital gains at 10% for both corporations and non-residents 
  • Impose a general 15% withholding tax rate for taxable income accrued by non-residents without a permanent establishment (certain special rates may apply) 
  • Impose a new tax regime on non-profit organizations to address perceived abuses and evasion of the corporate income tax 
  • Increase the general rate of VAT from 16% to 19% 
  • Impose VAT on certain digital services and intangible goods supplied from outside the country (a withholding mechanism to apply)
  • Introduce a “green” tax on fuels and other oil-derived energy products

The legislation also revises and refines tax accounting standards based on IFRS rules. 

 

Read a January 2017 report (Spanish) prepared by the KPMG member firm in Colombia

 

For more information, contact a tax professional with KPMG’s Latin America Markets practice or with the KPMG member firm in Colombia:

Alfonso A-Pallete | +1 (305) 913 2789 | apallete@kpmg.com

Eric Thompson | +57 (1) 618 8122 | ericthompson@kpmg.com

Jessica Massy | +57 (1) 618 8000 | jmassy@kpmg.com

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