Colombia – Tax Reform Law Brings Considerable Changes | KPMG | GLOBAL

Colombia – Tax Reform Law Brings Considerable Changes to Taxation of Individuals

Colombia – Tax Reform Law Brings Considerable Changes

This GMS Flash Alert reports on a substantive reform of the taxation of personal income in Colombia.

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Colombia’s Law 1819, part of the government’s tax reform plan1, contains provisions on:

  • new methods for assessing individual income tax for residents;
  • a new income tax structure.

From FY 2017 (returns which will be filed in 2018), income received by individuals should be separated into “baskets” depending on the type of income. 

In addition, new progressive tax rates apply for the groups of baskets that differ from the labor income basket. 

Moreover, limitations are being imposed upon the amount of deductions and exempt income. 

WHY THIS MATTERS

The new provisions will significantly affect the taxation of individuals in Colombia.  Global mobility tax professionals, international assignment program managers, and individuals rendering services in the country should take note of the changes, as they will affect individuals’ tax burdens and could result in employers experiencing higher international assignment costs.

Consequently, companies that have employees who work in Colombia or that are considering locating staff there will have to take into consideration the potential increased cost of assigning those employees – modifications will need to be made to cost projection systems, and, where employees are sent to or from Colombia, to hypothetical tax calculations as well.  Furthermore, where appropriate, payroll administrators should make the appropriate adjustments to payroll withholdings. 

Baskets of Income

From FY 2017 (returns which will be filed in 2018), tax resident individuals’ income should be separated into “baskets,” depending on the type of income:

(I) Labor income;

(II) Pensions;

(III) Capital income (interests or financial yields, rentals, royalties, etc.);

(IV) Non-labor income (residual basket); and(V) Dividends.

It is important to mention that the system for taxing capital gains remains – understood as the gain obtained from selling assets owned for two or more years.  In this case, a tax rate of 10 percent applies to the gain.

Law 1819 of 2016 eliminates the alternative minimum income tax (Impuesto Mínimo Alternativo Nacional, IMAN) and the simplified alternative minimum tax (Impuesto Mínimo Alternativo Simple, IMAS).

KPMG NOTE

The taxable base for each basket takes into account the deductions, tax benefits, costs, and expenses allowable for that specific basket.  A “net income” will be calculated for each basket, which will be added to net income relating to the other categories (labor + pensions and capital income + non-labor income; and the taxable base for dividends will be only such type of income) in order to determine the income tax liability for each basket. 

For the labor income basket, all remuneration, fees, and allowances paid under an employment contract or to an independent worker are treated as taxable income, whether received in cash or in-kind.

Limitation of Tax Reliefs

Although prior tax reliefs were not repealed, a limitation to such reliefs has been introduced.  Thus, for example, for the labor income basket, exempt income and deductions cannot exceed 40 percent of net taxable income, and cannot exceed UVT 5,040 (Tax Unit Value, which equals to COP 31,859 for FY17).

On the other hand, under the new rules, the limitation to the reliefs, consisting of deductions and exempt income applicable to the different baskets, cannot exceed 10 percent of the result of subtracting from the total value of income, including deductions, with a limit of UVT 1,000 (see equation below) – the sum of deductions and exempt income cannot exceed 10 percent of the gross income minus costs and deductions. 

Exempt income + Deductions = less than 10% * (Gross income – costs and deductions)

There is a problem with the redaction of the provision as it includes deductions as part of the limitation and part of the base to calculate the 10 percent, which we further explain below.  This applies for baskets different than labor income.

KPMG NOTE

There is an inconsistency in the law as redacted; it includes the provision that exempt income and deductions should not exceed 10 percent of net income.  The terms could not be not be applied as written, as deductions were already excluded from the taxable base, hence we believe that the limitation could be applied only to exempt income. 

Criteria for Determining Liability to File a Colombian Income Tax Return

One of the criteria to determine if a tax resident is required to file a Colombian income tax return is the amount of his purchases by credit card, and the amount of deposits to personal bank accounts.  The limit was reduced from UVT 2,800 to UVT 1,400 (each UVT equals to COP 31,859).  A taxpayer who exceeds this amount will be liable to file a return.

Tax Rates

The net labor income of a person resident in Colombia will be taxed at the same progressive rates applicable before the tax reform, ranging from 0 percent to 33 percent.  This is currently the maximum tax rate for residents and is applied on income earned over COP 130,621,900 for the 2017 tax year. Nonresidents are liable to income tax at a flat rate of 35 percent.  

Labor Income Tax Table for 2017

Taxable
income bracket

Total
tax on income below bracket

Tax
rate on income in bracket

From COP

To COP

COP

Percent

0

34,726,310

0

0

>34,726,310

54,160,300

(Taxable base – 34,726,310) x 19%

19

>54,160,300


130,621,900

(Taxable base  – 54,160,300) x 28% + 3,695,644

28

>130,621,900

Onwards

(Taxable base  – 130,621,900) x 33% + 25,104,892

33


It is important to mention that if the income received is classified as capital income or non-labor, the following rates will apply:

Capital Income or Non-Labor Income Tax Table for 2017

From COP

To

Tax rate

19,115,400

31,859,000

(Taxable base – 19,115,400) x 10%

> 31,859,000

63,718,000

(Taxable base – 31,859,000) x 20% + 1,274,360

> 63,718,000

95,577,000

(Taxable base – 63,718,000) x 30% + 7,646,160

> 95,577,000

127,436,000

(Taxable base – 95,577,000) x 33% + 17,203,860

>127,436,000

Onwards

(Taxable base – 127,436,000) x 35% + 27,717,330

However, if the income received is investment income (in this event, it is considered as a “dividend”), the tax regime applied would be as indicated below.

First it should be noted who is receiving the dividend, and then how it is distributed (taxed or non-taxed).  Below is an illustrative chart:

Beneficiary

Dividends distributed by Colombian entities as non-taxed 

Dividends distributed by Colombian entities as taxed 

Residents for tax purposes

From
(COP)

To
(COP)

Rate

35% of the amount received, and a 0%, 5%, or 10 % of the remaining
amount (*)

0

19,115,400

 

0%

19,115,400

31,859,000

Dividends less COP 19,115,400 * 5%

31,859,000

Dividends less COP 31,859,000 * 10% + COP 637,180

Nonresidents for tax purposes

5% of the payment

35% of the amount received, and 5% of the remaining amount (*)

(*) First the tax of 35% should be paid on the dividends as this is the
tax that the entity did not pay, and then the progressive rates should be
applied upon the remaining amount.

[COP 1 = EUR 0.00032 | COP 1 = USD 0.000344 | COP 1 = GBP 0.000276 | COP 1 = CNY 0.00237] 

FOOTNOTE

1  Law 1819, Reforma Tributaria Estructural, was published on 29 December 2016. See the text of the law (in Spanish) published on the website for Colombia’s president

CONTACTS

For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in Colombia:

 

Maria Consuelo Torres 

Tel. +57 (1) 6188000

mctorres@kpmg.com
 

 

Carlos Neira

Tel. +57 (1) 6188000 ext. 1511

ceneira@kpmg.com

The information contained in this newsletter was submitted by the KPMG International member firm in Colombia.

© 2017 KPMG Impuestos y Servicios Legales Ltda, a Colombian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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