The tax reform bill was filed in Congress on October 19, 2016 (“Bill”). Among the relevant matters we highlight the following:

  1. Corporate income tax

  1. General considerations: the income tax on fairness (CREE) would be eliminated. The income tax rate would be 34% for 2017, 33% for 2018 and 32% as of 2019.
  2. Deductibility limitations:
    • VAT paid on the acquisition or import of fixed assets would be deductible in the year in which the assets were acquired.
    • The 15% limitation on foreign payments deduction would remain. Foreign trade commissions and short term loan interests paid abroad would be subject to the 15% limitation. The deduction of foreign royalties’ payments to related parties or to free trade zone users would not be accepted, if the intangible is created in Colombia. In any case, royalties would not be deductible when associated to finished goods.
    • Technology agreements imports should be registered before the Tax Office within three months following the execution. If the agreement is amended, the registration term is one month. The income tax withholding applicable to these payments would be increased from 10% to 15%. However, the income tax withholding on fees, royalties and services would be reduced from 33% to 15%. The same rate would apply to loans granted for a term equal or higher than one year. The residual withholding rate would be 15% except from capital gains, case in which a 10% withholding tax would be applicable on gross payment.
    • Amortization of goodwill would not longer be allowed, regardless of how it is acquired.
    • Amortization of intangible assets acquired to related parties (as a single intangible or in a business acquisition) would not be allowed.
  3. Valuation of assets and debts:
  • Assets: the Bill proposes to modify assets and liabilities valuation methods. As a general rule, the equity value of assets or rights would be the tax basis. Exceptions would apply to: (i) assets acquired through leasing; (ii) assets valuated in foreign currency; (iii) local trust rights; and (iv) intangible assets.
  • Debts: the value of debts would be their tax basis with the exception of liabilities on foreign currency. Provisions and contingent liabilities, labor liabilities in which the right is not yet recognized to the employee; the deferred tax liability would not be considered as debts. Equity value of debts would be recognized for (i) financial liabilities using the amortized cost method and (ii) liabilities with implicit interest for tax purposes using their par value.
  • Adjustments for exchange differences: revenues, costs, deductions, assets and liabilities in foreign currency would be calculated at the time of their initial recognition to the official exchange rate. Assets and liabilities in foreign currency, would not have tax effects until the alienation of such asset, or the liquidation/partial payment of the liability.
  1. Aggressive tax planning:
     
    1. The Bill included the duty of revealing aggressive tax planning strategies within the next 2 month of the fiscal year following the strategy implementation. It is considered that aggressive tax planning occurs when it could eventually trigger tax savings and effective reduction of the tax burden.
    2. Aggressive tax planning strategies would exist when any of these characteristics arise:
      • The income tax return results or compensate more than 31.000 taxable units (approx. USD 307,450);
      • The use of jurisdictions in which the tax rate is equal or lower than 80% of the Colombian income tax rate;
      • The application of double taxation conventions;
      • Payments that are deductible in Colombia but not taxed in the recipient's jurisdiction;
      • Other requirements to be stated by regulatory decrees.
    3. The information to be provided should include the identification of the strategy promotor (person who designs the strategy), the main characteristic of the strategy; the effective beneficiaries, a description of the strategy, legal grounds to implement the strategy, a description and quantification of the tax savings.
    4. The submission of this information does not imply that the Tax Office accepts or challenges the strategy.
  2. Controlled foreign corporations (CFC): foreign related entities controlled by Colombian tax residents would be subject to CFC rules. These rules would apply to passive income derived through corporations, trusts, funds, private foundations or other fiduciary arrangements with or without legal personality. The presumption of control would exist in cases where the vehicle is resident, incorporated or operating in a tax haven or if the vehicle is subject to a preferential tax regime.
  3. Common reporting standards and exchange of information: the Bill proposes that the Tax Office would issue the list of entities required to provide financial information, in order to comply with automatic exchange of information. A definition of ultimate beneficial owner is proposed and the identification of foreign ultimate beneficial owners with assets or activities controlled in Colombian territory would be required.
  4. Tax havens regime: a broadened regime would be implemented to determine tax havens, no cooperation jurisdictions and tax preferential regime. The Government would update the blacklisted jurisdictions as it deems it convenient and not on October, as previously regulated.
  5. Anti-avoidance rules: the anti-avoidance rules would be reshaped. The key element for a transaction to be considered abusive and recharacterized by the Tax Office would be the lack of economic purpose. A transaction would lack of economic purpose if the transaction is (i) not reasonable, (ii) entails a high tax benefit and (iii) involves an apparent valid legal act or business. A special procedure to address tax abusive conducts would be created.
  6. Omitted assets or inexistent debts: a taxpayer acting on willful misconduct who (i) omits assets, (ii) report non-existent debts or (iii) files inaccurate information for values higher than 7.250 minimum monthly wages (approx. USD 1,694,000) would be subject to jail time from 48 to 108 months and a 20% fine on the omitted asset, non-existent debt or inaccurately reported asset would be imposed. Imprisonment could be pardoned, if the taxpayer files or amends the corresponding tax returns.
  7. Transfer Pricing
    1. Transfer Pricing (Documentation): The new international standard for transfer pricing documentation, as proposed by the OECD in Action 13 of the BEPS project, is adopted. Colombian taxpayers would have to prepare and file (i) a local file (i.e. what we currently know as the transfer pricing report); (ii) a master file (i.e. general information of the multinational group); and (iii) a Country by Country report with information of the global allocation of revenues and taxes maid by the multinational group, as well as indicator of economic activity. This Country by Country report is applicable as of FY 2016, and it is only mandatory for Colombian multinational entities having revenues higher than 81.000.000 taxable units (around USD 800 million).
    2. Transfer Pricing (Methods): The comparable uncontrolled price method is defined as the most appropriate for commodities transactions, and requires taxpayers to substantiate the negotiation date upon with reference price is used for intercompany pricing.
    3. Transfer Pricing (Penalty Regime): Modifications to the penalty regime. Penalties however remain high and in most cases determined as fixed percentages of the amount of intercompany transactions.
  8. Individual income taxation
    1. Taxation on individuals would only be based on residence and on income characterization (baskets). The Bill intends to simplify the income tax depuration by eliminating the IMAS and IMAN systems.
    2. Resident individuals would be subject to new progressive tax rates (i.e., 10%, 20%, 30%, 33%, 35%). Non-residents individuals would be subject to a 35% income tax rate.
    3. Individuals would able to offset losses on the same type of income.
    4. Exempted income would be limited to 35% of the employee taxable income without exceeding the 3,500 taxable units limitation (Approx. USD 35,000).
    5. The taxable base threshold would be 600 taxable units (Approx. USD 6,000).
    6. A new dividends tax would be imposed:

Please click here to view table

  1. VAT
    1. The VAT rate would be increased from 16% to 19%.
    2. Transfer or assignment of intangibles would be subject to VAT.
    3. The sale of new real estate having a value higher than approximately USD 271,000 would be subject to a 5% VAT.
  2. Tax controversy
    1. Statute of limitations ("SOL"): the SOL is extended from 2 to 3 years. In the case of tax returns in which NOLs are generated or offset the SOL is extended to 8 years. The tax returns of taxpayers subject to transfer pricing rules is equivalent to 6 years.
    2. Additional tax compliance issues: the procedure to amend tax returns would be modified, as well as the penalty regime.
  3. Local and new taxes: industry and commerce tax source rules would be amended. Changes to the cigarette and public lightening contribution are proposed. A Sugar-sweetened beverages tax is also proposed.
  4. Special tax regime for non-profit organizations: this regime would continue for non-profit organizations, although a stricter classification and verification of such entities would be implemented. The Government would create an information system in which non-profit entities should file their organization charts, payments to executives, gifts, investment programs, current and future projects, among others. Any direct or indirect distribution of profits would be prohibited.
  5. Wealth tax and normalization tax
    1. The wealth tax would not be reinforced. It will be phase out in 2017 for corporations and in 2018 for individuals.
    2. The normalization tax would not be extended. It will be phase out in 2017.

Please be informed that this Bill would have to be approved by Congress before entering into force. In order to apply as of FY 2017, it will have to be approved by Congress before this year ends. Many changes to the Bill may occur. We strongly suggest to review the proposed changes and its effect on case-by-case basis.