The digital economy has shown exponential growth in recent years, changing the way we do business around the world. This fourth industrial revolution has generated an important impact on the existing tax regulations, to the point of considering whether it is necessary to adapt or rewrite them.

The digital economy faces several challenges, both in Colombia and in the wider world. In view of the constant change of business models, several countries have modified their legislation in order to address legal gaps and to collect a greater amount of taxes. In terms of VAT, countries such as Argentina have redefined the VAT taxable event to tax digital services provided abroad or have created broader collection systems where intermediaries (mostly financial institutions) must apply the corresponding withholding taxes. Mexico, Peru, Chile and other Latin-American countries have also introduced similar taxes on digital services. Colombia is no exception.

Starting point

Before the Law 1819 of 2016, Article 420 of the Colombian Tax Code stated that VAT was applicable to the provision of services on Colombian soil. Generally, services rendered abroad were not subject to tax in Colombia, even if the beneficiary of the services was located in the country. Taking into account said legislation, supplies of digital services by non-resident companies to recipients located in Colombia were not subject to VAT. Therefore, there were no formal or withholding obligations regarding the matter.

Law 1819 of 2016 introduced a major change of approach for applying VAT to cross border supplies of services. Before Law 1819 was enacted, only services that were rendered or executed within Colombian territory were subject to VAT. Law 1819 of 2016 changed this approach to place of taxation by adopting the recipient principle, focusing on the jurisdiction where the consumer is located. Hence, as of 1 January 2017, services rendered abroad are subject to VAT in Colombia when the direct user or recipient of such services has fiscal residence, domicile, permanent establishment, or a head office of its business activity in the country. The general VAT rate applicable to the aforementioned transactions is 19%.

In accordance with the recommendations of the OECD and the different measures in the various jurisdictions, such a modification was initially envisage in relation to digital services. However, the taxable event was very broad, covering all types of services. Given the scope of the VAT taxable event, any service provider from abroad has to analyze if the corresponding standard is applicable or not.

Besides the above, Law 1819 also included Section 24 of Article 476 of the Colombian Tax Code, which provides that cloud computing, data hosting services and remote maintenance of programs and equipment are VAT excluded (not subject to VAT). There is no definition in Colombian Law as to cloud computing, data hosting and remote maintenance of programs services. Nonetheless, the Colombian Tax Administration in Ruling No. 017056 of 25 August 2017 defined these concepts by using the guidelines of the National Institute of Standards and Technology (NIST), which are broad and difficult to grasp.

As can be seen, Colombia has implemented a major tax change on VAT—with the purpose of adapting its tax system to new business models and the forth industrial revolution.

VAT collection systems

Based on the legal changes to the VAT taxable event, Colombia had to change its collection system. Current tax law establishes three VAT collection mechanisms:

(a) VAT collection system on business to business (B2B) transactions

The Colombian Tax Code provides that any legal entity pertaining to the VAT Common System is a VAT collector. It states that entities and persons that qualify as part of VAT Common System are those that render or sell vatable goods and services. Those that only sell excluded goods or services, i.e., services and goods not subject to VAT, are not part of the VAT Common System and therefore, not VAT collectors.

Current law determines that persons belonging to the VAT Common System, who contract with foreign services providers for the provision of services subject to VAT in the national territory, shall self-assess and collect VAT through the reverse-charge mechanism. The withholding tax is 100% of the applicable VAT.

(b) VAT collection system on business to consumer (B2C) transactions ("simplified system") or B2B transactions in which the business is not part of the VAT Common System

The Colombian Tax Code provides, when the purchaser of services does not belong to the VAT Common System, the foreign service provider will be obliged to comply with the simplified VAT collection system. This system states that all foreign providers of services shall register, file VAT returns and pay VAT when such services are taxed in Colombia.

This system was implemented by Law 1819 of 2016. However, it has not been applied yet since the Tax Office has not completely regulated the system and the registering platform is not fully in place.

(c) VAT collection system on digital services

In the event that the foreign supplier does not comply with its obligation of assessing and paying the VAT due, and if the underlying transaction involves certain types of digital services as detailed below, a secondary liability results. Specifically, credit and debit card issuers, prepaid card vendors and cash collectors on behalf of third parties are designated as withholding agents in cases where (i) the foreign supplier does not comply with its obligations under the simplified VAT collection system, and (ii) the underlying transaction involves the following listed services:

• Audiovisual services (among others, music, videos, movies and games of any kind, as well as broadcasting of any event).

• Digital distribution service of mobile apps.

• Digital advertising services.

• Distance learning or training services.

This collecting mechanism operates on an exceptional basis. However, the Tax Office has not issued the corresponding regulation for its application yet, even though this system was created by Law 1819.

As can be seen, the VAT collection system in Colombia is not simple. Foreign service providers have a difficult task in defining the applicable rules and systems. This obviously is not attractive in terms of investment for a developing country such as Colombia. Also, the fact that the Tax Office has not issued the appropriate regulation two years after the systems have been created, makes it more difficult for foreign service providers to determine their legal obligations and liabilities.

However, it is necessary to recognize that issuing these rules and regulations is not an easy task, specially taking into consideration the characteristics of digital economy. Colombia has been one of those pioneer countries which have proposed initiatives and regulations to do so. It is certain that, with time, the taxation system for digital services will be simpler, as is pretended with the upcoming tax reform.

The future

On 31 October 2018, the Colombian Government filed a Tax Reform Bill in Congress. The Bill proposes several legal changes which are relevant for the digital economy sector. Some of the key proposed changes are:

(a) It proposes that cloud computing, data hosting, supply of webpages services and the acquisition of software licenses to develop digital content are excluded from VAT.

(b) It also proposes that service suppliers of digital economy may choose not to apply the simplified VAT collection system. Instead, they may decide to apply the withholding mechanism. According to the Bill, credit card issuing entities, banks, cash collectors and other entities designated as withholding agents by the Colombian tax authorities will be responsible for collecting the VAT triggered in transactions related with the following digital economy services:

• Audiovisual services (among others, music, videos, movies and games of any kind, as well as broadcasting of any event).

• Other electronic or digital services provided to users located in Colombia.

With this legal change, the Bill proposes that this system is applicable not by default but as a choice. It also broadens its scope of application, since it comprises "other electronic or digital services provided to users located in Colombia". This clearly shows an improvement of the system, making it simpler, faster and economically efficient.

Colombia is one of the countries trying to tax digital services by adapting its legal system and filling in the legal gaps. It is also trying to improve its collection system on digital services, as well as incentivizing the use of technology in the country. However, considering that this subject is still new and highly relevant for its development, it will have to implement a clear public policy which addresses its goals and priorities.