List of abbreviations

Transcription

1 List of abbreviations ALA / CFT - Anti Lavado de Activos y Contra la Financiación del Terrorismo Art Artículo /Article CAN Comunidad Andina de Naciones COL - Colombia COP Colombian Peso DIAN Dirección de Aduanas Nacionales DTA Double Tax Agreement FATCA Foreign Account Tax Compliance Act MFMP Marco Fiscal de Mediano Plazo TIEA Tax Information Exchange Agreement UIAF Unidad de Inteligencia y Analisis Financiero UGPP Unidad de Gestión Pensional y Parafiscales UVT Unidad de Valor Tributario

2 Improving Tax Compliance in a Globalized World Colombia National Report There are several factors to take into account when analising Colombia s tax system. Colombia is one of the countries with highest level of poverty and inequality on income distribution. Its economy is mostly dependent on production and exportation of mining energy products as well as on revenues derived from oil and mining investments. The gradual collapse of international oil prices has created uncertainty about Colombia s economic future. All of this is reflected on an increase of fiscal and external balances. As a response to this fluctuating economic panorama, the current government is planning to implement a structural tax reform which comprises not only reviewing taxes levied as such but in a more general way, it means reconsidering the entire tax system enforceable in Colombia: substantial, formal, procedural and institutional aspects. Then the question is the role that Colombian tax system has to play as an essential agent on the recovery, improvement, development and subsequent placement of Colombia as a country levelled to international standards. For this purpose, the Government set a Commission of Experts 1 to diagnose Colombia s tax status and to identify possible solutions and propose alternatives to tackle tax evasion and to accomplish a more efficient and equal tax system. The Commission s Final Report will be used as a reference since it is the most recent study about Colombia s situation. According to the Final Report submitted by the Commission of Experts (hereinafter Commissions Report) to the Ministerio de Hacienda y Crédito Público [Ministry of Finance and Public Credit] on April 2016; Colombian actual tax regime has several limitations: Indeed, the tax system of our country generates low collection levels against its potential, given the level of development of the country; it does not contribute to a better distribution of income; it is horizontally unequal because it applies different treatment among individuals and similar entities; it is complex and difficult to manage, and it punishes investment, employment, growth 1 The Commission of Experts was set in accordance to Law 1739 of 2014 and Decree 0327 of The Commission is composed by nine ad honorem members.

3 and competitiveness 2. These particularities of the tax system will have a significant effect on how Colombia addresses its tax activities and issues as it will be demonstrated through out this paper. 1. The tax gap in Colombia The exact figure of the tax gap in Colombia is not clearly defined by the National Government in any instrument or precise document on the topic. On the contrary, this figure is usually determined by the Ministerio de Hacienda y Crédito Público [hereinafter Ministry of Finance] as part of its accountability which is presented on the Marco Fiscal de Mediano Plazo 3 (MFMP) [Medium Term Fiscal Framework]. The MFMP document includes the fiscal balance and the total amount of fiscal deficit of the previous year (amount of tax revenue collected referred to the country s GDP) and the economic prospects for next year. The information included on the MFMP distinguishes between type of tax and also refers (briefly) to revenues associated to foreign economic activity. Information about tax evasion and assets held offshore by domestic taxpayer is not specifically provided by the government on the MFMP, however such information can be found on studies conducted by private entities. On this point, it is important to take into account that in Colombia, the tax authorities called Dirección de Impuestos y Aduanas Nacionales DIAN (hereinafter, DIAN or tax authorities) - are not a separate entity from the Ministry of Finance; meaning that it is an agent of the government and therefore its autonomy is limited (mostly related to limitation on human resources) 4. In this sense, the Government, via the Ministry of Finance is the only institution able to provide 2 de Hacienda y Crédito Público. Diciembre de p 7. 3 The Marco Fiscal de Mediano Plazo [Medium Term Fiscal Framework] is a document containing the objectives and results of the fiscal policy. It includes the most relevant economic and fiscal events of the prior year as well as the estimates of the current year and the coherence of the budget figures with the macroeconomic forecast. (accessed 24 Apr. 2016) 4 According to the Commissions Report the tax authorities cannot realize modifications on its work forcé without external approval. Comisión de Expertos para la Equidad y la Competitividad Tributaria. Informe Final presentado al Ministro de Hacienda y Crédito Público. Diciembre de p 223.

4 information on the tax gap in the country. The MFMP does not indicates the methodology used to arrive to the final figures on tax collection for the previous and the next fiscal period. 2. Source of tax authorities information According to article 591 of the Estatuto Tributario 5 [Colombian Tax Code], all taxpayers liable to income tax are subject to file a tax return (exceptions may apply article 592 Colombian Tax Code). In other words, the taxpayer is obliged to fill out a tax return in its entirety (as long as each box applies to the situation). The tax return includes the information necessary to identify the taxpayer, determination of factors necessary to assess the taxable base of the income tax, the private assessment of the income tax due (including advance payments and penalties if applicable) 6, and the taxpayers signature. The tax authorities must be able to rely on its entirety on the tax return submitted by the taxpayer. In any case, DIAN will cross check the information of the taxpayers tax return with the information provided by third parties, as well as it will compare it with the taxpayers tax return of the previous year to identify major changes and its consequences for tax assessment purposes. Furthermore, tax authorities usually compare the total gross equity and net equity of the present year to the previous year, the amount of total revenue received during the year, observance of requirements to consider gifts as non constituting income neither capital gains, amount of costs and expenses incurred abroad, presumptive income, existence of capital gain, among others. Information obtained in VAT returns is cross checked with the information included for income tax purposes, particularly information related to revenue received. When it come to net wealth tax, the net equity included in the wealth tax return should be the same as the one used in the income tax return 7. 5 Decreto Extraordinario 624 de Colombian Tax Code. Article 644, 647, 649, and 650-3: at the risk of incurring in penalties for amending the tax return, inaccuracy, omission of assets and non existent liabilities, failure to report address and failure to report economic activity. 7 Exceptions may apply.

5 In order to improve collection methods and increase efficiency to tackle evasion, DIAN uses a mechanism called Reporte de Información Exógena [hereinafter Exogenous Information]. Exogenous information is the set of information that must be provided by individuals and legal entities periodically to the tax authorities about transactions made with customers and users 8. Colombian tax authorities use information cross check to ascertain the information of all taxpayers that have enter into any commercial transaction 9. Liable individuals and entities subject to reporting exogenous information are specifically listed on the regulation 10. The following subjects are liable to report exogenous information: financial institutions, Chambers of Commerce, Stock Exchange, National Registry of Civil Status, Notaries, economic groups and associations, individuals and legal entities. Alongside with the report given by third parties, tax authorities have their own record of tax returns submitted by taxpayers and invoicing authorizations issued (this is the tax authorities endogenous information) which is then crossed with the tax statement (detail of all economic transactions made by the taxpayer and reported by third parties during a fixed period of time which represents the tax authorities exogenous information 11. Information cross check between the tax return and the exogenous information allows to determine: i) which taxpayers are failing to file their tax return, ii) inaccurate taxpayers: taxpayers that file the tax return but fail to include information resulting in inaccurate figures and iii) shadow tax return: tax return obtained through the information cross over of third parties. Return made by the tax authorities DIAN. Presentación de información exógena presencial año gravable 2008 a presentarse en (2008) Plegable 3. 9 Information is then transmitted on XML. (extensible mark up language) files along with electronic signature and must be submitted on the same deadlines as the tax return. Electronic signature mechanism certifies the electronic filling of tax returns or exogenous information substituting the autograph signature: DIAN (2008). Presentación de información exógena presencial año gravable 2008 a presentarse en el Plegable, DIAN. Resolution of october 31, Patiño R and Parra O. (2009) Evasión de impuestos nacionales en Colombia: años Universidad Santo Tomas, Vol. XVIII (2), December 2010, Bogotá. p (accessed 14 Apr. 2016) 12 Patiño R and Parra O. (2009) Evasión de impuestos nacionales en Colombia: años Universidad Santo Tomas, Vol. XVIII (2), December 2010, Bogotá. p.95.

6 In addition to this, tax authorities are able to require individuals or entities, taxpayers or non taxpayer information set on regulation in order to conduct review and crossover of information needed to properly manage taxes and comply with other functions under its competence, including those related to the obligations agreed under the tax conventions signed by Colombia 13. This means that, said cross check covers both, fiscal and accounting information 14. With this in mind, article 583 of Colombian tax code indicates: Code Reserve of the Tax Return. Banks and other entities under the authorization to collect taxes and receive tax returns, under the competence of the National Tax Authorities, which are aware of the information and other data on tax nature of the tax returns, must observe strict reserve relative thereto and may be used only for the purposes of processing information require to for the report of collection and receipt, as required by the Ministry of Finance and Public Credit. Moreover, the Constitutional Court has expressed that every citizen has the right to economic intimacy and therefore tax authorities powers are limited: The possibility of requiring ledgers and other private documents left to public authorities under the terms stipulated by Law, is not unlimited. It s scope is determined by the protection of the essential core of the fundamental right to privacy 15. Nevertheless, citizens are obliged to disclosure economic information on their tax return. Then the correlative tax authorities faculties rest on the constitutional duty that all citizens have of contributing to the financial support of public charges 16. In certain cases the reserve of the tax return may be lifted based on the constitutional prevalence of public and general interests over private interest Colombia Tax Code article 631. Preamble Resolution of October 31, 2014 DIAN. 14 DIAN. Tax Ruling No of 30 Apr Constitutional Court. Decision C-489/ National Constitution. Article 95: Duties and Obligations. 17 COL. Constitutional Court, 02 nov 1995, C-489/1995. In this case, the reserve on tax return was restricted on issues where the existence of a labor relationship or a maintenance obligation is discussed.

7 Of equal importance, according to Colombia National Constitution 18, the professional secrecy is inviolable. Colombia recognizes the professional secrecy 19 as a inviolable and enforceable against third parties. Besides this, the scope of professional secrecy may vary according to each profession. For example, for banking services, the Constitutional Court has stated that although it is a duty to maintain professional secrecy, its application in some events deserve special consideration: In furtherance of that provision, the legislature has provided that it does not apply banking secrecy in matters such as the fight against smuggling and trafficking people, money laundering, corruption, drug trafficking and currency offenses and control to banking and financial institutions, research on certain financial phenomena within the state level and disciplinary customs regime 20. Concerning legal matters, according to the Código Disciplinario del Abogado [Lawyers Disciplinary Code] it is consider to be a lack of loyalty to the client to Disclose or use of secrets entrusted by the client, even under governmental request, unless written authorization from that, or in need to disclosure to prevent the commission of a crime 21 and therefore subject to disciplinary sanctions 22. Another factor to obtain information by tax authorities is through the electronic operations conducted by taxpayers. In this case, though in Colombia credit card payments and wire transfers are performed regularly, there are no incentives granted for credit card payments or wire transfers. Colombian tax authorities do not have the technological infrastructure needed to track this type of payments mainly due to the complexities of the economic situation of the country Article Professional secrecy has been defined by the Constitutional Court as classified or confidential information known by practicing a certain profession or activity. COL. Constitutional Court. 25 Apr 2012, C-301/12 20 COL. Constitutional Court, 25 Apr 2012, C-301/12 21 Article 34 Lawyers Disciplinary Code. 22 Disciplinary sanctions can vary from censorship, penalty, suspension to exclusion of the profession. Article 40 Lawyers Disciplinary Code. Professional secrecy can be lifted on state of necessity, such as events of commission of a crime. That is to say, that providing information to the tax authorities which is cover by professional secrecy cannot take place since this will only happen on situations where a fundamental right is in danger and where the advisor is able to know about a potential crime to be committed. 23 One reason behind this relative backwardness is that Colombia does not invest in improvements in the technological infrastructure of its tax administration. According to figures compiled by the OECD, spending

8 Likewise, there is no technological availability for online payments through mobile phones, so tracking by the tax authorities is very difficult. As it is included in the Final Report of the Commission of Experts Similarly, the use of electronic payment on which the taxpayer can do the entire operation over the Internet or other media such as specialized kiosks, is low in Colombia. The percentage of these electronic payments is 10% in Colombia, while in Chile is 95%, in Mexico it is 49% and Brazil 51% 24. Moreover, deductibility of cash payments is limited and will be progressively reduced from year 2019 to year 2022; the limitation is applicable by choosing the lowest over the amount paid or a fixed amount of tax units and a fixed percentage of deduction of the costs and deductions. For example: for year 2019, the amount of cash payments to be recognized as costs, deductions, debts or input taxes, is the lowest between between 85% of the amount paid or tax units (Unidad de Valor Tributario - UVT) or 50% of the total costs and expenses 25. In this respect, the use of electronic cash registers is not mandatory in Colombia. As stated by the Commission of Experts This mechanism requires major efforts to bring it to walk and mass application. The weakness of the current control mechanism have raised the phenomena of using false invoices for laxity in granting invoicing authorizations and its printings 26. Colombia introduced a regulation regarding electronic invoicing on 1995, nevertheless it was never implemented in practice, only in year 2015 the Government issued the corresponding Executive Decree to make it possible 27. on information technologies as a percentage of total expenditure of the DIAN is located about 5.3%. In several OECD countries, this percentage is above 15% - 20% and for example, in Brazil is around 16% [ ] The amount of budget resources allocated to DIAN is relatively low in an international comparison. Although no country in total administration expenses exceed 0.4% of GDP in Colombia this percentage is one of the lowest 0.08% of GDP. Final Report of the Commission of Experts for Equity and Tax Competitiveness. December Page de Hacienda y Crédito Público. Diciembre de P Colombian Tax Code. Art 771-5: payment methods for purposes of accepting costs, deductions, liabilities and deductible taxes. 26 de Hacienda y Crédito Público. Diciembre de p Executive Decree 2242 of November 24 / 2015.

9 A pilot project began on April 2016 with 50 companies and the program is expected to last 6 months. The idea is to have full electronic invoicing as of January This is the deadline set by the tax authorities for all businesses to transfer into electronic invoicing. Although used in Colombia at a minimum scale, electronic invoicing is now mandatory for all trading in Colombia. The tax authorities are aware of the additional burden this may represent for taxpayers that is why they have decided to implement gradually the new invoicing scheme applying the pilot project only to large taxpayers, and according to the results it will include more taxpayers until achieving total coverage. The tax authorities goal is to reduce 50% evasion thanks to the implementation of electronic invoicing 29. As we have seen, tax authorities have the mechanisms to access information needed to perform its functions, either by using the information provided by the taxpayer on its tax return, by using the exogenous information report and the one derived from electronic transactions. Nevertheless, it is also relevant to consider situations related to a specific period of time and a specific context on which the tax authorities (the Government and legislators) implement measures aimed to raise revenues and to identify taxpayers and subsequently broaden its database. Said situations refer to tax amnesties provided on the regulation which in Colombia though used in the short term as a tool to achieve fiscal policy objectives, since they ease the collection and broaden the tax base without having to incur in the costs that imply audits and sanction mechanisms, the practice of introducing tax reforms become permanent by the government and therefore may discourage taxpayers to comply with its tax obligations on time in the expectation of the next tax amnesty to obtain a benefit of a lesser tax treatment in comparison to that applied to those who promptly attended their obligations. 28 DIAN. Press Release No. 51. Inicia plan piloto del nuevo modelo de factura electrónica. April 18, (accessed april ). 29 Revista Dinero. Colombia le dirá adiós a la factura de papel y a la evasión. January 4, (accessed april ) Small and medium sized enterprises will receive electronic invoicing service for free.

10 In Colombia, tax reforms and and tax amnesties go hand in hand. However, in order for tax amnesties to be consider to be in accordance to the National Constitution they must meet 3 conditions: i) they cannot be generic, ii) they cannot give more favorable treatment to non compliant taxpayers over those who did timely and effectively comply with their tax obligations and iii) they must be proportionate and reasonable. There have been approximately 13 sets of tax amnesties rules since 1990 until Several tax amnesties have been declared unconstitutional, for example, tax reform of 2012 included a provision aimed to allow taxpayers that have unreported assets or liabilities to include them on their tax return, in an attempt to alleviate their tax burden and allow them to clarify their tax situations; which was then in opinion of the Constitutional Court granting a more favorable treatment to those taxpayers that did not fulfill their tax obligations over those who did. According to the tax authorities, from the COP100 billion that the Government estimates are located outside the country tax free even though they correspond to equity/assets created in Colombia, COP million were able to be repatriated. This resources correspond to the taxpayers that took advantage of the tax amnesty introduced in the 2012 tax reform, measure that was afterwards abolished by the Constitutional Court (not with retroactive effects) 30. A vast amount of taxpayers was not able to repatriate its secret accounts mostly located in tax havens. The Court argued an unfair and disproportionate treatment concerning those who in a timely manner, completely comply with its tax obligations. According to the Government, the Court decision implied that there were about COP7 and COP14 billion that would not be received which would put in risk the public finances. Several taxpayers were stuck on formal procedures to repatriate their revenues, meaning that there were people with the intention to join the regime but were not able to do it. As it can be seen, this taxpayers wanted to formalize their secret account, before the tax authorities as well as 30 Revista Portafolio. Por amnistía tributaria se repatriaron $40 mil millones. 15 March (accessed 18 april 2016)

11 have resources to invest in the country but were not able to do it 31, contributing to the already existing uncertain tax atmosphere. The problem with tax amnesties in Colombia is that sometimes they are left out of the effective control of the Constitutional Court since they involve a deadline or period which has to be met during the year, and taking into account the volume of judicial proceedings, there is a lack of immediate comparison of these measures against the principles of justice, equality and equity which aftereffect is its declaration as unconstitutional by the high Courts. In addition, the frequency of tax amnesties on legislation reflect how big the inequity and demoralization felt by citizens and taxpayers in complying with their tax obligations: The truth is that the perception we have of continuing reforms to the Colombian tax system since the beginning of the nineties, is that they have partly alleviated the fiscal deficit, but in parallel have introduced more levels of inequity, inefficiency, complexity in the administration of taxes and what it has now been described as a " loss of tax competitiveness " by the notorious increase in the nominal rate of income tax. To this, treatment of exemptions or tax refunds and subsidies obtained by certain pressure groups are not socially justified 32. The reason for this is that Colombia tends to be quite generous in granting benefits and opportunities for non-compliance taxpayers which results in an action against justice and a loss of the values, time and work of tax authorities employees. In the face of such a particular economic context, Colombia has not introduced whistleblower programs as such, rather they are considering as programs to tackle specifically evasion, money laundering and smuggling. It has introduced a program against money laundering where if liable subject is doubtful about the origin of money, or have not been able to identify the last beneficiary or is not sure if the person is an independent agent or is acting on behalf of a third party or when the explanations received were not satisfactory enough, it can report any 31 Revista Portafolio. Por amnistía tributaria se repatriaron $40 mil millones. 15 March (accessed on 18 april 2016) Entrevista a Antanas Mockus, Revista Portafolio 18 July (accessed on 18 april 2016)

12 suspicious transaction to the Unidad de Inteligencia y Analisis Financiero UIAF [Financial Intelligence and Analysis Unit]. If the UIAF receives such a report it will request the rest of the Colombian specific market to inform if this person has conducted similar transactions in order to establish a pattern. Other countries information can also be requested. The advantages of this collaboration is that it is a digital encryption system that allow to request the information via which allows to have the information in a maximum of three days to a week (contrary to a letter rogatory which may take up to one or two years). To show its effectiveness, on 2015 the UIAF, as a result of the collaboration with the Sistema Nacional Anti Lavado de Activos y Contra la Financiación del Terrorismo [National System for the Prevention of Asset Laundering and Terrorism Financing ] (ALA/CFT) with the Fiscalia General de la Nacional (Attorney General), more than COP24 thousand million were recovered from the dismantling of a criminal RED on the health area 33. Now, on regards with country by country reporting, on December 2015 the Colombian Tax Authority indicated that country-by-country reporting is soon to be introduced in Colombia. For this, the Colombian Tax Authority will have to issue the correspondent decree / regulation. Nevertheless, they have stated that a change in the current domestic legislation is not required. There is still no indication on how country-by-country reporting is going to be implemented in Colombia; nevertheless, Colombia has indicated that it will require more information besides the one requested by the template, such as intercompany interest income, royalty income and service fees. 3. The role of Colombia on the exchange of information 33 UIAF. Press Release. Más de 24 mil millones de pesos obtenidos con la desarticulación de una red criminal en el sector salud. December 03,

13 Exchange of information rules are included in Colombia s Tax Code. Article Tax Code indicates the possibility of providing tax information to foreign governments or its agencies by direct request for purposes of tax control or to be used on tax or criminal procedures; and vice versa in accordance to tax agreements entered into by Colombia (Article 631 Tax Code). In addition, it also indicates that said information can be consider as evidence whenever provided by a foreign government or as a part of a tax information exchange agreement (article 747 (6) and (7) Tax Code) 34. Exchange of information will only be valid as long as: i) Be provided in an international agreement such as a double tax treaty including a provision to exchange information and agreements on mutual assistance in tax matters) and comply with all the procedures for transposing into the Colombian tax system; ii) being information of a tax nature and iii) be in accordance with article 226 of the National Constitution of Colombia, be reciprocal arrangements for tax or criminal control 35. As for Colombia s tax international relationships, Colombian tax treaty network is relatively recent (2004). Latest tax treaties concluded by Colombia are Czech Republic (1690 of in force since January 1, 2016) Portugal (Law 1693 of 2013 in force since January 30,2015) India (Law 1668 of 2013 in force since July 7,2014) and South Korea (Law 1667 of 2013 in force since July 3, 2014). All of them are in line with the latest version of Article 26, however the tax treaties with Portugal and South Korea do not include Article 26.2 regarding the possibility by the receiving State of using the information for purposes in addition to the ordinary purposes of Article 26 paragraph 2 (assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above or for the disclosure of information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for 34 Additionally, the Tax Code also allows to conduct audits whenever under a tax treaty, tax authorities require to obtain evidence (article Tax Code) and permits the presence of agents of the country requiring the information to take evidence (article Tax Code). 35 C.F Caycedo, A.F Rivas. Intercambio de información tributaria y derechos de los contribuyentes. Ambito Jurídico. 30 Apr Cultura/intercambio-de-informacion-tributaria-y-derechos-de-los-contribuyentes (accessed on Apr )

14 other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorizes such use 36. Besides this, Colombia is a member of the CoE/OECD Convention on Mutual Administrative Assistance in Tax Matters since March 19, 2014 (Amended Convention); however, it does not have any other TIEA s available. Colombia is able to exchange information under its current double tax conventions. Most of Colombia s TIEA agreements are not enforceable yet and most of them are pending the last legislative procedures in each country in order to become law (Barbados, Bermuda, United Arab Emirates, Curacao and Panama). Colombia signed a FATCA agreement with the US on April 23, Our country follows Model I which enabled entities to register until January 1, The agreement requires Colombia to certify that it is able to ensure the confidentiality conditions as well as the technology and infrastructure in order to exchange de information. According to this Agreement, information can be exchanged automatically (information needed to comply with the objectives of the agreement to manage and enforce its national laws regarding taxes covered in this Agreement, spontaneously and upon request. With this in mind, Colombia does not invest in improvements on the technological infrastructure of the tax authorities. According to the OCDE, the expenditure on information technologies from the total amount of expenditure of the tax authorities is around 5.3%. According to the Report of the Commission of Experts the amount of resources from the budget allocated to the tax authorities in Colombia is relativity low in comparison with other countries. Although none of the comparison countries exceed an expenditure over 0.04% of the GDP, in Colombia the percentage is one of the lowest 0.08% It must be noted that the tax treaty with Switzerland contains an exchange of information provision limited to tax crimes. 37 de Hacienda y Crédito Público. Diciembre de p 23.

15 4. Cooperation between Colombia Tax Authorities and other agencies Tax authorities in Colombia have entered in inter institutional co-operation agreements with entities from the national and state level, as well as some private entities. At the national level, the tax authorities exchange information with the Ministry of Transport, Attorney General s Office, Pension and Contributions Unit (UGPP), Ministry of Health and Social Protection, Financial Intelligence and Analysis Unit among others. On the state level, it has entered in agreements with the Bogotá s Municipality (more exactly the Secretaria Distrital de Hacienda) Medellin s Municipality and Cali s Municipality. On the private level, tax authorities exchange information with the Chamber of Commerce of Bogotá, Central Unit of Credits (Datacrédito) among others. Additionally, Colombian Tax Code includes a provision on Article 585 stating the possibility to exchange information between the Ministry of Treasury and the Tax Departments at the State and Municipal level for purposes of national, state and municipal taxes. For these purposes, the municipalities are also able to request the National Tax Authorities, a copy of the existing investigations on income tax and VAT, which can be used as evidence for the assessment and collection of the turnover tax (local tax). In the same way, the national tax authorities can request municipalities information on the same matters for income tax and VAT purposes 38. Colombia has been fighting against smuggling by means of the implementation of a legal and institutional framework; Law 1762 of 2015 intends to guarantee the continuity of the investigations and penalty procedures against illegal trade, and as a part of it, it intends to tighten the penalties by means of which criminal trade and unfair competition contribute to finance money laundering, terrorism and organized crime. Nevertheless, on practice actions have been scarce, lack of coordination, lack of financial, technological and statistic data resources in order to achieve the goals aimed. As mentioned on the Final Report One of the latent problems in the fight against smuggling is the Statistics and Information weakness, lack of investment in technology by the government (in other countries of the region the scanners and allow to inspect real-time 100 % of the containers without open and cause delays and damage and traceability 38 Colombian Tax Code article 585

16 systems are used in sensitive products such as cigarettes and liquor, which have sharply reduced smuggling). In any case, the lack of presence of the DIAN in some border areas weakens the capacity for monitoring and control 39. Legally tax authorities cannot share information with the Credit Risk Center Datacrédito (private entity) since the information collected by the latter is information for financial purposes and not tax purposes, unless expressively authorized by the taxpayer 40. On the contrary, information can be shared whenever the information is collected and shared among the entities in charge of collecting taxes in order to control the tax burden, taking into account the right of individuals to know, update and correct such data must always prevail, but it is not necessary to have their authorization because this is the harmonious cooperation which must mediate between the different organs of the State in order to protect public property 41. The rule is that the information collected for tax purposes, can be shared, only for those purposes; otherwise if the information is illegally obtained it cannot be used for any purpose. If the tax administration discovers tax fraud it is not complied to transfer the case to the public prosecutor. It is authorized to conduct its own investigations and reassess the tax liability. Tax fraud is not a criminal behavior under Colombian law. The only tax related crime are the Omission of the withholding agent, fraudulent use of identification documents and the erroneous certification of withheld amounts 42. Colombia is a member of Financial Action Task Force of Latin America (GAFILAT) (formerly Financial Action Task Force on Money Laundering in South America GAFISUD), entity in charge of conducting the assessment of the implementation of anti-money laundering and counter-terrorist financing (AML/CFT) measures in Colombia. Even though tax crimes are considered as predicated offence under the Financial Action Task Force (FATF), as long as there 39 de Hacienda y Crédito Público. Diciembre de p Constitutional Court. Decision C-993/04 41 Constitutional Court. Decision C-981/05 42 Colombian Criminal Code. Article 402: Omission of the withholding agent. Article 294: erroneous certification of withheld amount. Colombian Tax Code Article 650. Fraudulent use of identification documents: consider in criminal law as procedural fraud.

17 is no legal provision for a tax crime different to the one above mentioned, there will be no implications in Colombia. 5. Cooperative compliance in Colombia Colombia has not introduced a formalized Enhanced Relationship initiative or program. According to the Key Issues Report of the IFA Initiative on the Enhanced Relationship Taxpayers and intermediaries have been called by DIAN and the Ministry of Finance in order to discuss tax reforms, adjustments to tax law for the implementation of IFRS, and possible improvements in administrative practice based on industry needs. However, no particular cases or tax positions have been disclosed by companies and intermediaries in these meetings 43. In conclusion, there has ben no attempt to launch such a program, neither to begin reveling the position of a specific taxpayer whenever asking for a ruling, let alone regulation or legislation. Even though there is no formal Enhanced Relationship program, taxpayers and tax authorities are usually consulted whenever a draft or project or bill of legislation that may affect them intends to be introduced. 6. Collection of taxes in Colombia The collection procedure managed by the tax authorities was implemented in Colombia in 1987, meaning it has 28 years of existence. Currently the system is not adjusted, both, technologically and on its provisions to the current needs, especially against the economic openness and technology development 44. The above results on the fact that there are approximately defaulting debtors and a historic accumulation of overdue portfolio of tax obligations managed by the tax 43 International Fiscal Association. IFA Initiative on the Enhanced Relationship. Key Issues Report. For discussion purposes only. August de Hacienda y Crédito Público. Diciembre de p 235.

18 authorities, dating from According to the tax authorities (2015) the total of the overdue portfolio as of December 2014 is of COP4.25 billions. The following types of income are subject to a withholding obligation: i) For income tax purposes: labor income, dividends, fees, services, restaurant and accommodation services, letting, consultancy services for infrastructure projects, financial yields, transfer of fixed assets between individuals, lotteries and gambling, payments made abroad (for income tax purposes), consultancy technical services and technical assistance rendered by non residents provided within the country or abroad, income; ii) For VAT purposes: sale of tangible goods and rendering of services within the national territory. For VAT purposes, 100% withholding will be applied on payments to non residents. 46 Non residents do not have to comply with any withholding tax obligations. For them, the withholding practiced by the Colombian resident constitutes its final tax due 47. The withholding tax obligation can be seen as an excessive administrative burden for the withholding agent since they are obliged not only to conduct the withholding 48 but also to file a withholding tax return 49 every month, unless there has been no transactions subject to withholding during the month 50. Colombia has divided its taxpayers in two categories depending on particular characteristics (amount of transactions, complexity of investments and operations, and its higher capacity to use aggressive tax planning) 51 regular taxpayers and major taxpayers 52. In this sense major taxpayers are obliged by law to conduct quarterly prepayments of income tax which cannot be lower than a fixed percentage of prior year income tax due. In addition to this, every income tax taxpayer is 45 de Hacienda y Crédito Público. Diciembre de p Colombian Tax Code. Article 437-1, paragraph Colombian Tax Code Article 9 and 592 (2). 48 Colombian Tax Code. Article Colombian Tax Code. Article 376 and Colombian Tax Code. Article de Hacienda y Crédito Público. Diciembre de p Tax Authorities Resolution No. 027 of January 03 of 2014: stating the conditions and procedure to be qualified as Major Taxpayer

19 subject to paying an advance payment of its income tax of the next year 53 meaning that in addition to paying the current tax due, taxpayers have to pay part of the tax due that is supposed to arise on the next period. The advance payment amounts to 75% of the net income tax assessed for the current period; if you are a first time taxpayer the percentage is of 25% and the second year is of 50% 54. According to a study of Dian, through advances it is collected on average (in the last 14 years) 24 percent income tax. Such percentage may highly vary from one sector of the economy to other from 56,6% to 0,3%; being the mining sector, financial services and electricity gas and steam those who contribute the most to the collection 55. In its majority, all of Colombia s double tax treaties include a provision similar to article 27 assistance on the collection of taxes. Only DTA s with Czech Republic, Canada, Switzerland and Chile do not include such a provision. Additionally, Colombia is a member of the Andean Community CAN. According to its Decision 578 Regime to avoid Double Taxation and Prevention of Tax Evasion - the tax authorities of the member countries are able to consult each other and exchange information needed to resolve mutually any difficulties or doubts that may result from the application of Decision 578 and to establish the necessary administrative control to prevent fraud and evasion. For these purposes, the tax authorities may communicate directly with each other, perform simultaneous audits and use the information obtain for tax control purposes 56. Regarding the assistance on the collection of taxes, member countries shall provide assistance in the collection of taxes owed by a taxpayer. The request for assistance may only be made if the 53 Colombian Tax Code. Article On February 2016, the tax authorities expected to collect COP$950,000 millions on the payment of the first installment of major taxpayers. (accessed on 09 march 2016) 55 El Tiempo. Billonarias devoluciones de impuestos ponen a hacer cuentas a Gobierno. November 26, (accessed 24 march 2016) 56 Andean Community CAN. Decision 578. Article 19

20 property owned by the taxpayer located on the country where the debt arises, are not sufficient to cover the amount of the unpaid tax liability Advantages of improving tax compliance If tax compliance is improved, the taxpayer will have more certainty regarding its tax obligations. The lack of enforcement by the tax authorities creates a disadvantage situation between the benefit perceived by those individuals and corporations that do not pay their taxes and those hat do comply with its tax obligations. Therefore, as stated in the Commissions Report, this disadvantage situation distorts the allocation of resources in the economy in favor of evasive companies. One of the reasons behind the high levels of evasion is the reduced efficiency of the tax administration. 58 If the tax compliance improves, taxpayers are not subject to face a high burden of procedural duties to comply with its tax obligations. Additionally, as stated on the Commissions Report, if the dispute of resolution improves, the country s judicial system would also be benefited as the amount of disputes would considerably be reduced Tax evasion in Colombia: Challenges in the future There are several reasons for tax evasion in Colombia such as deferral of foreign taxes, aggressive tax planning, use of tax havens, lacks of identification of the beneficial owner and abuse of tax treaties 60. Tax havens list although exist is of difficult application due to political and diplomatic issues that result in the delay of effective enforcement of the law. 57 Andean Community CAN. Decision 578. Article de Hacienda y Crédito Público. Diciembre de p de Hacienda y Crédito Público. Diciembre de p de Hacienda y Crédito Público. Diciembre de p 242.

21 It must be taken into account that in first place, in Colombia, the argument about tax evasion is a technical argument. Evasion in Colombia arises due to the complexity of the tax and customs regulation which contains loopholes allowing individuals to technically find a way to avoid complying with their obligations. For example, some of the mechanisms detected by the tax authorities that are used to evade taxes are, companies that deduct costs on transfers made to entities located abroad, companies that do not issue invoices, alter them and have double book keeping, VAT collection that is not actually paid to the authorities, and trusts companies which beneficiaries or owners are located abroad but still maintain assets in Colombia. The country continues to impose a high and complex tax burden on companies and the personal income tax is still regressive. Tax evasion is mostly related to an inefficient tax administration which translates in inspecting around 0.1% of taxpayers compared to approximately 3% inspection in Latin American countries 61. In addition to this, the tax authorities personnel is not composed by young and better prepared staff which has an implication on the use of modern technologies for the collection and audits as a part of strengthening the tax administration 62. Furthermore, tax authorities do not have enough personnel for the amount of taxpayers it intends to cover. Taking into account the current situation of Colombia s tax system (taxes and tax authorities) it may be concluded that the public opinion regarding tax evasion has not changed nor even improved. Measures don t seem to work. The country still need to advance on efficiency and logistic issues in order to solve the current and future challenges. 61 OCDE Economic Surveys Colombia. January Overview de Hacienda y Crédito Público. Diciembre de P 225.