INTERNATIONAL BUSINESS ASSOCIATION GENERAL RAPPORTEURSHIP COLOMBIA A. Tax Reform: Law 1739/2014 On the 23 rd of December, 2014, the Colombian government enacted a new tax reform, considering new taxes for both individuals and legal entities, modifying issues pending of further regulation and creating special payment conditions for debts with the Tax Authorities, amongst others. The highlights of the most significant changes introduced by the tax reform are the following: 1. Wealth Tax The tax reform created a new wealth tax for all those taxpayers holding wealth in Colombia higher than 1 billion pesos on the 1 st of January, 2015. Foreign Companies with wealth held in Colombia higher than 1 billion pesos, are to be considered taxpayers. The wealth tax will be accrued and the tax liability must be determined considering the wealth held in Colombia as of the 1 st of January of 2015, 2016 and 2017 for legal entities and the 1 st of January of 2015, 2016, 2017 and 2018 for individuals. Tax rates will vary depending on each taxpayer s taxable base, which is to be determined by considering the total assets held in Colombia, minus the debts held in Colombia and the net worth of shares in Colombian companies. 2. Non-declared assets: As part of the government s strategy to reduce non-declared assets, the tax reform introduced the possibility to declare these assets and determine a tax liability at a tax rate of 10%, applied to the non-declared asset taxable base. This new complementary tax will only apply to non-declared assets or to non-existence passives and will trigger the mandatory compliance with wealth tax, even if the wealth held in Colombia is below 1 billion pesos. 3. Income tax for equality (CREE) surcharge The tax reform introduced a surcharge applicable for years 2015, 2016, 2017 and 2018, to all those Colombian tax payers subject to CREE with CREE taxable base (tax profits) higher than $800.000.000. The surcharge will not apply to offshore Free Trade Zones
The tax rates will vary in between 5% and 9% depending on the CREE taxable base, and its payment must be done in 2 installments following the applicable rules for CREE. The effective tax rate for all those taxpayers subject to CREE surcharge will be increased as follows: for 2015: 39%, for 2016 40%, for 2017: 42% and for 2018: 43%. Note that CREE ordinary rate was modified and fixed in 9%. (Previously 8%). 4. Changes introduced to the Income tax for equality: The Colombian government sought to reduce breaches existing on the determination of CREE tax liability and to incorporate new rules regarding these breaches. In general, the tax reform clearly indicated that transfer pricing and thin capitalization rules will apply to CREE, additionally it was determined that fiscal losses could be compensated in CREE. 5. Credit for VAT paid on the acquisition or import of capital assets and heavy machinery for basic industries Companies and similar entities will be allowed to take as a credit from its income tax return, two (2) points out of the VAT paid on the acquisition or import of capital assets subject to VAT at the general tax rate (16%). The credit must be used on the fiscal year the acquisition or import took place. Regarding heavy machinery for basic industries, the tax reform determined that if the imported machinery has a CIF price above USD 500,000, the VAT could be paid: 40% with the import declaration and the remaining amount in two installments within the next two years. For that purpose a payment agreement must be entered in between the importer and the Tax Authorities. The VAT Paid on the acquisition or import can be credited against the income tax on the fiscal year the payment was done, and in the following years. 6. Early termination procedures Pursuant to the tax reform, early termination procedures by mutual agreement are to be contemplated by the tax authorities, related to tax, customs and foreign exchange matters pending of administrative or judicial decision. Taxpayers who enter into an agreement with the Tax Authorities, will be subject to a reduction in the penalties and interests applicable to the alleged contraventions. Notwithstanding, the early termination of a proceeding is subject to further regulation from the Colombian government and the term to request such termination is subject to a specific date, depending on the applicable proceeding. 7. Special committee for the review of tax law:
The tax reform created a special committee in order to review the actual tax law regime in Colombia, and as special review specifically on non-profit entities, local taxes, VAT, and tax benefits in Colombia. The experts in charge of reviewing the tax law in Colombia where named on February, 2015 and include, amongst others, a former Minister of Finance, a former CEO of the Colombian Central Bank, a former accounting firm president, academics, and actual directors of government s special committees. B. Exchange of information The Colombian government, as part of its fight against tax evasion and its increasingly interest to comply with international standards, has signed both bilateral and multilateral agreements regarding the exchange of information for tax purposes. The exchange of information agreements entered into and by the Colombian government and foreign governments, could be identified as follows: (i) exchange of information made available through conventions for the avoidance of double taxation (Double Tax Conventions); (ii) exchange of information by means of a specific exchange of information agreement; and (iii) automatic exchange of information agreed under the Multilateral convention of the OECD. 1. Exchange of information made available through Double Tax Conventions: All of double tax conventions entered into and by Colombia and foreign governments have an article incorporating the mandate upon which competent authorities shall exchange information for carrying out the provisions of the Convention or the domestic laws. The exchange of information is applicable to every kind of taxes imposed on behalf of the other party to the Convention. The information made available through this mechanism of exchange of information, is to be kept secret and its disclosure can only be made available to individuals or authorities concerned with the collection of taxes or prosecution related to taxes. 2. Exchange of information by means of a specific exchange of information agreement: Colombia has signed two exchange of information agreements, with Barbados and with the United States of America, for the mutual assistance to facilitate the exchange of tax information to prevent and combat tax evasion, and establish the best sources of tax information. Particularly, the agreement with the United States is not limited to information regarding residents of Colombia or United States and its scope goes far beyond in
contemplating the exchange of information regarding non-residents of either Colombia or United States. As per the applicable taxes, the exchange of Colombian tax information will only refer to income tax and capital gains, VAT, and tax on transactions. The exchange of information could vary depending on the information requested, as follows: (i) general and automatic information: all the information considered relevant for the purpose of the agreement; (ii) spontaneous information: information made available which could be relevant for the purpose of the treaty; and (iii) specific information: upon request, information necessary to comply with the purpose of the agreement. 3. Automatic exchange of information agreed under the multilateral convention of the OECD. On 29 October 2014, 51 jurisdictions, including Colombia, signed a multilateral competent authority agreement looking to exchange tax information based on the OECD multilateral convention, and the automatic exchange standard endorsed by the G20 Finance Ministers. The multilateral agreement will allow the signatory countries to report to the tax authorities in Colombia, among others, the balances of financial investments Colombian tax residents hold directly in those jurisdictions. Through mutual assistance for tax purposes, the tax authorities signatories countries should coordinate their administrative efforts to prevent tax evasion and tax avoidance of its residents. This instrument establishes the obligation under public international law for the 54 signatory states to cooperate actively in the exchange of information automatically, which means it will no longer be needed prior research on taxation, for countries signatories of the agreement to exchange tax information of their tax residents. The automatic information standard is expected to be implemented fully on 2018 by all jurisdictions, notwithstanding, Colombia as part of the early adopter group, has committed to undertake first exchanges by 2017 and have provided specific timelines for its implementation. C. Double Tax Conventions In consideration to the increase of foreign investment in Colombia and Colombian investment abroad, Colombia has entered into the international tax law sphere, entering into conventions that aim to eliminate the double taxation that could derive from income or gains arisen in one territory and paid to residents of another territory.
When negotiating the double tax conventions, Colombia has followed the OECD Model Tax Convention and its commentaries. The commentaries of the OECD Model Tax Convention are not mandatory in Colombia, but are deemed as important guidelines for the interpretation of the provisions envisioned in the double tax conventions subscribed. As of April 30, 2015, Colombia had signed 9 double tax conventions with Spain, Chile, Switzerland, Canada, Mexico, Korea, India, Czech Republic and Portugal, in a time frame of 6 years. Additionally, Colombia signed a double tax convention with the members of the Andean Community, making a total of 10 double tax conventions signed. The double tax conventions signed with Czech Republic and Portugal are still pending of approval by the Colombian government. On October, 2014, Colombia and Panama agreed that they will negotiate a double tax convention, negotiations that are expected to be finalized around October, 2015.