7 October 2014 Global Tax Alert News from Americas Tax Center EY Americas Tax Center The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: http://www.ey.com/us/en/ Services/Tax/Americas-Tax- Center---borderless-clientservice Colombian Government proposes tax reform On 3 October 2014, Colombia s Ministry of Treasury filed bill No. 134/14 before the House of Representatives. The bill proposes changes to the Tax Statute (Law 1607 of 2012) and creates new mechanisms to combat tax evasion. The Government projects that it will collect $12.5 billion Colombian pesos (approx. US$6,164,000 1 ) during 2015, which will help it meet its goal under the structural deficit provision contained in the Law of Fiscal Rule. If that amount is not collected, the Government will have to reduce its level of public investment for 2015 through 2018. Proposed tax changes New wealth tax The tax reform would create a new wealth tax that would be charged to income taxpayers that are individuals and legal entities. Nonresidents, domestic or foreign individuals, foreign companies and foreign entities also would be subject to the new wealth tax. The tax would be applied to equity held directly in Colombia and equity held indirectly through permanent establishments (PEs) or branches. The tax reform would exempt from the tax foreign portfolio investors, companies in liquidation or under a restructuring agreement and individuals under the insolvency regime provided by Law 1564 of 2012. The reform would consider certain insolvency strategies as acts to which anti-abuse measures would apply and those measures would hold partners and shareholders jointly liable. Under the reform, the tax base would be the taxpayer s wealth, determined as taxpayer s gross assets minus debts as of 1 January 2015, equal to or greater than COP 1,000,000,000 (approx. US$493,000).
From the tax base, the net value of the following assets could be deducted: The first $12,200 UVT (Tax Value Unit for its acronym in Spanish) (for 2014, COP 335,000,000, approx. US$165,000) of the fair market value of a residential home Shares in domestic companies, even if held through a trust or collective investment fund Contributions of cooperative entities described in Paragraph 4 of Section 19 of the Tax Statute Real estate used and beneficial to mass transit public companies Land banks owned by territorial public companies, with land intended for priority housing Even though the tax base is static, the accrual of this tax would be annually on 1 January 2015, 2016, 2017 and 2018. Note that for PEs and branches, the tax reform has not clearly established how the equity attribution rules would operate. The tax would be progressive depending on the level of equity, as follows: Ranges (Colombian pesos COP) Applicable tax(*) 0 to $2,000,000,000 (**) (approx. US$986,000) 0.20% $2,000,000,000 to $3,000,000,000 million (approx. US$986,000 to 1,479,000) 0.35% $3,000,000,000 million to $5,000,000,000 million (approx. US$1,479,000 to 2,465,000) 0.75% $5,000,000,000 million and above (approx. US$2,465,000) 1.50% (*) The outcome indicates the obligation to add a fixed portion in Colombian pesos to the indicated range. (**) Taxpayers are filers provided wealth is beyond COP 1,000 million. The wealth tax would not be deductible or discountable from the income tax or CREE tax (income tax for equality). It also may not be offset with other taxes. CREE surtax For tax years 2015 through 2018, a CREE surtax of 3% would be imposed on taxpayers subject to that tax if their taxable base is equal to or greater than COP1,000,000,000 (approx. US$ 493,000). Additionally, the reform would require taxpayers to calculate the surtax on the tax base for the previous year (as an advance) and pay it in two annual installments. Increase in CREE tax rate The tax reform would permanently increase the CREE tax rate to 9% beginning in 2016 and, thus, the lower tax rate would no longer apply, which was expected to be 8% as of 2016. Additional anti-evasion rules In addition to the current anti-evasion rules and transfer pricing regulations, the reform would create a new normalization tax, which would be imposed from 2015 through 2017 as surtax to the wealth tax. This tax would be imposed on taxpayers subject to the wealth tax and those taxpayers that want to voluntarily file to report omitted assets when they were legally required to report those assets. Conversely, taxpayers subject to the wealth tax that do not have omitted assets would not be subject to the new surtax. The tax base for the new surtax would be the asset value as determined under the income tax rules. 2 Global Tax Alert Americas Tax Center
The tax reform also would create measures regarding equity held through private foundations and trusts under which the rights in those structures and contracts would be presumed to be held in Colombia and the asset rules applicable to fiduciary rights would be applicable. The inclusion of the omitted assets would not result in taxable income due to assessment made when comparing equities of the taxpayer under special provisions provided by law or special taxable income due to asset omission. The normalization surtax rate would increase incrementally (10% for 2015, 15% for 2016, 20% for 2017), which is intended to make taxpayers comply with the normalization as soon as possible. Additionally, the tax reform would establish a new statement for information on assets that Colombian residents own abroad. On the statement, the type and nature of the assets would have to be reported if the assets are greater than a certain amount (3,580 UVT, Tax Value Unit for its acronym in Spanish, which for FY2014 ascends to COP $98 million approx. US$48,000). The jurisdiction where the assets are located also must be disclosed. Another anti-evasion measure would be the creation of a criminal offense for the omission of assets or the inclusion of nonexistent assets with a value equal to or greater than 12,966 Current Monthly Minimum Legally Wages (for FY2014, approx. US$3,938,000), which would affect the income tax, CREE tax and corresponding balance in favor. The penalty will stop accruing once an amended return is filed and the tax, penalties and interest are paid. Taxpayers that are subject to the normalization tax will not be subject to the penalty for tax years 2015 through 2017. The tax reform also would require a committee of experts to be formed to propose reforms aimed at preventing tax evasion by entities in the special tax regime, which includes nonprofit entities. Levy to financial transactions (GMF for acronym in Spanish) The tax reform also would modify the gradual elimination of the GMF and maintain the 0.4% tax rate from 2015 to 2018. It would be reduced to 0.3% in 2019, 0.2% in 2020 and 0.1% in 2021. The tax would be repealed in 2022. VAT changes The tax reform would eliminate the two point VAT reduction for the purchase of goods and services made by credit or debit cards or through a mobile banking service, which are generally taxed at a 16% general rate or a 5% rate depending on the type of transaction. Endnote 1. Exchange rate: US$1: Colombian Pesos (COP) 2,208. Global Tax Alert Americas Tax Center 3
For additional information with respect to this Alert, please contact the following: Ernst & Young Ltda., Bogotá, Colombia Diego Casas +57 1 484 7050 diego.e.casas@co.ey.com Ricardo Ruiz +57 1 484 7537 ricardo.ruiz@co.ey.com Carlos Parra +57 1 484 7931 carlos.parra@co.ey.com 4 Global Tax Alert Americas Tax Center
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