Volume 6, Number 7, Page 3

Tax Reform in Colombia

By Publio Perilla Lozano y Lina Uribe García

Editor’s Note: Recent tax reform has created substantial changes to the Colombian Tax code, including in the area of foreign investment. The article below expands upon Michael Anderson and Jamie Vargas’ piece in the March 26, 1999 edition of the Trade Report.

I. Income Tax

• The profit obtained in the sale of low liquidity shares through the Stock Market will be subject to income tax, while the profit obtained by selling high and medium liquidity shares continues to be exempt from said tax.

• The monthly sum received by workers through indirect payments for food or vouchers to acquire food is not considered taxable income if the sum does not exceed the equivalent of two minimum monthly salaries.

• The tax benefit for employees and independent workers who make contributions to pension funds is extended from 20 percent to 30 percent of their annual income.

• The tax discount for VAT paid in the acquisition of fixed assets is eliminated, and now it is treated as an income tax deduction. For VAT balances accumulated as of December 1998, that have not been discounted yet, there is a term of 5 years for its deduction.

• The tax discounts for donations made to universities are now extended also to those given to schools and hospitals. Also, donations made to the Gustavo Matamoros Association and to organizations whose purpose is the defense, protection and promotion of human rights and access to justice, produce a deduction equal to 125 percent of the value of the donation.

• Starting in 1999, the presumptive taxable income over gross net worth is eliminated for all tax payers.

• The exemption regarding interest obtained by holders of external public debt bonds is eliminated when these are obtained by Colombian tax payers. The exemption for non-residents is still in force. However, with regards to bonds known as “Bonos Colombia” (Decree 700, 1992) and with bonds issued in accordance with Resolution 4308, 1994, the exemptions are still in force for bond holders.

• For entities with foreign stock holders and/or branches of foreign companies, the income or remittance tax of 7 percent may be eliminated with the sole reinvestment of the profits in the company’s patrimony for a period of five years.

• The adjustment for inflation is eliminated for inventories, acquisition of merchandise and for the profit and loss statement, for both accounting and fiscal purposes. New faculties are granted to the government in order to modify or abolish said adjustments.

• The rate of withholding at source is unified at a 10 percent rate for technical services provided both in Colombia and abroad. This rate is also applicable for consulting services rendered by such entities abroad.

• Labor expenses for new jobs generated by taxpayers during a fiscal year can be discounted directly from the taxpayer’s income tax, for an amount up to 15 percent of the corresponding net tax. The discount is possible if the number of new jobs generated exceeds at least by 5 percent the number of workers employed as of December 31 of the preceding year and if the new workers continue to work for at least one year.

• The Unified Taxation Regime (RUI) is established for small income tax and value added taxpayers by means of which the Tax Administration will be able to jointly assess these taxes, considering a minimum presumed income for each activity, taking into account objective estimation bases.

II. VALUE ADDED TAX (VAT)

• The rate for value added tax (VAT) will be reduced to 15 percent (currently it is 16 percent) starting on November of 1999.

• The list of goods and services subject to VAT has been extended to include butter, oils and soaps and the services of air transportation of passengers (except vacation seasons), advertising in radio, press and television, (except small media) which are subject to a 10 percent rate.

• The VAT for lodging services rendered by hotels and other lodging establishments is eliminated.

• Imported vehicles whose value exceeds US $ 40,000 will be subject to VAT at a tariff of 45 percent (they were subject to a tariff of 60 percent), vehicles known as “camperos” either produced in Colombia or imported with a value not higher than US $ 30,000 are subject to a VAT of 20 percent. Vehicles with value of less than US$ 40,000 are subject to a tariff of 35 percent (they were subject to a tariff of 45 percent).

• Among goods not subject to VAT are live animals, fruits, medicines and electric energy. Among services not subject to VAT are the public ground transportation of persons, cargo transportation, medical services and the public services of energy, water and sewerage, public cleaning and domiciliary gas services.

• Certain services rendered from abroad to Colombian residents are considered rendered domestically for VAT purposes, including consulting and advisory services. On the other hand, it has been clarified that services rendered in Colombia to non residents are subject to VAT.

• All big taxpayers (Grandes Contribuyentes) are appointed as withholding agents in addition to those expressly appointed by a Resolution.

III. SMUGGLING

This offense will take place when merchandise is imported or exported to and from the country through a place that is not authorized for such purpose, in an amount between 100 and 200 minimum monthly salaries. Imprisonment of 3 to 5 years and a fine equivalent to 200 percent of the value of the merchandise might be imposed. Additionally, when this criminal offense committed using merchandise of a value higher than 200 minimum monthly salaries, imprisonment of 5 to 8 years and the same fine described above will be imposed. The crime of aiding the activity of smuggling is committed when there is merchandise involved for an amount exceeding 100 minimum monthly salaries, and it is subject to a prison penalty from 1 to 5 years and a fine from 100 to 1000 minimum monthly salaries.

• An infraction to the foreign exchange regime is presumed whenever merchandise is introduced to the country without the compliance of all applicable legal requirements. Therefore, whenever there is smuggling, it is legally presumed that there is also a violation of the foreign exchange regime, subject to the corresponding sanctions.

• Any person that acquires a good or service must request the issuance of an invoice from the seller, and must produce it whenever required by the authorities.

• The authorities may retain the merchandise of those caught without the corresponding invoice, but only within an area of 600 meters of the commercial premises where the merchandise was bought.

IV. STAMP TAX

The stamp tax tariff is increased from 1 percent to 1.5 percent. Additionally, public credit operations will be exempt from stamp tax, as well as the refinancing of financial mortgage obligations.

V. MUNICIPAL AND DISTRICT TAXES

• Municipalities, districts and departments are authorized to establish gas surtaxes of 20 percent. On the other hand, it is established an ACPM surtax that will have a rate of 6 percent.

• Stamp tax and the tax of circulation and transit of vehicles were merged in order to create the unified vehicle tax.

• Registry tax over the increase of the subscribed capital of stock corporations was reestablished.

VI. OTHER REGULATIONS

• Default Interest Rate. The default interest rate for tax obligations, published every 3 months, will be the DTF annual rate increased in 50 percent. While it is published, the rate will be of 45 percent. However, taxpayers that comply with their obligations before March 31, 1999, will be subject to a special tariff of 28 percent.

• Withholding at Source to Income Coming from Abroad. The withholding of 3 percent corresponding to income coming from abroad will not be applicable, in addition to the income from exports of goods, to the income from services rendered abroad by Colombian residents to non-residents, if the foreign currency generated is channeled through the exchange market.

V. PEACE BONDS

A new compulsory investment in “Peace Bonds” has been established for the years 1999 and 2000 for all legal entities and for individuals with a liquid net worth exceeding Ps. 210 million as of December 31, 1998.

These bonds are negotiable instruments with a seven year term, and which bear interest at a rate equal to 110 percent of the variation of the consumer price index as certified by the Government. The value of this investment will be of 0.6 percent of the net patrimony existing on December 31 of 1998 (for the investment in 1999) and 0.6 percent of the 1998 net patrimony increased in the 1999 inflation percentage (for the investment in the year 2000).

Finally, it is important to note that in order to calculate the investment, the net patrimony may be diminished in the proportion (within the total value of the assets owned by December 31) of the value of assets represented in shares and quotas in Colombian companies. Additionally, individuals may discount voluntary and compulsory contributions to public and private pension funds.

Publio Perilla Lozano and Lina Uribe García are attorneys with Gómez Pinzón & Asociados in Colombia.