2021 TAX REFORM BILL

Bill 594 of 2020

On April 15, 2021, the national government submitted to Congress tax reform bill 594 of 2020. Below we summarize the main changes proposed in tax matters^[1]:

VAT

• Certain services to change their status of exempt services to taxable services

• Power, water and sewage, public cleaning and residential gas (social strata 4, 5 and 6)
• Commissions on the use of credit and debit cards
• Cloud computing and hosting services
• Postal and courier services
• Acquisition of software licenses for the commercial development of digital content
• Commissions earned by trust companies, investment management companies and stock exchange brokers for the management of collective investment funds/collective equity funds

• Certain services to change their status of items taxed at 5% to exempt status

• Prepaid medicine and supplementary plans, surgery and hospitalization insurance policies, health services insurance policies and additional health plans generally, in accordance with current law.
• The storage of agricultural products.

• Certain zero rated items to change status to items taxed at 5%

– Sale of solar panels, solar charge controller inverters (5%)

• Certain zero rated items to change status to exempt items

– Scientific and cultural books and magazines

– Beef, poultry, fish, milk, eggs, rice

– Vitamins, antibiotics, glands, medications

• VAT paid on the acquisition of real productive fixed assets

• VAT paid on acquisitions or imports of real productive fixed assets by VAT collection agents would be treated as a VAT credit. Former rules to apply through December 31, 2021.
• The refund or offset of VAT overpayments to be claimed on the VAT return showing the overpayment.
• The bill does not mention the VAT paid on the making or construction of real productive fixed assets nor the services that are required to place these assets in operating conditions.
• The bill clarifies the point that fixed assets carry the right to a credit only in the cases provided for in Articles 485-2 and Article 485 (c)

• VAT-less days (days with no VAT)

• The majority of the requirements established by Legislative Decree 682 of 2020 are maintained.

Changes in the income tax

• Corporate income tax rates

• Companies that earn net income of up to 13,770 UVT will pay income tax at 24%. Any marginal net income would be taxed at 30%.
• An income tax surcharge of three points is established for 2022 and 2023. This surcharge would be initially paid as a prepayment of 100%, calculated based on the prior year income tax. The total surcharge would be payable in two equal annual installments.

• Exempt income

• Starting January 1, 2023, all items of exempt income established under Article 235-2 of the Tax Code[2] would be repealed. All “consolidated legal situations” and international treaties would nonetheless be respected.
• The tax benefit for income earned by the so-called orange economy enterprises would be maintained. The deadline for establishing these enterprises to be extended through December 31, 2022.

• Income of collective investment funds or private equity funds treated as deferred income

• The deferred income treatment would apply only where the real or effective beneficiary or the group of related investor companies or the members of a same family do not hold more than 10% of interests in the fund, either directly or indirectly (including all the fund compartments). Currently, the limit is 50%.

• Definition of real or effective beneficiary

• The definition of effective beneficiary set forth in Article 23-1 of the Tax Code would be repealed; and the definition set forth in Article 631-5 of the Tax Code would be modified.^[3]

•  Colombian source income

• Income earned from the provision of advertising or marketing services abroad or from these services where targeted to the national market or where the actual benefit occurs in the country would be included as Colombian source income.

A withholding tax of 20% would apply on this income.

• Incentives for new jobs

• The bill includes a package of incentives for the hiring of people under 28 years of age who get their first job, for persons with no pension, for the disabled, for unemployed women older than 40 years of age and for apprentices, provided that the remuneration does not exceed 3 minimum wages.
• The Ministry of Finance would pay the social security contributions and payroll taxes due by the employer for employees earning less than 1.5 minimum wages.

• Income tax deductions to be repealed

• Contributions for education institutions (Article 107-2 (c))
• 120% of the salary of employees under 28 years of age (on their first job)
• Membership payments paid to professional associations
• 120% of the salary paid to elder employees
• 200% of salaries and labor benefits of workers with a disability of 25% or more
• 125% of donations made to the Corporación General Gustavo Matamoros D’Costa and to foundations and organizations for the defense and promotion of human rights
• 125% of donations made to not-for-profit amateur sports organizations
• Donations made to sponsor natural parks and for the preservation of natural forests
• 130% of expenses for salaries and labor benefits of workers hired as apprentices, in addition to those provided by law

• Tax credit for ICA (the industry and commerce tax)

• This credit to be maintained at 50% permanently.

• Taxable base in sales of real property

Notaries to be required to use geo-referencing systems and to report whether or not the parties are complying with the rules of Article 90 of the Tax Code for purposes of setting the fair value of the real property being sold. Notaries to be held as joint and severally liable with the parties were they fail to meet this provision of the law.

• Personal income tax rates

• Today, individuals pay income taxes on their income/revenue that exceeds 1009 UVT. Under the reform, the threshold would drop to 800 UVT in 2022 and to 560 in 2023.
• Today, progressive rates start at 19% and go up to 39%. Under the reform, the lowest rate would be 10% and the highest marginal rate would be 41%.
• Withholding tax rates would increase in correlated manner. The total amount of income tax deductions and exempt income would drop from 40% to 25%.
• The dividend tax rate would go from 10% to 15% for any distributions in excess of 800 UVT.

• Individuals required to file an income tax return

• Any individuals and estates earning revenue in excess of 400 UVT (14,523,200 COP for 2021) and with gross assets in excess of 2500 U VT (90,770,000 COP 2021).
• Persons making transactions with credit cards, or making purchases or consumptions or receiving bank deposits in excess of 400 UVT (14,523,200 COP for 2021).

• Changes in the calculation of basket income

• New limits on claimable exempt income and deductions are set for the general income basket (25% of net revenue, without exceeding 5040 U VT – approximately 183,000,000 for 2021).
• No deductible costs or expenses may be claimed in the dividend income basket, except for the solidarity wealth tax. Any losses suffered before 2022 may be carried forward against the general income basket only, with limits applying.
• Temporarily, the percentage of exempt income related to the acquisition of goods and services established by law which are supported with electronic invoices can range between 3% and 10% – for the general income and pension income baskets.
• For the non-labor and capital income baskets, all deductible costs and expenses must be supported with electronic invoices.

• New items of income taxable for individuals

• Severance pay and related interest
• Incentive for long-term savings for the promotion of construction (AFC for the Spanish initials) and voluntary contributions to pension plans.
• Retirement pensions, disability pensions, old-age pensions, surviving spouse pensions and workmen compensation pensions to be taxed to the extent they exceed 1600 UVT per year. Rule to apply to pension surrogate indemnifications.
• Voluntary contributions paid under individual solidarity pension saving plans to be treated as taxable capital gains (currently they are nontaxable)

• Deductible costs and expenses to be repealed or limited for individuals

• Health insurance or prepaid medical care plans
• Contributions to severance pay plans, made by freelancers, up to 2500 UVT^[4]
• Interest on housing loans and ICETEX educational loans

Capital gains tax

Capital gains taxable bases for gains earned as inheritance, bequests, donations, spouse assignments and other gratuitous transactions to be increased.

Solidarity wealth tax

This tax would apply in 2022 one 2023, to be payable by:

• Individuals and estates who are income taxpayers or who are subject to tax under special surrogate systems
• National or foreign nonresident individuals, in respect of the assets that they hold in Colombia through permanent establishments, directly or indirectly
• Estates of nonresident decedents in respect of assets held in Colombia
• Foreign companies or entities that do not file a tax return and that hold assets in Colombia. This does not include persons that do not file returns where the assets held are shares, accounts receivable or portfolio investments provided they comply with foreign exchange regulations

All of the above is under the condition that the relevant person/estate holds net assets equal to or greater than 134,000 UVT (approximately 4,850,000,000 COP for 2021) as of January 1, 2022.

The rate of this tax would be as follows:

.

The solidarity wealth tax would be income tax deductible regardless of whether or not it is related to the income-producing activity of the taxpayer.

Temporary solidarity tax on high revenues

• This solidarity tax would be payable by any person earning monthly revenue in excess of 10 million pesos, at the rate of 10%, from July 1, 2021 through December 31, 2021.
• The tax would apply for private and state employees, contractors, service providers, investment beneficiaries[5], and also on pension income exceeding the above-noted amount.
• 50% of this solidarity tax may be claimed as a tax credit in 2021. The remaining 50% would be claimed in the following years until 100% is claimed as a credit.

Normalization tax

• Under the bill, the so-called normalization tax is included again, allowing taxpayers to “normalize” assets that were not reported in prior years or nonexistent liabilities that were reported, as of January 1, 2022. The normalized items would be taxed at 17% on the tax basis or self-made appraisal. In certain cases, the tax would apply on the fair market value. In case the assets are reinvested in Colombia, the rate would go down to 8.5%.
• At the latest, this tax must be filed and paid no later than September 25, 2022. Neither late returns nor amended returns would be admitted.
• The bill also includes rules for foreign exchange normalization.
• The bill includes rules for the normalization of assets that were subject to the normalization tax in prior years, where the assets were reported for values below fair market value.
• Special rates for hotel projects and theme parks (among others) would be repealed.

National carbon tax

• The tax on natural gas and liquefied gas for the generation of power would start to be collected in 2024, with the full tax being charged in 2028.
• The essential elements of this tax are clarified
• Tax returns where the total tax is not paid are ineffective
• This tax is income tax deductible

Other taxes

• National tax on single-use plastic products used as containers or packages of goods. The tax will be charged on the sale, withdrawal for the taxpayer’s own use and imports of the products defining the project at a rate of 0.00005 UVT per each gram of weight of the container or package. Tax not to apply if circular economy use is certified.
• National tax on the consumption of pesticides. To apply as from January 1, 2022, on sales to the end consumer or withdrawal for the taxpayer’s own use, at the rate of 8% on the products final value. Biological-based pesticides are not included. The tax cannot be claimed as deductible costs or expense nor as a tax credit.
• National vehicles tax. This tax would replace the vehicles tax of Law 488 of 1998 and the vehicles circulation and transit tax for public service vehicles. The commercial value of the vehicle and pollution factors would be taken into account to define the applicable rates. For the commercial component, the rates would range between 1.5% and 3.5%. In the same manner, differential rates would apply for public service vehicles and electrical vehicles. It would accrue as of January 1 every year, and low rates would apply through 2028.
• Road tolls in capital cities. Capital cities would be authorized to install tollbooths within their jurisdictions for the bettering of their roads and street systems. The municipal or district authorities would set the rates prorated to distances run, etc.

Formal obligations and tax proceedings

• DIAN may invoice the income tax to taxpayers, and these invoices will be valid as enforceable securities, unless the taxpayer decides to file his income tax return. This rule will also apply to the special SIMPLE income tax system.
• DIAN may also register ex officio any individual in the national unified tax register (RUT, for the Spanish initials), regardless of whether or not the person is liable for tax obligations.
• The obligation to issue invoices would be extended to every person that does not qualify as a merchant and whether or not this person is a taxpayer of any of the taxes administered by DIAN.
• The maximum percentages of deductible costs and expenses to be supported without an invoice are eliminated.
• Penalties are imposed for failure to implement invoicing systems and for other conducts related to the procedure of validating electronic invoices previously, and also for failure to meet the invoicing implementation deadlines.

[1] This document is informative in nature. Hence GodoyHoyos assumes no responsibility for the use or interpretation of information contained in it, nor for any subsequent updates.

[2] Corresponding to the following activities: development of Colombian rural areas; sale of alternative power sources (wind power, biomass or agricultural residues based power, solar power, geothermal power, or ocean generated power); income related to sales of houses for the poor; exploitation of new forestry plantations; river transportation with shallow draft vessels; tax benefits for so-called orange economy literary creations; financial income derived from stabilization reserves set aside by pension and severance pay funds managing companies.

[3] Final beneficiary is defined as follows. “The individual (s) who ultimately holds or controls (hold or control) the client, directly or indirectly, or the individual on whose behalf the transaction is made. This includes as well any individual (s) who holds (who hold) the effective or ultimate control, directly or indirectly, over a legal entity or any unincorporated structure [business vehicle] ”.

[4] Without exceeding 1/12 of the taxable revenue of the respective tax year.

[5] Interest, financial income, rentals, royalties, exploitation of intellectual property and dividends and shares in profits.