March 19, 2021
Colombia: Commission of Experts on Tax Expenditures/Benefits issues recommendations for Colombian tax system
The Commission of Experts on Tax Expenditures/Benefits suggests increasing certain tax rates and reducing the number of tax exemptions.
On 17 March 2021, the Colombian Government released the report prepared by the Commission of Experts on Tax Expenditures/Benefits (the Commission). The report is key to the tax reform proposal that the Colombian Executive Power has announced it will send to the Congress shortly.
According to the report, in 2019, tax benefits in Colombia totaled approximately COP69.1 billion – COP51.6 billion for value-added tax (VAT) benefits, COP17.1 billion for income tax benefits, and the remaining amount for other tax benefits. The total tax benefits for that year represented 6.5% of the Colombian Gross Domestic Product. Tax evasion totaled an estimated COP20.7 billion for VAT and COP21.6 billion for corporate income tax. In addition, the rate of labor informality1 is estimated at 49.2%
Colombia needs to increase tax revenue and that need has become more urgent with the growth of the fiscal deficit as a result of COVID-19 pandemic. Additionally, Colombia is at risk of having its credit rating reduced if Colombia makes no tax adjustments in the short term.
The Commission was established by Law 2010 of 2019 to make recommendations for improving Colombia’s tax policy and began activities in August 2020. The Commission is led by five international experts2 and has five working focus groups.3
The Commission concluded Colombia has introduced piecemeal reforms to counteract the system imbalances and increase tax revenues. The tax system has narrow tax bases and high tax rates imposed on those who cannot avoid the tax. The tax system is complex and includes distortive taxes (e.g., debit tax, ICA (i.e., turnover tax4), VAT on investment).
The Commission also determined that acting to balance the tax system too quickly may harm economic recovery and abolishing tax benefits within each tax provision may be ineffective. Thus, the Commission suggests ambitious tax base broadening tax packages/reform. Additionally, Colombia needs to consider long transitional periods.
Accordingly, the Commission recommends: (i) requiring the tax authorities to produce annual reports, including item-by-item tax expenditure and benefit reports; (ii) adding a mandatory framework chapter to each law that explains the rationale of the tax reform and provides a detailed economic assessment; and (iii) creating an independent body of public finance experts to assist the Ministry of Finance in developing a strategy for implementing the suggested reform.
The tax benefits were classified by each of the focus groups into the following categories: 1) no reform is needed (at least in the short run); 2) reform is desirable; 3) reform is conditioned (on other reforms); 4) unclear whether to reform or not. A table with these classifications is attached below.
The Commission generally recommended the following changes:
Personal income tax
Business tax regime
Report tax benefits commission of experts - Annex
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A.S. Bogota
Ernst & Young LLP (United States), Latin America Business Center, New York
Ernst & Young Abogados, Latin America Business Center, Madrid
Ernst & Young LLP (United Kingdom), Latin America Business Center, London
Ernst & Young Tax Co., Latin America Business Center, Japan & Asia Pacific