Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

March 19, 2021
2021-5327

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.

Background

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

Commission’s conclusions

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.

Key recommendations

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

  • Significantly reduce the number of tax exemptions

  • Avoid tax allowances that increase with income (e.g., benefits that correspond to an amount of total income)

  • Reduce the basic tax allowances (broadening the tax base) and the number of tax brackets (avoid increasing statutory tax brackets)

  • Tax pensions at a fair effective tax rate

  • Improve how tax is levied on personal capital income

  • Use market value (not historical) to determine taxable income

  • Strengthen tax enforcement and collection, particularly on self-employed individuals

VAT

  • Reduce number of excluded and exempted goods and services

  • Ensure that the VAT compensation mechanism reaches the most vulnerable population

  • Keep a 0% VAT for basic needs in the short term (while the compensation mechanism is improved)

  • Increase the current reduced VAT rate from 5% to a rate in the range of approximately 10% to 12% (currently, the standard rate for VAT purposes is 19%)

  • Credit input VAT paid on investments in fixed assets against output VAT (currently, input VAT on investments in fixed assets may be creditable for income tax purposes rather than for VAT purposes)

  • Eliminate the national consumption tax and increase green taxes and taxes on unhealthy activities/goods

  • Tax goods and services in free trade zones (in particular special permanent free trade zones) under the standard VAT regime

Business tax regime

  • Abolish debit tax/financial transactions tax (or limit it to cash withdrawals)

  • Replace the municipal turnover tax with immovable property tax (or grant/transfer tax)

  • Broaden the corporate income tax base and reduce the rate to be competitive with international standards

  • Align tax treatment across sectors (e.g., avoid reduced income rates for certain sectors)

  • Abolish corporate income tax recapture on dividends paid out of profits not subject to income tax at the corporate level

  • Merge the free trade zone regime with the standard corporate income tax regime

  • Keep the tax simplified regime (SIMPLE)

  • Strengthen the agricultural sector’s compliance with the law, focusing on development and growth of the sector, including tax and non-tax measures

  • Redesign certain special regimes (e.g., Zomac, Zese)

_________________

ATTACHMENT

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

_________________________________________

Endnotes

  1. Informality is defined to include: i) employees who do not pay health contributions; and ii) self-employed who do not pay social security contributions (Brazil, Chile and Turkey), or whose business is not registered (Argentina, Colombia, Costa Rica, Mexico, Peru and South Africa).

  2. The international experts are David Rosenbloom, Brian Arnold, Jeffrey Owens, Pascal Saint-Amans, and Kent Smetters.

  3. The focus groups are:(i) Corporate Income tax, (ii) Non-taxable income and incentives for the countryside, (iii) Individuals, employment and dividends, (iv) Global trade, and (v) VAT.

  4. A municipal tax levied on the performance of industrial, commercial or service activities within the territory of a specific municipality.

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct