Financing bill: major shortcomings identified

The 87 articles of the Finance Bill filed on October 31, 2018 would end up affecting 164 rules of the ET and 19 additional rules. In several of the proposals raised therein, important deficiencies can be detected that must be corrected by Congress during its processing.

Complying with the eternal custom of the most recent presidents we have had in our nation (who processed tax reforms a few months after taking office), the Government of the new President Iván Duque (inaugurated on August 7, 2018), invoking the rule of Article 347 of the National Constitution; filed on October 31, 2018 a financing bill with which it seeks to obtain the 14 trillion pesos that would be missing to cover the 259 billion of the general budget of the Nation for 2019, the latter approved in Congress on October 17, 2018.

Ironically, President Duque himself, while he was a senator, had opposed the initiative of former President Santos, when he resorted in December 2014 to the figure of processing a Financing Law (which became Law 1739 of December 23, 2014 and was declared exequible in sentence C-015 of January 27, 2016), to obtain the missing resources from the 2015 budget, something that was achieved mainly by establishing surtaxes on the CREE tax and imposing a wealth tax during the years 2015 to 2018 for legal entities and individuals that as of January 1, 2015 had liquid assets exceeding 1.1 billion.

However, in the case of the new financing bill submitted by the Government of President Duque (which for now consists of 87 articles that would affect 164 norms of the Tax Statute -ET- and other 19 outside said statute), and evidently failing to comply with the multiple promises he had made in his presidential campaign when he announced that he would not increase taxes; it has been proposed that the missing 14 billion for the 2019 budget would be obtained mainly by imposing a new VAT tax of 18% on all goods and services that today are taxed at the special VAT rate of 5% and imposing that same VAT of 18% on all goods exempted from Article 477 of the ET (which would disappear from the Statute) and also on a large number of goods and services that are so far excluded (mainly goods and services that are part of the family basket), see articles 2 and 11 of the project that would modify articles 424 and 476 of the ET).

Additionally, and also quite ironically, despite the fact that the objective of the bill is to obtain greater resources for the State’s expenses, the text of the bill proposes important reductions in the income tax of legal and natural persons, which could even begin to benefit from a new and excessively beneficial regime of simple taxation (see article 57 of the bill), a proposal that is based on the idea that by reducing the income tax for companies, the national economy would be reactivated even more, which is not always true.

Having studied the text of the financing bill filed on October 31, 2018, below, we will highlight several of what we consider to be important deficiencies in the body of the proposals put forward by the national government and which should therefore be corrected while the reform is being processed in Congress.

VAT increase to the family basket, its refund to poor families and the effects on the economy.

“Since the vast majority of low-income families would begin to be affected by the high VAT on their basic foodstuffs, the Government proposes to give them a bimonthly “compensation” of 3 UVT”.

The national Government indicates that if the goods of the family basket that until now have been excluded and/or exempt from VAT (such as potatoes, eggs and milk) are taxed at a rate of 18%, it would mean that the few wealthy families in Colombia would no longer benefit from saving the tax on such goods. In addition, as the vast majority of low-income families would begin to be affected by the high VAT on their basic foodstuffs, the Government proposes to give them a bimonthly “compensation” of 3 UVT (currently $99,468), but only to 30% of them. This would be done with monies that would be granted to those who appear as registered in the Sisbén (see article 1 of the bill and the answer to question 2 of the FAQ questionnaire on the bill published by the Ministry of Finance on November 1, 2018).

In relation to the above it is easy to discover that if the Government’s proposal were to be implemented what may very well happen is the following:

a. Wealthy families could stop consuming the large quantities of goods of the family basket that they are used to acquiring (so, for example, instead of ten bottles of milk in the week, they could go on to consume only seven). Middle-sector families would do the same, all of which will ultimately lead to a significant drop in the sales of producers and traders.

b.The poorest families will continue to buy their goods directly in the market places (as they have always done), and there it is obvious that they will never be charged VAT, since they buy directly from the farmers who grow the products and who would now start to say that they belong to the simplified VAT regime, regime that with the bill would change its name to start being called “not responsible for VAT” (see article 5 of the bill and the new paragraph 3 that would be added to article 437 of the ET, see also the repeal of article 499 of the ET that would be made with article 87 of the bill). Therefore, it would be illogical for the national government to compensate these poor families for a VAT that they have never actually paid.

c. When the poorest families decide to buy in places that do charge VAT, it is clear that the consumption of each family is different and therefore the VAT that each family would pay would be different (since consumption depends on the number of members of each family). Thus, it would not make sense for the national government to benefit all families with the same value for “compensation” of 3 UVT bimonthly.

d. If a VAT of 18% is charged for the most basic foods in the human diet, in that case the foundations, associations and other entities that work feeding the most needy will no longer be able to buy as much food as they would like to be able to continue carrying out their humanitarian work.

Therefore, we believe that in practice the proposal to levy a VAT of 18% on sensitive products of the family basket, would only serve to slow down many of the sales of the business sector (which is not convenient for the economy of any country), or to slow down the work of foundations and other humanitarian entities and even to end up making inadequate compensation with public resources. The best thing would be to tax such goods at a lower rate (perhaps 2%), and to return the VAT only to poor families who can prove that they actually paid it (something that could only be demonstrated when they go to places that invoice their sales).

It would even be better to think of taxing with a VAT, even if it is small, exports of many goods and services that today are totally exempt operations (see article 481 of the ET).

Creation of the Simple Taxation Regime would endanger the resources in favor of Sena, ICBF, EPS and other entities.

Article 57 of the bill would totally modify articles 903 to 917 of the ET, eliminating in one fell swoop the taxation regime known as the Monotributo, which was created just two years ago with Law 1819 of December 2016. This allowed individuals, traders and hairdressers with annual income of up to 3,500 UVT to voluntarily opt out of the ordinary income tax regime and pay to the State only between 12 and 26 UVT as annual tax according to their gross income level.

As the voluntary opt-in to the Monotributo regime was a total failure, now the Government is proposing to eliminate such regime and create what would be known as the simple taxation regime, which would have the following basic characteristics:

a. It is a voluntary regime to which national companies (both resident individuals and national legal entities) may apply, provided that in the previous year they have obtained gross tax income for all concepts between 1,400 UVT and 80,000 UVT (currently $46,418,000 and $2,652,480.000), and as long as they do not appear in the list of Article 906 of the ET (list indicating the type of companies that may not benefit from this regime, including companies that are financial institutions, or companies whose partners or managers have in substance an employment relationship with a contractor, because they are personal services rendered with regularity and subordination).

“they must notify before January 31 of the following year their intention to join the simple regime (something that for the year 2019 can be done until July 31, 2019).”

These companies must notify before January 31 of the following year their intention to join the simple regime (something that for the year 2019 can be done until July 31, 2019) and will begin to pay on a bimonthly basis, in a special form throughout that same fiscal year and in advance, the special tax that is calculated only on their ordinary gross taxable income at rates ranging from 2.6% to 13.6% (all depending on their economic activity and their range of bimonthly income. The payment of this tax would cover both the income tax and the national consumption tax -INC- (in the case of businesses related to restaurant and bar activities), and the municipal industry and commerce tax. In this regard, it is clarified that the industry and commerce tax and its complementary tax of notices and boards, for all activities and regardless of the municipality where the companies are located, will correspond to the part that is calculated at the rate of 0.6% (which is already added within the global rates mentioned above). This money would then be transferred by the Dian to the different municipalities.

b. These companies shall not be required to withhold any income tax at the source and they themselves shall not be required to withhold or self-withhold any income tax (except when they cancel values for labor payments).

c. At the end of the year, and before March 15 of the following year, they will file their annual return on a special form from which they will subtract the amounts paid in advance during the fiscal year. If a balance to be paid is finally originated, the respective return must be filed with full payment.

d. These companies will not be subject to presumptive income (see article 67 of the project), and since they do not belong to the ordinary income tax regime, they will not be subject to income by equity comparison, nor will they have to calculate advance payments to the following year’s tax.

e. If they are liable for VAT, these companies will file an annual return. But the payment of such VAT must have been made in advance during the fiscal year in the same form in which the tax mentioned in point b) of this list is settled.

In accordance with all of the above, it is important to highlight that this important proposal contains three rather large technical defects, namely:

a. In the first place, it is clear that the legal entities that end up joining the simple regime would not be taxed at the rate of article 240 of the ET (which in article 69 of the bill is proposed to be reduced from 33% to 30% between 2019 and 2022), but they would enjoy at the same time the benefits of exemption from the parafiscal contributions to Sena, ICBF, EPS and other entities contemplated in article 114-1 of the ET, as confirmed by the new version of article 903 of the ET. Facing such scenario, it is obvious then that the Sena, ICBF and EPS and other entities mentioned in article 243 of the ET would be greatly harmed since they would not receive any part of the special tax to be paid by the companies under the Simple Regime. In effect, and because the bill does not say anything about it, it is understood that the Sena, ICBF, EPS and other entities of Article 243 of the ET would only continue to receive what is collected with nine points of the rate applicable to the few companies that would remain in the ordinary regime and liquidate their traditional income tax with the rate of Article 240 of the ET (currently 33%). Therefore, we believe that this is something that will have to be corrected when the congressmen are studying the bill, since the income in favor of such important entities as those mentioned and others of article 243 of the ET cannot be put at risk.

b. In the second place, if the legal entities that are included in the simple regime would cease to belong to the ordinary regime, in that case it would happen that when they intend to distribute their after-tax accounting profits to their partners or shareholders, such profits would be delivered as dividends or participations fully taxed to such partners or shareholders (who, in case of being resident individuals, would be taxed on such dividends with the same taxation as the shareholders or partners), would be taxed on such dividends at the rate of the second paragraph of Article 242 of the ET, which is intended to be modified with Article 26 of the draft law, to establish that such rate will be the same as that applicable to commercial companies contained in Article 240 of the ET, which is currently 33% and which is proposed to be reduced to 30% in 2022, and if they are non-resident individuals, they would be taxed on their dividends at the rate of 35% of Article 247 of the ET). This is so because the bill does not say how the untaxed accounting profits of the companies under the simple regime would be calculated, and consequently if the formula of Article 49 of the ET is used (which would only continue to apply to companies that remain in the ordinary regime), the calculation would always start from a “net taxable income” and an ordinary income tax of zero pesos, with which obviously the untaxed amount of the accounting profits would also be zero pesos.

In short, it is clear that all the companies interested in joining the simple regime, as it is currently proposed, will have to make many calculations to confirm whether it is really convenient for them or not.

c. Thirdly, if the individuals and legal entities that join the simple tax regime are not subject to income calculations by equity comparison, nor to net income calculations for omitted assets or nonexistent liabilities (since such calculations will only continue to apply to those who remain in the ordinary regime), In this case it is obvious that this type of taxpayers will be able to carry out tax normalizations without any cost to them, that is to say, they will be able to reveal their hidden assets at any time without such normalization increasing their taxable income (and all because the project, as it is currently proposed, does not set any limit to the taxable assets they must have in order to be registered in the simple regime). This is something that in the past could also be done by individuals who declared in the Imas forms and that can also be done nowadays by the few people who have joined the Monotax. Therefore, it is clear that the creation of alternative regimes in which taxpayers can enter to escape from belonging to the ordinary regime will continue to make it easier for evaders to normalize their assets with zero costs, and this should be corrected.

Finally, it is also important to highlight that if the bill modifies articles from 903 to 916 of the ET in which reference was made to the Monotributo, in that case it is necessary to mention that the texts of all the other rules that currently refer to the Monotributo should also be eliminated from the bill.

Source: Actualícese