Financing bill: VAT withholding

Article 7 of the financing bill intends to add numeral 4 to Article 437-2 of the ET to revive the withholding of VAT assumed to the simplified regime. In addition, it would repeal Article 485-1 of the ET, to prevent the withholding agent from taking the assumed withholding as deductible VAT.

Among the multiple changes intended to be made to national taxes through the financing bill filed in Congress last October 31, 2018, it is important to highlight that Article 7 of such bill proposes to modify again Article 437-2 of the Tax Statute -ET- to revive the former VAT withholding assumed on purchases from individuals of the simplified regime, which existed between the years 1996 to 2016(as it was created with Law 223 of 1995 and repealed with Article 376 of Law 1819 of 2016).

In this regard, it is necessary to highlight in the first place that Article 87 of the bill would repeal the rules of Articles 499 and 502 to 508 of the ET, which have long regulated matters related to the “simplified regime”. However, at the same time, and through article 5 of the bill, a new paragraph 3 would be added to article 437 of the ET (whose title is: “Traders and those who perform acts similar to those of traders and importers are taxable persons”), which would contain the new requirements to belong to the “simplified VAT regime”, expression that would be replaced by “not liable for VAT”. The requirements would be basically the same as those that have existed until now within the rule of Article 499 of the ET, except for the fact that the ceilings currently set at 3,500 UVT would be lowered to 2,500 UVT.

Therefore, regarding VAT withholding, Articles 6 and 7 of the draft bill propose the following changes:

“the VAT withholding would no longer be practiced at the rate of 15% of the value of the tax, but at the new rate of 50% of the value of the tax.”

a. Article 437-1 of the ET would be modified, indicating that the VAT withholding would no longer be practiced at the rate of 15% of the value of the tax, but at the new rate of 50% of the value of the tax.

b. A new numeral 4 would be added to article 437-2 (VAT withholding agents) which would read as follows: “Those liable for sales tax -VAT- when they acquire taxable tangible personal property or services, from persons who are not liable for sales tax -VAT-, and which correspond to a cost or expense of the taxpayer’s income producing activity. This obligation does not apply to taxpayers of the unified tax under the simple taxation regime -SIMPLE.”

According to the above, all purchasers (individuals or legal entities) that belong to the common VAT regime (i.e., that are liable for VAT), and provided that they do not appear in the new simple taxation regime that would be created with Article 57 of the draft (a regime to which we find a rather important defect), would have to assume a VAT withholding of 50% on the value of such tax, which would be calculated on the purchases they make from individuals not liable for VAT. In practice, and if the general VAT rate reaches 18% in 2019, this would be equivalent to assuming 9% of the value of the purchases made from this type of natural persons.

Assumed VAT withholding could no longer be taken as deductible VAT.

Now, the main problem of reviving the assumed VAT withholding on purchases made to natural persons not liable for the tax in question is that Article 87 of the bill proposes to repeal Article 485-1 of the ET, a rule that had always allowed withholding agents to take as deductible VAT the value of VAT withholdings assumed with those responsible for the simplified VAT regime.

According to the above, it would be clear that, if these proposals were approved, what would happen is that in practice no individual or legal entity of the common regime would want to make purchases from individuals not responsible for VAT, since this would imply having to answer to the Dian for a withholding of 9% on such purchases, but with the aggravating factor that such withholding would become at the same time a non-deductible expense for such buyers (something that did not happen between the years 1996 and 2016, when the VAT withholding assumed could, at least, be subtracted as a deductible VAT in their VAT returns).

“congress itself would be in charge of creating a block so that buyers who belong to the common VAT regime would be disinterested in making purchases from natural persons not liable for VAT”

That is to say, the Congress itself would be in charge of creating a blockade so that buyers who belong to the common VAT regime would not be interested in making purchases to individuals not responsible for VAT and, therefore, the latter, in order to continue making sales to this type of customers, will have to voluntarily register in the common VAT regime, charging a rate of 18%, which would be fully deductible for their buyers.

In this order of ideas, we will have to keep a close eye on how this type of proposal will evolve in Congress.

Source: Actualícese