Financing Law: Learn about the new taxes.

On December 28, 2018, President Ivan Duque signed Financing Law 1943, which includes, among other things, four new national taxes intended to solve the national budget deficit. In this editorial we address the most important aspects of each of them.

According to statements made by the Minister of Finance, Alberto Carrasquilla, the new tax reform will guarantee the collection of at least 8 trillion pesos, with which the current government will have to solve the budget deficit of approximately 14 trillion pesos. With such firm purpose, the law in question gave legal life to a new tax, expanded another one and reactivated two more that had already operated in Colombia years ago. Let’s see.

SIMPLE Tax

The new unified tax under the simple taxation regime that came into force on January 1, 2019 will replace the old single tax regime, thus preserving the founding idea of the latter regarding the reduction of formal and substantial burdens of small businesses or new entrepreneurs, in order to promote formality and above all to generate, simplify and facilitate compliance with tax obligations of those who decide to join voluntarily.

This new tax, which was compiled in articles 903 to 916 of the ET, will be freely accessible both for resident individuals and national companies that comply with the requirements stipulated in articles 905 (taxpayers) and 906 (subjects that cannot opt for the tax) of the statute in question, among which stands out the fact of having obtained ordinary tax gross income of less than 80,000 UVT for the previous taxable year. This means that for the taxable year 2019, those who have obtained gross ordinary tax income of less than $2,652,480,000 during 2018, and comply with the other requirements of articles 905 and 906 of the ET, will be able to access the SIMPLE.

Those who voluntarily opt in will no longer belong to the ordinary income tax regime (in which the tax is settled on the taxable income) and will begin to contribute on their ordinary gross income, with the benefit that the tax to be paid for SIMPLE will not only cover the income tax, but also the consolidated industry and commerce tax (i.e., with the firefighter surcharges and the complementary tax on notices and boards), the national consumption tax when food and beverage services are provided, and the VAT in those cases (and only in those) in which the taxpayer is a small store, mini-market, micro-market or hairdresser’s store.

Those who find their registration in this tax regime profitable, may access it for the taxable year 2019, making the respective procedure until July 31 of the same year, situation for which the national government must issue the respective regulations.

Exit tax

Article 108 of Law 1943 of 2018 amended Article 23 of Law 679 of 2001, by means of which a statute to combat exploitation, pornography and sexual tourism with minors was introduced to the national regulations.

The tax on leaving the country already existed in the national legislation, but it was updated in order to broaden the range of those obliged to contribute. Thus, the previous version of such article went from indicating that the obligation to pay one U.S. dollar (or its equivalent in pesos) corresponded only to foreigners leaving Colombia, to include in the group of taxpayers also nationals; both types of taxpayers without distinction of their tax residence.

This tax, which according to the previous version of the regulation was charged at the moment of leaving the Colombian territory, without clarifying by what means, now expressly indicates that it will be charged when leaving the country by air, and collected at the moment of purchase of the travel ticket.

Wealth tax

The amendments introduced by Financing Law 1943 of 2018 to articles 292-2, 294-2, 295-2, 296-2, 297-2, 298-6 and 298-8 of the ET gave new legal life to the wealth tax, which this time will be settled and paid between 2019 and 2021 by the following taxpayers expressly indicated in the new version of article 292-2 of the ET:

1.Natural persons or illiquid successions taxpayers of income tax and its complementary.

Individuals,regardless of whether they are nationals or foreigners who do not have residence in the country (only on the assets they own in Colombia, either directly or indirectly by resorting to the figure of permanent establishments).

3.Unliquidated successions of deceased persons without residence in Colombia (only on the assets owned in the country at the time of their death).

Foreign companies or entities, provided they are not income tax filers and their assets in Colombia are of any other type than shares, accounts receivable and/or portfolio investments.

This tax will be levied with 1% for the possession -as of January 1, 2019- of a net worth equal or higher than $5,000,000,000, collecting such percentage on an annual basis during its term. In this regard, it is valid to remember the possibility of subtracting from the taxable base concepts such as the first 13,500 UVT of the equity value of the taxpayer’s house or apartment, or 50% of the equity value of the assets standardized and declared in the taxable year 2019 and that have been permanently repatriated.

Likewise, it is important to highlight that the 1% rate will not be applied statically to the same liquid assets at the beginning of 2019, during the whole validity of the transitory tax, but the taxable base of the tax in question for the years 2020 and 2021 may fluctuate depending on whether it is lower or higher than the one determined for the taxable year 2019.

Tax normalization tax

The tax normalization tax stipulated in Article 42 of Financing Law 1943 of 2018 is a complementary to income tax and wealth tax; and constitutes a benefit for those income tax payers that to date have assets that have been omitted in their tax returns, or fictitious liabilities that have been included in the same.

“The normalization tax may be settled voluntarily in a separate return to be filed on September 25, 2019.”

The normalization tax may be settled on a voluntary basis in a separate return to be filed on September 25, 2019 and in which a general rate of only 13% of the historical tax cost of the omitted assets or the tax value of the non-existent liabilities will be applied. Such rate would be applied on 50% of such tax value in the case of assets abroad that are invested with the intention of remaining in the country.

Additionally, one of the most important benefits of this figure of tax legalization is the guarantee that the increase in net worth generated by the inclusion of the assets subject to the tax will not give rise to an income by equity comparison, nor to a taxable net income for the omitted assets that are formalized. This benefit extends to avoid any type of penalty in the income tax and complementary tax, VAT, transfer prices and even in the exogenous information.

Finally, it is valid to keep in mind that the figure of normalization may also be used to clean up assets other than inventories, which are being declared for a value lower than the market value, in which case the taxpayer may update its value, including the additional amounts that may be applicable as taxable base of the normalization tax.

Source: Actualize