Payment of taxes abroad will be tax deductible.

Among the tax discounts allowed are those that apply to taxes paid abroad. They consist in that a person with Colombian residence who earns income outside the country and pays taxes on it may deduct the amount paid abroad from the balance payable in Colombia.

“The income obtained by the taxpayer abroad will also be part of his income tax return in Colombia, and the respective tax must be paid on it”.

A natural person who is a resident in Colombia for tax purposes must declare to the Government of this country, in addition to the income obtained here, those generated abroad. In this way, the income obtained by the taxpayer abroad will also be part of his income tax return in Colombia, and the respective tax must be settled on them. However, if he/she paid taxes on such income, he/she may deduct the respective tax in the income tax return filed in Colombia.

Limit to the discount for taxes paid abroad

The tax deduction for taxes paid abroad is limited to the same amount of income tax that such income would generate in Colombia. That said, it should be noted that in the event that the amount of taxes paid abroad is higher than the amount that should be paid in Colombia, the taxpayer will not be obliged to pay any amount, but neither will it be able to claim the resulting difference. The following table illustrates what happens when the difference between both taxes is positive, and what happens when it is negative:

How are the discounts applied in the form 210 ceded?

In the event that a resident individual or estate has obtained income abroad and such income has already been taxed outside the country, the value of the tax paid on such income may be used as a tax discount in the form 210, as permitted by Article 254 of the ET.

To exemplify what it means to use the tax paid abroad as a tax discount, suppose that a resident individual obtains net income as a trader in Colombia for an amount of $100,000,000, and also net income as a trader abroad (in a country that is not part of the Andean Community of Nations -CAN-) for an amount of $50,000,000, and that on the latter he already paid an income tax abroad for an amount of $5,000,000.

Thus, at the time of preparing his income tax return in form 210 before the Colombian Government, the taxpayer must report the $150,000,000 of net income in his non-labor income card, which if searched in table number 2 of article 241 of the ET (before being modified by article 26 of Law 1943 of 2018) produce a tax of $34,927,000.

According to the above, and if the $50,000,000 of net income obtained abroad represents 33.33% of the $150,000,000 reported as total net income within the non-labor income schedule, it would be said that the tax generated in Colombia on such net income from abroad is equivalent to 33.33% of the $34,927,000 reported in the return; that is, it would be equivalent to $11,642,000.

Since the tax already paid abroad on that same income ($5,000,000) is a value that is below the $11,642,000, the taxpayer may take all that tax paid abroad and subtract it as a tax deduction. If the tax already paid abroad would have been higher than $11,642,000, then the maximum amount that could be taken as a discount for tax paid abroad would be up to $11,642,000.

Furthermore, if the basic income tax (i.e. the one calculated before subtracting the discounts) had not been deducted from the ordinary income but from the presumptive income, the discount for taxes paid abroad would also be applicable, as it is contemplated in Concept 065231 of August 13, 2009.

To illustrate the above, let us suppose that the ordinary income yielded the same $150.000.000.000 already mentioned, but the presumptive income was $200.000.000.000. If so, the tax should only be calculated on the presumptive income, which when looked up in table number 2 of article 241 of the ET would produce a basic tax of $52,427,000. In such case, it would again be said that the net income obtained abroad represents 33.33% of the $150,000,000 reported as total ordinary income, and therefore the tax generated in Colombia on such net income from abroad is equivalent to 33.33% of the $52,427,000 reported in the return; i.e., it would be equivalent to $17,474,000. Consequently, the taxpayer could take all the $5,000,000 paid abroad as a tax deduction.

It should be noted that the value of the net income tax (that which remains after taking any tax discount) must also keep the limit contemplated in article 259 of the ET, which indicates that it cannot be less than 75% of the basic income tax obtained on the presumptive income. Therefore, and going back to the previous example, if the tax obtained on the presumptive income is $52,427,000, the net income tax can never be below $39,320,000.

Changes for taxable year 2019

The amendment made to article 254 of the ET through article 81 of the Financing Law 1943 of 2018, reiterated that legal entities, as well as natural persons resident in the country, taxpayers of income tax and complementary taxes, and those who also receive foreign source income subject to income tax in the country of origin; may deduct from the amount of the Colombian tax the value paid abroad, whatever its denomination.

“one of the changes of the law regarding this discount is that the taxpayer may subtract from the Colombian tax the total amount of the tax paid abroad.”

Finally, one of the changes of the law regarding this discount is that the taxpayer will be able to subtract from the Colombian tax the totality of the tax paid abroad, provided that the latter does not exceed the value of the former, without the need to apply the formula contained in the old version of article 254 of the ET; but taking into account that, for purposes of the general limitation, foreign income will be depurated by imputing income, costs and expenses.

Source: Actualícese