Tax reform 2019: VAT refund proposal.

The 2019 tax reform proposal contemplates the creation of a sales tax -VAT- compensation mechanism in favor of the most vulnerable population. Upon reviewing the regulations, it is evident that such proposal has some structural gaps for its implementation.

After the study and discussion of the report presented by the Government on the 2019 tax reform bill, on December 3 of this year, the third economic commissions of the Senate and the House of Representatives approved in first debate the new tax reform bill, known as the Economic Growth Law.

Said bill includes in Article 120 what would be the VAT compensation in favor of the most vulnerable population of the country that would come into effect as from the taxable year 2021 and that, according to President Iván Duque, represents 20% of the total population. The above is intended to provide them with tax relief and, in turn, generate greater equity against VAT as a regressive tax.

“The Ministry of Finance will determine the beneficiaries by means of a resolution, through the targeting methodology defined by the National Planning Department”.

However, the regulation in question establishes that the Ministry of Finance will determine the beneficiaries by means of a resolution, through the targeting methodology defined by the National Planning Department -DNP-.

How much would be the amount of the VAT refund?

According to the 2019 tax reform proposal, the compensation will correspond to a fixed amount in pesos, which the national government will define by averaging the VAT paid by lower-income households. However, it should be recalled that the Deputy Minister of Finance, Juan Alberto Londoño, explained that such initiative, which would start in 2021, may have a fiscal cost of 2.2 trillion pesos, indicating, in turn, that the monthly VAT refund could range between $65,000 and $70,000 per person.

What is the refund mechanism?

The 2019 tax reform proposal leaves a huge gap in the face of this concern, as it only establishes that the national government will be in charge of determining the mechanisms to make the VAT compensation effective and control that such resources do not end up in the wrong hands.

Currently there are two modalities for the delivery of economic incentives granted by the Government, and under speculations it could be concluded that the same could be implemented in the VAT refund project:

–Creditin a bank account or authorized financial product: in this modality beneficiaries have a savings account that allows them to use debit cards or mobile banking to withdraw the incentive at any of the points authorized by the bank.

– Transfermodality: this modality is aimed at families who cannot access financial products. The incentive is delivered directly, by means of a money order collected at the bank’s teller window or correspondent bank.

Finally, it should be noted that the transfer of resources required for the execution of the program in question will not incur VAT and will be exempt from the tax on financial movements.

Source: Actualícese