On December 29th, 2010 the 2011 Tax Reform Act No. 1430 was enacted, adopting material changes to the current Colombian tax framework. In addition to the national level income and VAT taxes, this act adopts many other important changes in the national net-worth and bank debits taxes, and in certain aspects of local (territorial) taxes, among other changes and measures to increase tax collections.
Please bear in mind that this document presents a selective summary of this tax reform for informational purposes only and it is not intended to be a detailed and comprehensive dissertation of all the topics found therein. Therefore, it is advisable that the readers do not exclusively rely on this document and thoroughly review the measures and changes that could affect them, seeking qualified advice from professional tax attorneys admitted to practice law in Colombia.
The topics of the 2011 Tax Reform Act No. 1430-2010 featured in this issue are: (1) the immediate elimination of the 30% FAID special income tax deduction (as defined in §1, P.2, herein below); (2) the adoption of a 14% withholding tax on certain cross-border financings; (3) the changes to the "one-time" net–worth tax assessable on January 1st, 2011; (4) the unexpected adoption of the 25% surcharge on this 2011 net-worth tax and the adoption of this tax for taxpayers with gross net-worth between USD $500k and USD $1.5m, among other related measures adopted in the year-end "Economic Emergency" decrees; (5) the adoption of an advanced collection "self-withholding tax" on hydrocarbons and minerals exports of up to 10%; (6) the elimination of the zero-rated VAT regime for "intermediate services in the production line" for hydrocarbons and mining export activities; (7) the elimination of the special transfer pricing regime for mining activities; (8) the reduction of penalties in transfer pricing compliance; (9) the amendments to the current statutory foreign tax credit regime for Colombian income tax taxpayers; (10) the changes introduced to the Bank Debits Tax and its progressive sunset scheduled for 2018; and (11) the temporary availability of penalties and lateness interest rebates in national level tax debts.
In matters of taxation the Colombian Congress had a prolific year-end and in addition to Tax Reform Act No. 1430-2010, many other changes were introduced in other pieces of legislation enacted last December, which are not featured in this issue of Colombian_Tax_Flash®.
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(1) Immediate Elimination of the 30% FAID Special Income Tax Deduction for all Taxpayers. –
The 2011 tax reform act adopts an immediate elimination of the "popular" 30% Fixed Assets Investments Income Tax Deduction ("FAID"), beginning January 1st, 2011.
Subject to eligibility, for FY2010 income taxpayers are entitled to deduct 30% of their investments in tangible fixed assets used in their income producing activity. Although the percentage varied from 25% to 40%, this deduction was available since FY2003 for both purchased and manufactured (or built) assets, and for both new and used (second-hand) assets. Leased assets were also eligible for this incentive, provided that the taxpayer exercises the irrevocable purchase option in the corresponding agreement. Certain rules and restrictions were applicable (For more information on the creation and evolution of the FAID, see: Colombian_Tax_Flash® : July 2004, yr. 1 – No. 2; November 2006, yr. 3 – No. 7, P.1 [unnumbered item 2]; January 2007, yr. 4 – No. 8, P.2 [unnumbered item 5]; April 2007, yr. 4 – No. 10, P.2 [unnumbered item 6]; October 2007, yr. 4 – No. 12, P.1 [unnumbered item 2]; August 2008, yr. 5 – No. 15, P.2 [unnumbered item 3]; September 2009, yr. 6 – No. 17, P.1, §§2(b) and 2(c); March 2010, yr. 7 – No. 18, P.2, §(b), all found in the Publications tab at: www.lewinywills.com).
Although change originally proposed by the Colombian Government was the immediate elimination for the hydrocarbons and mining industries and a progressive elimination for all other sectors, the Colombian Congress opted for the immediate elimination of the FAID for all sectors.
trestingly, the Lawmaker in the 2011 tax reform act provided that any income tax taxpayers that included the 30% FAID in a Legal Stability Agreement (hereinafter "LSA") filed for before November 1st, 2010, will be entitled to benefit from the 30% FAID for up to three-years. The Lawmaker was silent with respect to those taxpayers with LSAs already executed (vis-à-vis those filed for) that also included the 30% FAID; will they continue to benefit from the 30% FAID for the term of the duration of the corresponding LSA or will this benefit also be limited to a 3-year term? This should be carefully analyzed on a case-by-case basis, as it is likely to be a controversial issue.
As a reminder, since their adoption on 2005, LSAs have become important tools for eligible investors and companies in Colombia seeking to prevent future changes in selected features of the Colombian legal and tax framework, that they consider key to their investments and business activities in the country (see: Colombian_Tax_Flash® , September 2009, yr. 6 – No. 17, P.3, §5, found in the Publications tab at www.lewinywills.com).
(2) 14% Withholding Tax on Certain Cross-border Financing Facilities. –
Pursuant to the 2011 tax reform act and unless otherwise provided for in the applicable regulations, interest payments on certain inbound cross-border "Qualified Credit Facilities" and "Qualified Leasing Transactions" (both as defined further below), shall be subject to a 14% withholding tax. If the 14% withholding tax is not applied, the Colombian payor cannot deduct the corresponding interest payment, without prejudice of its joint and several liability for the tax that was not withheld.
For over 25 years, the Colombian income tax regulations privileged interest payments on certain Qualified Credit Facilities and Qualified Leasing Transactions, by deeming such payments as income not from a Colombian source thus not subject to Colombian Withholding Tax. If the cross-border inbound financing was not qualified or otherwise exempted, the corresponding interest payments were subject to a 33% withholding tax.
Under the previous regime, the following cross-border inbound financings were deemed Qualified Credit Facilities and eligible for the withholding tax-free treatment:
(a) Short-term bank overdrafts and imports short-term financings (without any changes in the 2011 tax reform act).
(b) Exports financings or pre-financings (without any changes in the 2011 tax reform act).
(c) Financings contracted abroad by Colombian financial institutions (in the 2011 tax reform act, Congress adopted certain modifications to this item to include Bancoldex and other financial type entities).
(d) Financings for foreign trade operations contracted through Colombian financial institutions (in the 2011 tax reform act, Congress adopted certain modifications to this item to include Bancoldex and other financial type entities).
(e) Financings with foreign financial institutions, which funds were destined to a "Qualified Activity." Qualified Activities were those that according to the directives of the Colombian Council for Social and Economic Development (CONPES), were deemed of public interest for Colombia's social and economic development, which included all activities related to the primary, manufacturing and services sector, including transportation, engineering, lodging, tourism, health, trade, and housing construction.
Under the new regime, item (e) above has been revoked and no longer qualifies as a Qualified Credit Facility eligible for the withholding tax-free treatment, and any cross-border interest payments on such facilities made pursuant to agreements entered on or after January 1st, 2011, will be subject to a 14% withholding tax, provided that the facility's term is equal or greater than 1-year. If the facility is not within items (a) through (d) and it's term is less than 1-year, the applicable withholding tax rate on the interest payments should be 33%. For the avoidance of doubt, it is important to highlight that under the new regime, facilities within items (a) through (d) above with a term equal or greater than 1-year, will continue to be deemed as Qualified Credit Facilities eligible for the withholding tax-free treatment.
Under the previous regime, the following cross-border inbound leasing transactions were deemed Qualified Leasing Transactions eligible for the withholding tax-free treatment:
(f) Leasing transactions with foreign leasing providers to finance investments in a "Qualified Activity" (as defined above).
(g) Leasing transactions to finance M&E investments in Colombian export activities.
Pursuant to the changes introduced by the 2011 tax reform act, both items (f) and (g) above have been revoked and no longer qualify as Qualified Leasing Transactions eligible for the withholding tax-free treatment, and the interest component of any cross-border leasing payments on such transactions made pursuant to agreements entered on or after January 1st, 2011, except otherwise provided by applicable regulations, will be subject to a 14% withholding tax, and unless the equipment leased is a vessel, helicopter or airplane, case in which the reduced applicable withholding tax rate will be 1%.
Any interest payments on inbound cross-border Qualified Credit Facilities and Qualified Leasing Transactions under items (e), (f) and (g) above (and also items (a) through (d)), made pursuant to agreements entered on or before December 31st, 2010, shall continue to be eligible for the withholding tax-free treatment. This provision will likely be a source of controversy with the Colombian Tax Service, because of the conflicting measures in this regard adopted by the Colombian Government back on November 5, 2010, through Decree 4145-2010.
IMPORTANT: Under the new regime it is made clear that the offerings of notes, bonds and similar debt securities, are not deemed held in Colombia, provided that the offering is made by a Colombian issuer and that the securities are traded outside of Colombia. In our view, the importance of this provision is that despite the adoption of the new withholding tax regime on cross-border interest payments, cross-border interest payments made pursuant to this type of offerings should not be deemed income from a Colombian source and should not be subject to Colombian withholding tax, when the beneficiary is a non-resident. Nonetheless, please bear in mind that application of this rule should be carefully analyzed on a case-by-case basis.
Cross-border interest payments on inbound cross-border financings where the borrowers/debtors are Colombian governmental entities shall continue to be eligible for withholding tax-free treatment.
(3) 2011 Net–worth Tax Revenue Increase Measures. –
The previous 2010 tax reform act introduced a "one-time" net-worth tax assessable on January 1st, 2011 and payable in 8 semiannual installments through 2014 (Tax Reform Act No. 1370-2009. See: Colombian_Tax_Flash® , March 2010, yr. 7 – No. 18, P.1, §(a), found in the Publications tab at www.lewinywills.com). This tax is almost identical to its predecessor 1.2% net-worth tax in force through fiscal year 2010. In adopting this new "one-time" tax, the definition therein of "taxable base" allowed to construe that upon exclusion from the taxable base of certain non-taxable items, e.g., stock or quotas in Colombian companies, the taxpayer was not subject to this tax if the net taxable net-worth was below the taxable threshold of approximately USD $1.5m (COP $3,000,000,000). The 2011 tax reform act recently enacted by Congress adopts measures to correct this "imperfection" clarifying that the tax is applicable on the taxpayers' gross net-worth, i.e., before excluding non taxable items, even if after excluding the non-taxable items the resulting net taxable net-worth drops below the lower bracket.
In addition to this clarification, the Colombian Congress adopted a series of measures to "tackle" tax avoidance strategies such as the creation of new SAS companies (simplified stock corporations) and statutory divisions of companies, popular amongst taxpayers as a net-worth partition strategy to avoid triggering the net-worth tax. Pursuant to the newly adopted measures, the net-worth of the target entity (whether resulting from the creation of a new SAS or a statutory division) shall be added to the net-worth of the "contributing" or "divided" taxpayer, in order to determine whether the Net-worth Tax is triggered.
As a reminder, taxpayers subject to the newly adopted net-worth tax would have to assess the tax on their net-worth as of January 1st, 2011. If the taxpayer's net-worth as of January 1st, 2011 was approximately USD $1.5m (COP $3,000,000,000) without exceeding approximately USD $2.5m (COP $5,000,000,000), the applicable rate would be 2.4%. If the taxpayer's net-worth exceeds USD $2.5m (COP $5,000,000,000), the applicable rate would be 4.8%.
For purposes of this tax, it is important to keep in mind the change adopted by the previous 2010 tax reform act regarding related party debt deemed as equity (Tax Reform Act No. 1370-2009. See: Colombian_Tax_Flash® , March 2010, yr. 7 – No. 18, P.2, §(d), found in the Publications tab at www.lewinywills.com). Pursuant to the amendment enacted therein, all related party debt would be deemed as equity for tax purposes (Colombian Tax Code, §287).
US dollars figures in this section are approximate values using a COP $2,000 exchange rate.
(4) Year-end "Economic Emergency" Measures Increasing the Reach of the 2011 Net-worth Tax to Taxpayers with a Gross Net-worth between USD $500k and USD $1.5m Tax, and the Adoption of a 25% Surcharge on the Net-worth Tax for Taxpayers with a Gross Net-worth greater than USD $1.5m. –
Motivated on the damages suffered by the victims of the rain-floods catastrophe, the Colombian Government declared the State of Emergency and through "Economic Emergency" Decree No. 4825, issued on December 29, 2010, adopted two new brackets of taxpayers subject to the "one-time" 2011 net-worth tax commented on §3 above. According to these measures, if the taxpayer's gross net-worth as of January 1st, 2011 was approximately USD $500k (COP $1,000,000,000) without exceeding approximately USD $1m (COP $2,000,000,000), the applicable rate is 1%. If the taxpayer's gross net-worth was between USD $1m (COP $2,000,000,000) and USD $1.5m (COP $3,000,000,000), the applicable rate is 1.4%. Taxpayers subject to the newly adopted net-worth tax would have to assess the tax on their net taxable net-worth as of January 1st, 2011, and the tax is payable in 8 semiannual installments through 2014. If the taxpayer's gross net-worth did not exceed USD $500k (COP $1,000,000,000), the taxpayer is not subject to the 2011 net-worth tax.
Additionally, through the year-end "Economic Emergency" measures the Government adopted a 25% surcharge on the "one-time" 2011 net-worth tax for taxpayers with a gross net-worth greater than USD $1.5m (COP $3,000,000,000). Like the reference tax, the surcharge should be assessed on January 1st, 2011, and is payable in 8 semiannual installments through 2014. The adoption of this surcharge results in an effective economic burden (including both the reference tax and the surcharge) of 3% of their net taxable net-worth for taxpayers with a gross net-worth between USD $1.5m (COP $3,000,000,000) and USD $2.5m (COP $5,000,000,000), and of 6% of their net taxable net-worth for taxpayers with a gross net-worth greater than USD $2.5m (COP $5,000,000,000). For the avoidance of doubt, net-worth tax taxpayers in the gross net-worth brackets between USD $500k (COP $1,000,000,000) and USD $1.5m (COP $3,000,000,000) are not subject to the 25% net-worth tax surcharge affecting net-worth tax taxpayers in the gross net-worth brackets greater than USD $1.5m (COP $3,000,000,000).
IMPORTANT: Through the year-end "Economic Emergency" measures the Government adopted additional complex regulations affecting all taxpayers of the 2011 net-worth tax, regardless of the bracket they are in, which are not commented herein and that require careful examination on a case-by-case basis. Among these, are worth noting both (i) the adoption of a measure for purposes of determining whether the net-worth tax is triggering, "disregarding" any net-worth partition strategies implemented by the taxpayer, and (ii) the carve out from LSAs entered pursuant to the Legal Stability Agreements Act No. 963-2005 (see: §1, ¶5, P.2 above), of both the 2011 net-worth tax for taxpayers in the brackets below USD $1.5m (COP $3,000,000,000) and the surcharge for taxpayers in the brackets above USD $1.5m (COP $3,000,000,000).
Through a recent revenue ruling the Colombian Tax Service adopted the "likely controversial and debatable" position that taxpayers subject to the 2011 net-worth tax in the brackets above USD $1.5m (COP $3,000,000,000), cannot benefit from a previous LSA they have entered on that covered previous predecessor net-worth taxes ("Dirección de Impuestos y Aduanas Nacionales" – DIAN, Revenue Ruling No. 098797 – 2010, issued on December 28, 2010).
US dollars figures in this section are approximate values using a COP $2,000 exchange rate.
(5) Advanced Collection Self-Withholding Tax on Hydrocarbons and Minerals Exports. –
Pursuant to the recently enacted 2011 tax reform act, hydrocarbons and mineral Colombian exporters shall assess, and pay within the next month, a "self-withholding" on the gross sales price of their exports. Such withheld amounts are creditable towards the corresponding fiscal year income tax liability of the Colombian exporter, which is assessable and payable on the immediately following year. The tax reform act invests the Colombian Government with the power to determine the withholding tax rate applicable on these exports, which cannot be greater than 10%.
Rather than a real withholding tax burden on the foreign purchaser, this "self-withholding" burden on the exporter constitutes an advanced collection mechanism of its Colombian income tax liability for the corresponding fiscal year.
(6) Elimination of the Zero-rated VAT Regime for "Intermediate Services in the Production Line" for Hydrocarbons and Mining Export Activities. –
Because hydrocarbons and mining exports were zero-rated for VAT purposes, prior to this reform certain "intermediate services in the production line" were also eligible for zero-rated treatment. This will no longer be the case beginning January 1st, 2011.
Provided compliance with statutory requirements, certain "intermediate services in the production line" are eligible for preferential VAT treatment, i.e., taxed at the same VAT rate to which the final product is subject (Colombian Tax Statute, §476, last paragraph). As of January 1st, 2011, this preferential treatment is no longer available for taxpayers in the hydrocarbons and mining industries. Thus, such services in such industries will be subject to the general VAT regime and rate. For the avoidance of doubt the above mentioned preferential VAT treatment continues to be available for other industries.
(7) Elimination of the Special Transfer Pricing Regime for Mining Activities. –
Through this tax reform act and beginning FY2011, the Colombian Congress eliminates the special fix-price transfer pricing regime currently in place for mining activities and adopted back in 2006 (Colombian Tax Reform Act No. 1111-2006. See: Colombian_Tax_Flash® , January 2007, yr. 4 – No. 8, P.2 [unnumbered item 6], found in the Publications tab at www.lewinywills.com). As a result of this change, as of January 1st, 2011, mining activities shall be subject to the ordinary transfer pricing "arm's-length based" regime.
For Income tax purposes Colombia has a regular transfer pricing "arm's-length based" regime, which mostly resembles international OECD guidelines (hereinafter the "Regular Regime"). When it comes to mining activities in the country, since 2006, certain Eligible Income Tax Payers (hereinafter "EIT") were subject to a special transfer pricing "fix-price based" regime (hereinafter the "Special Regime"). Under the Special Regime, semiannually the Ministry of Mines and Energy fixed the deemed price for each exporter for that 6-month period, and that price multiplied by the number of exported tons was the deemed income tax base for mineral exporters.
Both the Regular and Special Regimes are applicable with respect to cross-border transactions between related parties. The Colombian catalog of foreign related party situations is complex and the income taxpayer must review it carefully.
EITs subject to the Special Regime were minerals producers/exporters that in the immediately preceding fiscal year had export sales over USD$ 100m.
(8) Reduction of Penalties in Transfer Pricing Compliance. –
Income tax payers subject to the Regular Regime (see: §7, ¶2, P.7 above) have to comply with certain documentation and transfer pricing returns filing obligations. Non-compliance of such obligations gives rise to penalties. These transfer pricing compliance penalties are being reduced in more than 40% by the 2011 tax reform act.
(9) Amendments to the Current Statutory Foreign Tax Credit ("FTC"). –
The current Colombian income tax regime provides for an FTC, provided compliance of certain statutory requirements and subject to certain limitations. Pursuant to these regulations Colombian companies with operations outside of Colombia are eligible for both a direct and an indirect statutory FTC for taxes levied by the source country on non-Colombian source income and dividends respectively.
The 2011 income tax reform act adopts a series of changes to the relevant regulations, including among others, (a) an additional remote FTC on taxes levied by a Third Country, for Colombian companies receiving distributions from foreign companies that have received a distribution subject to income tax in said Third Country, and (b) the introduction of a 15% minimum interest requirement to be entitled to the FTC.
The new regulations of the FTC are complex and should be carefully examined on a case-by-case basis.
(10) Bank Debits Tax Revenue Increase Measures, Sunset Scheduled for 2018, and Increase of the Corresponding Income Tax Deduction. –
The 2011 tax reform act adopts a series of changes and measures to "tackle" certain alternatives offered by financial institutions and other authorized agents, as planning tools to minimize the economic burden of this tax.
This national level tax has been in place since the year 2000 and currently taxes, among others, all funds withdrawn or transferred from checking or savings accounts in Colombia at a tax rate of 4 per thousand.
In addition to the abovementioned revenue increase measures, the Colombian Congress has approved the sunset of this tax through a phase-out tax rate scale that begins on 2014 with a reduction to 2 per thousand, followed by a further reduction in 2016 to 1 per thousand, and its final elimination beginning 2018.
In addition and subject to certain requirements, as of FY2013, the 2011 tax reform act authorizes an income tax deduction of 50% of the Bank Debits Tax paid by the income taxpayer during the corresponding fiscal year. The current authorized deduction in place through FY2012 is of 25%.
(11) Temporary Availability of Penalties and Lateness Interest Rebates for National Level Tax Debts. –
National level taxes taxpayers that agree to pay their outstanding tax debts corresponding to 2008 and prior taxable periods, are eligible to benefit from a 50% rebate of any outstanding penalties and lateness interest, authorized by the 2011 tax reform act, provided that the owed amounts are paid within the 6 months following the enactment of the 2011 tax reform act, i.e., December 29, 2010, and that the taxpayer continues to timely file and pay her taxes during the 2 years that follow the date in which the owed amounts were paid. If the taxpayer fails to comply with the latter condition, the benefit will be recaptured in full and the Colombian Tax Service is allowed to seek payment of the rebated amounts. Certain rules and restrictions apply.
The 2011 tax reform act authorizes local authorities to adopt measures granting a similar rebate for local (territorial) level tax debts.
(12) Other Important Changes Introduced. –
As mentioned in the introductory paragraphs of this issue, the 2011 tax reform act adopts other material changes not discussed herein that should be carefully studied, seeking qualified advice from professional tax attorneys admitted to practice law in Colombia. Some (not all) of these measures are: changes in the VAT withholding regime for providers of Foreign Trading Companies; changes in the terms and proceedings for VAT refunds; the progressive elimination of deductible expenses paid in cash; the extension of the early expiration term to audit income tax returns subject to the compliance of certain requirements; the VAT rate reduction for certain sports and recreation vessels from 35% to 20%; and the 3-year extension of the contributions for public works contracts, public works concessions and other concessions; among others.
In addition, Congress introduced many other changes in other pieces of legislation enacted last December, which are not featured in this issue of Colombian_Tax_Flash®.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
