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Colombia 2013 | EXECUTIVE GUIDE | REVIEW: ACCOUNTANCY

Luz María Jaramillo, Country Managing Partner & Tax Partner of Ernst & Young Colombia, details the steps for operating and working under the tax guidelines of Colombia.

Colombian commercial law provides for different types of legal entities by means of which investors can incorporate a business presence in Colombia that requires registration before the Chamber of Commerce. The most common legal vehicles are: Simplified Share Companies (Sociedad por Acciones Simplificada), Corporations (Sociedad Anónima), Limited Liability Companies (Sociedad de Responsabilidad Limitada), and branch offices of foreign companies (Sucursal). Incorporation procedures vary depending on the selected vehicle. New legal vehicles in Colombia also have to register before the Colombian Tax Authorities (DIAN) in order to obtain a Tax Identification Number (NIT) to comply with formal tax obligations under the National Tax Registration (RUT). From a foreign exchange standpoint, in general, some transactions must be reported and registered before the Central Bank and handled or channeled through the foreign exchange market, which is referred to as “Regulated Exchange Market." These transactions are: i) The import and export of goods; ii) Foreign indebtedness and related financial costs; iii) Foreign capital investments in Colombia and related yields; iv) Colombian capital investments abroad and related yields; v) Financial investments in securities issued abroad, investments in assets located abroad and related yields, unless the investment is made with foreign currency from transactions that are not required to be channeled through the exchange market; vi) Endorsements and warranty bonds in foreign currency; and vii) Derivative transactions.

ACCOUNTING PRINCIPLES

Colombian Law establishes that the financial statements of companies incorporated in Colombia must follow Colombian General Accepted Accounting Principles as they are set out in Decree 2649 of 1993 (Colombian GAAP). The accounting records must be prepared and kept in Spanish and in the local currency, the Colombian peso. There are additional accounting regulations on specific items included in other laws, such as tax and commercial laws and regulations. A convergence process to IFRS rules was approved by the Colombian Congress by Law 1314 of 2009 and is expected to be fully implemented by 2015.

CORPORATE TAX

Companies that are incorporated under Colombian law are taxed on their worldwide income at a 25% (to be applicable since fiscal year 2013, as of 2012 the general rate was 33%). For Colombian tax purposes, tax payers are obligated to calculate the annual income tax of the ordinary taxable income and presumptive income. The excess of presumptive income over ordinary income (adjusted for inflation) may be carried forward as a deduction for five years. For local corporate tax payers, obliged to file income tax returns, which include branch offices and the Permanent Establishment of foreign entities, Law 1607, 2012 (tax bill in force since January 1, 2013) introduced a new income tax (CREE tax) of 9%, while it eliminates certain contributions (up to 13.5% of the salary) assessed on salaries, only for employees earning up to 10 minimum monthly wages. The rate for the CREE tax is reduced to 8% as of 2016. The taxable base for the CREE tax is net revenue minus costs and certain deductions stated in the law. Furthermore, the CREE taxable base may not be lower than the tax equity of the previous year, which constitutes the same base for the calculation of the presumptive income tax. In addition, certain exempted income is subject to CREE tax.

PERSONAL/EMPLOYEE INCOME TAXES

Under ordinary income tax systems, the tax rates that apply for national and foreign residents are determined according to brackets of taxable income, which reach as high as 33% and are applied on net taxable income. An alternative income tax system (IMAN tax) is created for three categories of taxpayers: employees, qualified independent workers, and passive income holders. The taxable base for each is revenue minus limited deductible items defined by law. The ordinary income tax system continues, but if the tax so calculated is less than the IMAN tax, the latter tax constitutes the final tax due. Some of the most important changes in the determination of ordinary taxable income are as follows: i) Taxpayers may take a monthly deduction of up to 10% of gross income, but limited to approximately $450, ii) Pre-paid health payments may be deducted by the taxpayer, spouse, and up to two children, but not exceed $230, and iii) Contributions to voluntary pension funds are non-taxable income, but the permanence term is increased from five to 10 years.

MINING & MINERAL RESOURCE TAXES

The fiscal regime that applies to the oil, gas, and mining industry in Colombia consists of a combination of corporate income taxation and a royalty-based system. Colombia-based companies and branches from foreign companies devoted to exploration and exploitation activities are subject to taxation under the same rules provided for in general tax rules for tax payers devoted to other type of activities. In this regard, for corporate income tax purposes, Colombia-based companies and branches from foreign companies, devoted to exploration and exploitation activities are subject to a 33% general income tax rate over ordinary taxable income or presumptive income (determination on income tax under the presumptive income system does not apply to mining activities). Section 16 of Decree 1056 of 1953 (Oil Code) states that some activities for oil exploration and exploitation are exempt from departmental or municipal taxes. In these circumstances, the tax payer may be required to file a local tax return with assessment of no taxes. From January 1, 2011, the exportation of hydrocarbons and minerals must be subject to “self-income tax withholding" by the exporter and paid over to the authorities through the corresponding withholding tax return. The rate is 1% over gross payments or credit entry.

VALUE-ADDED TAXES

Colombian VAT is triggered by the following transactions: i) Sale of tangible movable assets (sales of fixed assets are subject to with VAT); ii) Imports of tangible movable assets; and iii) Rendering of services in Colombia. In some cases specified in the tax laws, the import of services, which is to say services rendered abroad and used in Colombia, is subject to VAT, if the recipient of the service is located in Colombia. The general VAT rate is 16%. This rate applies to all goods and services; however, some specific ones have a 5% rate. Tax regulation contemplates certain goods and services (principally basic household items) as excluded from VAT and other as exempt (e.g. exports), which are taxed at a 0% rate. There is a new consumption tax on food services, catering services, mobile phone services, and sales of certain vehicles, among others. The rate varies from 4% to 8%. The tax paid does not allow an input VAT credit, and most of the items subject to consumption tax are not subject to VAT.

COMPANY TAXES ON DIFFERENT ENTITIES

In general, this is not applicable; however, companies duly registered before the CHamber of Commerce between December 29, 2010, and up to December 31, 2014, and qualify as small companies, may access some benefits such as: i) Reduction on the applicable corporate income tax rate and other tax incentives (progressive tax income rates per year or special deductions due to the hiring of certain employees, for example); ii) Reducation on the value of payroll taxes and other payroll contributions; and iii) Reduction on the applicable rates for commercial registry fees and renewables.

LAND & PROPERTY TAXES

The real estate tax is a municipal tax. The rates range between 0.4% and 1.2% depending on the municipality rates, the economic destination of the real estate, and its location within the municipal territory. The real estate tax actually paid is 100% deductible for income tax purposes but only to the extent it is related to the income-producing activity of the taxpayer.

OTHER TAXES

Tax on financial transactions (TFT): The TFT applies on any transaction involving the withdrawal of funds deposited in checking or savings bank accounts held with financial entities. It also applies over checking account overdrafts used to make payments to suppliers, labor payments, and payments to other third parties. The tax rate of the TFT is 4x1000 (0.4%). This tax rate applies on the total amount of the transaction. The withholding agents of the TFT are the financial entities and the Central Bank. For 2012, 25% of the tax paid is deductible for income tax purposes. This percentage increases to 50% as of tax year 2013. A gradual reduction of the rate will start to apply in 2014, until the elimination of the tax in 2018. The reduction will apply as follows: i) 2012-2013 0.4%, ii) 2014-2015 0.2%, iii) 2016-2017 0.1%, and iv) 2018 onwards 0%.

Industry and commerce tax (ICA): The ICA is a municipal tax that is applied on gross revenues earned for the carrying out of industrial, commercial, or service activities in the territory of any municipality and in a specific real property located therein, regardless of whether the activity is permanent or occasional. ICA rate varies depending on the municipality; as a general rule they range between 0.3% and 1.36%. ICA is often paid via withholding tax collections. The ICA actually paid is 100% deductible for income tax purposes in the year in which this tax is paid, but only to the extent it is related to the income producing activity of the taxpayer.

DOUBLE TAXATION TREATIES

Colombia has entered into a multilateral tax treaty with Bolivia, Ecuador, and Peru, which follows the Andean Community Model of Double Taxation (a multilateral source tax treaty). In addition, Colombia has double tax treaties in effect with Chile, Spain, Canada, and Switzerland. All of these tax treaties are based on the Organization for Economic Cooperation and Development (OECD) model convention.

INTEREST ON LOANS – TAX DEDUCTION

General tax treatment provides that interest paid to foreign lenders pursuant to loan agreements for a term equal or greater than one year is subject to a 14% withholding tax. If the term of the agreement is less than one year, the applicable rate is 33%. Regulation contemplates some cases where the interest is considered as foreign source income, not subject to withholding tax. Interest paid on the following operations is deemed to generate foreign source income, thus not subject to withholding tax: i) Short-term loans for the import of merchandise, bank overdrafts, or credit lines, ii) Loans for the finance or pre-finance of exports of merchandise, and iii) Loans for foreign trade through most Colombian financial entities and Bancoldex. Interest paid to foreign entities is deemed to be deductible; however, a thin capitalization rule has been introduced since January 2013, to limit the deduction of interest payments on debt that on average exceeds a 3:1 debt to equity ratio (taxable equity as of December 31 of the previous year). For calculation purposes, only debt that accrues interest is taken into account. This rule is applicable to any kind of indebtedness whether with related or not related parties. If the loan is granted by a foreign related entity, interest payments are subject to transfer pricing regulation in Colombia; therefore, the arm's length principle should be applied.

USE OF TAX LOSSES

Tax losses may be carried forward with no time limitation; tax regulations provide no limitations on the amount of tax losses available for offset against ordinary taxable income each tax year. This treatment is applicable to tax losses generated from the 2007 tax year and thereafter. Tax losses generated between 2003 and 2006 were subject to time and amount limitations (eight years with only 25% of the tax losses being available for offset each tax year). Change of control in target entities does not generate limitation to use tax losses, as long as the entities remain in its legal structure (if a merger were performed some restrictions apply to offset tax losses).