Taxes 10
New National Tax Proposal Would Collect COP$25 Trillion Extra in 2023, COP$50 Trillion Extra by 2026
Colombia’s new Finance Minster Jose Antonio Campo on August 8 unveiled a 130-page tax proposal to the national Congress -- aiming to boost tax collections by COP$25 trillion (US$5.8 billion) next year, then gradually increasing each of the following three years, hitting COP$50 trillion (US$11.58 billion) by 2026.
The proposed scheme generally follows promises made by Colombia’s newly sworn-in President Gustavo Petro to boost taxes on wealthier individuals and corporations, as well as producers of hydrocarbons and minerals (mainly oil, gas, coal and gold), new taxes on unhealthy sugary drinks and foods, on waste plastics, on profitable stock dividends, and reductions in many current tax exemptions.
If approved by Congress, the new scheme aims to slash income inequality and drastically reduce poverty levels at a rate nine-times that of prior tax-and-spending reforms over the past 14 years, according to Campo.
“The progress that the country has had in terms of health and education coverage, among others, must be maintained and accelerated to heal a deteriorated social fabric,” Campo states in the tax proposal.
“This tax reform project aims to advance fundamentally in two dimensions. First, by reducing the inequitable exemptions enjoyed by individuals with higher incomes and some companies, as well as closing avenues for tax evasion and avoidance,” he added.
A new “wealth tax” (patrimony) --considered by many nations including the U.S. as counter-productive -- would hit people with liquid assets exceeding COP$3 billion (US$695,000), generating about COP$2.66 trillion (US$616 million ) in extra revenues next year. The principal residence would be excluded from the “patrimony” calculation, but second-homes and vacation-homes would be included.
Workers and business owners with incomes exceeding COP$10 million (US$2,315) monthly would be hit by higher income taxes, generating an extra COP$5.45 trillion (US$1.26 billion) in revenues in 2023.
Higher corporate income taxes would bring-in an extra COP$5.1 trillion (US$1.18 billion) next year, while higher taxes on hydrocarbons and minerals (including gold) would bring-in another COP$7 trillion (US$1.6 billion) extra next year.
New carbon taxes (the CO2 emitted by burning hydrocarbons) would net another COP$2.5 trillion (US$579 million), while taxes on sugary drinks and high-sugar-content processed foods would add another COP$2.2 trillion (US$510 million) in new revenue, according to the proposal.
While higher taxes on higher-wage workers and higher-income business people would dampen their spending, transfers of these higher taxes to poorer people would result an a “marginally positive” boost to gross domestic product (GDP) “in the coming years,” according to Campo.
“Distortions that could derive from the increase in effective tax burdens would be mitigated by the positive effects of the use of these resources in greater transfers to households of low income and an increase in public investment,” he claimed.
As for the net impact on poorer populations, simulation-studies indicate that “the gain in welfare of the first four years -- defined as the sum of the utilities for each year, brought to present value -- would be equivalent to increasing the current consumption of these poorer households by 7.5%.
“In contrast, this reform would decrease the welfare of higher-income households, on account of the higher tax burden they would face, although the effects would be minor compared to the gain in well-being of lower-income households.”
Meanwhile, “the incidence of monetary poverty would be reduced by 3.9 percentage-points, reflecting a fall of 10% in the total population living in poverty, while extreme poverty would decrease by 4 percentage points, which would represent a percentage decrease of 32.4% of the population living in extreme poverty in 2021,” according to the proposal.
Meanwhile, the tax-revenue transfers to poorer populations would cut the current “Gini” index of inequality by “nine times the average annual reduction of the last 14 years,” he said.
Colombia Former VP German Vargas Lleras Responds
In an opinion column published in Colombia’s biggest daily newspaper (El Tiempo), former Colombia Vice-President German Vargas Lleras sees serious issues with certain parts of the proposed tax reform.
“I am concerned that with the introduction of new taxes and the increase in some rates we will continue to deepen our loss of competitiveness, the outflow of capital will continue and it will not be possible to attract new investment, either local or foreign,” Vargas Lleras states.
“I had the opportunity to present to the appointed Finance Minister my concern about the return of non-technical taxes such as wealth. To this is added the increase in the tax on dividends and occasional profits by 100% and the dismantling of the discount in the ICA [industrial/commercial tax deductions] and the creation of new taxes such as those proposed for the mining-energy sectors, among others . . .
“How are we going to guarantee our energy security? With what does the [Petro government] think to replace the enormous income [from state oil company Ecopetrol] that just in this first half of 2022 represented US$16 billion [in government revenues] and is 54% of all our exports?”
Colombia President Ivan Duque today (September 14) signed far-reaching tax and social-benefits legislation that promises to benefit more than 29 million poor- and middle-class Colombians -- while also putting a heavier tax burden on wealthier individuals and corporations.
Not only is the legislation progressive -- contradicting some biased media reports and some blowhards that paint Duque as a “right-wing” President -- but also it’s remarkable that the bill passed both houses of Congress in the final months of a four-year presidential term. Getting anything done legislatively when Colombian presidents are leaving soon is almost unheard-of in Colombian politics.
The new law also “makes Colombia the first country in the hemisphere to carry out a social and fiscal reform in the midst of the pandemic,” according to Duque.
The bill aims to raise COP$15.2 trillion (US$3.97 billion) by raising the corporate income tax rate to 35%, cracking down on tax evasion, cutting non-mandated federal expenses, and continuing the existing financial-transfers tax and the ICA tax.
As for social benefits, the bill gives all students in lower-income strata (1, 2 and 3) free tuition at all public schools; extends the “solidarity income” subsidy for hiring young people; refunds the 19% value-added tax (VAT) to poorer people; extends the “emergency basic income” subsidy -- created at the start of the Covid-19 pandemic -- through 2022, and continues a variety of income subsidies for senior citizens, young people and poor families.
“Thanks to the application of the law, extreme poverty levels will be reduced from 15.1% in 2020 to 6.7% in 2022,” according to Duque. “Moderate poverty levels will also decrease from 42.5% in 2020 to 34.3% in 2022. In total, 4.1 million households will benefit from Solidarity Income, equivalent to 14.3 million people,” he added.
The employment subsidies included in the bill are projected to recover around 1 million jobs and help slash unemployment to levels prior to the pandemic outbreak.
“Every [temporary subsidy measure] that arose in the midst of the [Covid-19] complexities today becomes state policy thanks to the assistance of the political parties, unions, youth, governors and mayors,” Duque added, citing the broad coalitions that backed the new legislation.
“The Formal Employment Support Program [PAEF in Spanish initials] is historic for what it represents. This year, when we see the reactivation [of the national economy], we are not going to put it aside. On the contrary, we know that there are companies that are still affected and there are sectors that are just getting ahead and, therefore, retroactively, from May this year to December this year, the PAEF has also become an effective response to the needs of the Colombian people.
“And new elements are added: support for women, support for the population with disabilities, support, also, for those who were victims of the [‘Paro National’ riots and] blockades, those who wanted to destroy and who, too, were affected in their lives, in their income. They, too, are answered,” Duque added.
“But let it also be clear: The solution has not been at the cost of taking away competitiveness from the private sector, but of maintaining it -- and I say this because of the following: this reform maintains the 100% VAT discount on capital goods. This reform maintains the elimination of presumptive income [from tax]. Because even with the increase in the nominal [corporate tax] rate [to 35%], it is still a rate substantially lower than the one we had in 2018 and, also, because the ICA tax deduction is left at 50%.
“In other words, the private sector contributes, but maintains the competitiveness gained in these years, to continue making Colombia an attractive place for foreign investment,” Duque concluded.
Colombia Finance Minister José Manuel Restrepo on July 13 unveiled a COP$11 trillion (US$2.9 billion) tax hike on wealthier corporations in order to expand and continue subsidies to especially vulnerable populations economically slammed by the Covid-19 crisis.
The proposal DOES NOT include any new taxes on middle-class people, nor does it boost the existing value-added sales tax (“IVA” in Spanish initials) -- which in any case mainly hits higher-income people rather than the poor. But it will boost the corporate tax rate to 35% and extend financial-sector income-tax surcharges to 2025.
The bill comes on the heels of two months of consultations with representatives of understandably frustrated social groups including poor people, workers, small-business people, students as well as Colombia’s leading business trade associations -- including ANDI (originally founded in Medellin).
It also comes on the heels of financially punishing Wall Street debt-ratings downgrades on government and corporations, which unfortunately cripple the government’s ability to finance subsidies to poor people, the working classes, small business and huge numbers of unemployed young people -- all slammed by the Covid-19 crisis.
Commenting on the new proposal, ANDI President Bruce MacMaster stated: “I must say that the business sector is going to support this effort. And it will do so with a patriotic, supportive, important, developed spirit . . . [We need to] generate economic reactivation, to generate reduction in unemployment, to generate more opportunities for Colombians and to address this [massive fiscal deficit] situation,” he added.
The bill would extend and expand existing Covid-19-triggered subsidy programs including the “Solidarity Income” subsidy (through 2022) and the "Payroll Subsidy" (PAEF) program (through December 2021), according to the Finance Minister.
The Solidarity Income subsidy expansion “would allow more than 731,000 Colombians living in extreme poverty who today do not receive any benefits from the state to start doing so for the first time. With this, the program would reach a total of 3.3 million households,” Minister Restrepo explained.
Cost of the Solidarity Income subsidy would hit COP$2.31 trillion (US$608 million) in 2021 and another COP$6.59 trillion (US$1.7 billion) in 2022, he said.
Meanwhile, extension of the PAEF payroll subsidy for the second semester of 2021 “would support about 459,000 employees through a scheme that encourages the hiring of young people between 18 and 28 years old, along with the rest of the population with incomes of up to three minimum wages,” he added. That cost will total COP$1.06 trillion (US$279 million).
“We will focus the program on small companies and will include individuals with businesses that employ at least two people,” Restrepo explained. As a result, another 55,000 employers are expected to apply for payroll subsidies, corresponding to 400,000 employees.
Meanwhile, the new tax bill would grant free tuition at public universities and trade schools for 695,000 students in the lower-income “1, 2 and 3” strata, along with “incentives and better conditions to users of ‘Icetex’ educational credits,” he said.
“With these measures and the social programs in force, the national government will reach more than 25 million Colombians who will benefit” via subsidies totaling COP$8.8 trillion (US$2.3 billion) in 2021 and another COP$8 trillion (US$2.1 billion) in 2022, he said.
The proposal also contains a government-austerity plan that aims to generate recurring savings of COP$1.9 trillion (US$500 million) between 2022 and 2032, on average. This includes a restriction starting in 2023 on personnel expenses along with reductions in travel expenses, vehicle expenses and mobile-phone expenses, he said.
Transfers of federal revenues to Colombia’s 34 departments also would be trimmed “without affecting those mandated by the Constitution, such as Social Security, public universities” and other legally mandated payments, he said.
Another provision aiming to crack down on tax evaders would boost revenues by some $2.7 trillion (US$710 million), he added. In addition, a new “georeferenced information system” would aim to “detect the real value of declared properties and allow income tax to be invoiced based on information from the electronic invoice and information reported by third parties,” according to the Minister.
Meanwhile, the existing “ICA” tax on corporations would be trimmed by 50%, but an income-tax surcharge on Colombia’s financial sector would be extended until 2025.
Once including all the new tax provisions, austerity measures and anti-evasion efforts, Colombia’s tax revenues would be boosted by COP$15.2 trillion (US$4 billion), the Minister added.
Colombia President Ivan Duque on December 27 signed into law a new national tax bill that mainly helps lower-income people and incentivizes job growth in legal industries.
The new law “seeks to continue promoting economic development and creates the basis for reducing inequality and closing income gaps in the country,” according to the official press statement following the President’s signing.
The measure would generate an estimated COP$13.5 trillion (US$4.1 billion) in new revenue in 2020, via income taxes on people with relatively high incomes; a surcharge on the financial system; and a multi-phase VAT (value-added tax) on beer and soft drinks, according to the summary.
“Normalization” measures in the bill would generate COP$5.3 trillion (US$1.6 billion); while economic growth stimulation measures would result in another COP$3.2 trillion (US$971 million). Furthermore, a new electronic tax-billing-and-collection system is expected to raise another COP$5 trillion (US$1.5 billion), according to the summary.
The full text of the new law (in the original Spanish) is available here: https://dapre.presidencia.gov.co/normativa/normativa/LEY%202010%20DEL%2027%20DE%20DICIEMBRE%20DE%202019.pdf
“This legislation links social programs such as the VAT refund for 2.8 million low-income households, plus three days without VAT per year, the reduction in [individual] health [insurance] contributions from 12% to 4% for pensioners and vulnerable populations, plus incentives to companies that create jobs for young people between 18 and 28 years.”
“This reform will allow us to continue increasing resources for education, for health, for household improvements, and for bringing clean drinking water supplies to the most vulnerable areas of our country,” added President Duque.
The measure, officially dubbed the “Economic Growth Law,” contains measures that will continue to boost the growth of Colombia's Gross Domestic Product (GDP) and foreign direct investment (FDI), hence creating more jobs in the “formal” (legal, taxable) economic sectors.
The new law also establishes income-tax benefits for large, medium, small and micro enterprises, as well as VAT discounts for imported capital goods “in order to reduce costs so that the business sector is modernized more quickly and becomes more cost-competitive,” according to the press summary.
The law also includes a mechanism by which compliance with the tax obligations of micro- and small businesses are simplified.
Another provision includes nearly COP$2 trillion (US$607 million) received from financial-sector taxes for upgrading rural, tertiary roads -- in order to improve logistics in many of Colombia’s remotest regions, as noted by the Transport Ministry.
Colombia President Ivan Duque and Minister of Finance Alberto Carrasquilla on December 19 both hailed final votes in the Colombian House and Senate to approve a revised tax package for 2019.
“The approved bill retains the initial spirit of protecting the most vulnerable population of the country and strengthening the collection through the taxation of the population with the highest income,” according to a Finance Ministry press statement.
The new law “aims to recover investment in the country and allow the economy to grow above 4% [annually], removing the burden on the generators of employment and encouraging investment,” the Ministry added.
Unlike the original proposal, the new law won’t extend the current 19% value-added tax (VAT) on many products to the basic “food·basket” that includes what most Colombians buy every day. However, beer and carbonated soft-drinks – previously exempt from IVA -- will now be hit by that tax.
On the other hand, neither pensions nor certain service contracts will be taxed, contrary to the original tax proposal.
Meanwhile, the new law strengthens the hand of the national tax-collection agency (DIAN) in the fight against tax evasion, including possible prison sentences for evaders.
Responding to a proposal from President Duque, “tax conditions were created so that companies related to the ‘orange’ economy [high-tech, environmentally ‘green’] could develop, benefiting cultural and technological ventures that generate added value to economic growth,” the Ministry noted.
According to President Duque, the new law “promotes entrepreneurship, simplifying and facilitating the work of micro-, small, medium and large companies, which currently face a huge and inequitable tax burden that does not allow them to grow, and substantially reduces the fiscal asphyxia in sectors generating formal employment.”
Corporate income-tax rates will be gradually reduced from 33% today to 30% over the next four years.
“To increase productivity, VAT will be allowed to be deducted from the investment in capital goods starting in the taxable year 2019. In addition, companies will be able to deduct 50% of the ‘Industry and Commerce Tax’ from the taxable year 2019 and 100%l in 2022. The deduction of 50% of the ‘Lien on Financial Movements’ is maintained,” according to the Ministry.
Meanwhile, a new “SIMPLE” alternative taxation system “seeks to simplify compliance with the tax obligations of legal or natural persons with annual gross income of less than COP$2.75 billion [US$847,500]. Using a single form, they can settle their income tax obligations and ICA [Industry and Commerce Tax], reducing the costs of compliance with their tax obligations and promoting formalization [of employment],” according to the Ministry.
“In addition, SIMPLE system rates for small stores, mini-markets, micro-markets and hairdressers already are included in VAT liability. On the other hand, restaurants will liquidate the consumption tax in the same form,” according to the Ministry.
The new law also includes a 1% tax on assets of more than COP$5 billion [US$1.54 million], while real estate sales valued at more-than COP$918 million [US$282,760] will be hit by a 2% consumption tax, except for rural properties destined for agricultural production.
In addition, the personal income tax rate is increased for people with average monthly incomes greater than COP$40 million [US$12,320].
The extra tax revenues resulting from the new law “will be directed mainly to address the subsidized health system, social programs such as ‘Families in Action’ and the ‘Elderly and School Feeding Program,’” according to the Ministry.
Editor’s Note: The following column was written by IRS enrolled agent and chartered financial analyst (CFA) John Ohe of Hola Expat Tax Services. Medellin Herald does not specifically endorse the author’s opinion; this column is for general information only and should not be construed as personal tax advice.
Colombia’s House and Senate on December 28 voted to approve a wide-ranging tax-reform law, which won immediate approval from President Juan Manuel Santos.
Editor’s Note: The following column was written by IRS enrolled agent and chartered financial analyst (CFA) John Ohe of Hola Expat Tax Services. Medellin Herald does not specifically endorse the author’s opinion; this column is for general information only and should not be construed as personal tax advice.
Colombia’s Home Minister (Ministro de Hacienda) Mauricio Cardenas on October 19 finally unveiled a long-awaited, 182-pages-long tax reform proposal that would bring business and investment taxes more in-line with international standards -- and thus help Colombia attract more investment while creating more “formal” employment as well as more personal income taxes.
