Colombia: Are We Losing Course?

These tax changes have been presented by the Colombian government as measures against tax evasion, and as the way to clean up public finances, promote economic and social development, reactivate the economy, create jobs, encourage entrepreneurship, and promote labour and tax formalisation all over the country.

Most of these measures have also been the result of the country’s commitment to adopt the OECD’s recommendations and standards. There is no doubt, the OECD’s tax recommendations and standards have been implemented by Colombia. This has resulted in a positive outcome: Colombia is the OECD’s 37th member.

In a nutshell, the most relevant measures in this regard can be summarised as follows:

Act 1607 of 2012:      

• Redefinition of tax residence for individuals, including tie-breaker rules for citizens residing in other countries but whose family, assets, and business remain in the country.

• Place of effective management regulation for foreign entities whose direction and management decisions were made within Colombian territory and therefore would have to be deemed local entities/taxpayers.

• New anti-avoidance rules within the Colombian tax regime.

Act 1739 of 2014:

• Normalisation tax 1.0: A “reloaded” tax amnesty programme finally declared constitutional by the Colombian Constitutional Court, applicable to taxpayers who had omitted assets or included inexistent debts in their tax returns and could regularise said situations through a normalisation tax payment in fiscal years 2015 (at a 10 per cent tax rate), 2016 (at a 11.5 per cent tax rate) or 2017 (at a 13 per cent tax rate).

• Wealth tax for fiscal years 2015, 2016, 2017, and 2018, applicable to individuals and corporations whose net worth exceeded COP$ 1,000 million as of January 1^st

• The filing of the informative foreign assets return, through which taxpayers must annually report and detail the information of foreign bank accounts, investments, receivables and other foreign assets.

Act 1819 of 2016:

• Introduction of controlled foreign corporation (CFC) rules taxing passive income derived through foreign investment vehicles controlled by Colombian entities or individuals.

• First rules on Ultimate Beneficial Owners (UBO), requiring reporting of foreign UBOs controlling 25 per cent or more of Colombian companies deemed subsidiaries or affiliates of foreign entities, permanent establishments, and local trusts and investment funds.

Act 1943 of 2018:

• Normalisation Tax 2.0: New amnesty programme for taxpayers who had omitted assets with a new normalisation tax rate of 15 per cent.

• Additional and new rules regarding the report of rights/participation in foreign trusts, private interest foundations, and life insurance policies for tax purposes.

• Net worth tax for fiscal years 2019, 2020, and 2021, to individuals whose net worth exceeded COP$5,000 million as of January 1^st

• Annual return to report UBOs. Creation of the first version of the UBOs registry managed by the Colombian Tax Office (CTO).

Act 2010 of 2019:

• On October 26^th of 2019, Act 1943 of 2019 was declared unconstitutional by the Colombian Constitutional Court. The Court made this decision based on various procedural mistakes made by the Congress.

• To mitigate any fiscal impact, the Colombian government filed a new tax bill. As a result, the rules on tax amnesty, net worth tax, and reporting requirements were left untouched and were once again introduced by Act 2010 of 2019.

Act 2155 of 2021:

• Normalisation tax 3.0: New normalisation tax at a 17 per cent rate. For the first time, the deadline for filing and paying normalisation tax was February 2022 and taxpayers had to make an advance payment during November 2021, equivalent to 50 per cent of the tax due determined on the estimated taxable base for January 1^st, 2022.

• Broader definitions on reporting rules concerning rights and participation in trusts, foundations, insurances, or similar fiduciary structures.

• Introduction of new rules and new formal obligations regarding the report of UBOs information. Creation of new UBOs registry (Registro de Único de Beneficiarios finales – RUB) and establishment of penalties for non-compliance.

Besides the abovementioned tax reforms, Colombia has introduced numerous rules for the implementation of information exchange agreements e.g., the Foreign Account Tax Compliance Act (FATCA), the OECD common reporting standard (CRS), and anti-money laundering and counter terrorism financing leading to greater transparency.

The above has also resulted in a positive outcome. This is illustrated by the broad way in which the tax amnesty has been embraced by taxpayers in the last eight years. In terms of tax collections and according to the CTO, more than 5,400 Colombian residents with unreported assets and liabilities abroad, filed and paid in the 2019 amnesty resulting in the collection of COP$1.1 trillion, exceeding the established collection goal by 115 per cent. According to the annual collection report issued for FY 2020, another 4,778 taxpayers filed normalisation tax returns resulting in an additional collection of COP$ 627.9 billion.

That said, it looks as if the introduced rules have provided the CTO with the necessary information to tackle tax evasion. On the one hand, taxpayers are being required to report foreign assets and income in addition to the identification and reporting of UBO information. On the other,  the CTO is not only receiving what local taxpayers report but also other relevant data through FATCA and CRS. The compliance circle appears to be closed.

However, these constant tax changes as well as the increase of regulatory reporting requirements have, in fact, led to serious interrogation, uncertainty, and a higher compliance burden for taxpayers. Contrary to facilitating the CTO’s work and/or the taxpayers’ compliance, this excess of information is making everything even more complex for the CTO and for the same group of taxpayers, the compliant one. The non-compliant taxpayers remain undetected for the most part, in particular those within the country boundaries.

The CTO has been circulating a series of mass e-mails suggesting taxpayers should review their tax situation in the event of possible inconsistencies or omissions based on the information received by this entity within the framework of CRS and FATCA, but which apparently have been misinterpreted by the CTO or considered out of the full context of the transactions/investment structures involved. For many, there is an uncomfortable feeling that these communications are, in fact, fishing expeditions.

There are serious questions being raised by taxpayers who reported in the different tax amnesties, acting in good faith and in accordance with the enforceable tax regulations. They now face constant, persuasive communications from the CTO that could be interpreted as intimidating. And while taxpayers who are complying with their tax obligations are being  harried by the CTO, no real measures are being sought to persecute tax evasion (which is reported at 0.2 per cent of the Gross Domestic Product).

Apparently, the same tax amnesty, the process of becoming an OECD member and embracing the network of treaties that pursued fiscal transparency, tax efficiency, and economic growth that years ago attracted investments into Colombia and led Colombians to repatriate assets, today leads them to seek other safer jurisdictions in which to settle and invest.

Complying with international requirements and macroeconomic objectives generated an excess of regulation and a flow of vulnerable information that, far from making things easier and safer for taxpayers and tax authorities, is causing over-chasing on the same compliant taxpayers, saturating the system and making Colombia far less attractive.

The context is not the best. The informal economy remains steady at 48 per cent due to the impact generated by the spread of the COVID-19 pandemic, the Colombian peso has been subject to an accelerated devaluation, there is political uncertainty in the country, rising inflation, and taxpayers feel that the legal system is increasingly volatile which is causing capital to flee.

For the most part, the recent tax rules have resulted in positive indicators for the country but chasing the same taxpayers will not result in any positive outcome. The real challenge is and will  continue to be, the very basic focus of how to tackle tax evasion within Colombian territory and how to end it.

Rodrigo Castillo Cottin
Rodrigo is a Partner with the firm, specialising in Trusts and Estates, Tax & Latin America. He has previously contributed to “Private Wealth Trends and Developments in Colombia”, Chambers and Partners; “Getting the Deal Through – Private Client”, Lexology; and “Colombia: Private Client”, The Legal 500.

Ana Lopez Murillo
Ana is an Associate in Rimôn’s Bogota office, specialising in Trusts and Estates, Tax & Latin America. She has previously contributed to “Private Wealth Trends and Developments in Colombia”, Chambers and Partners; “Private Wealth 2021 Law and Practice in Colombia”, Chambers and Partners; “Getting the Deal Through – Private Client”, Lexology; and “Colombia: Private Client”, The Legal 500.

Alejandra Becerra
Alejandra is an Associate in Rimôn’s Bogota office, specialising in Trusts and Estates, Tax & Latin America. She has previously contributed to “Private Wealth Trends and Developments in Colombia”, Chambers and Partners; “Private Wealth 2021 Law and Practice in Colombia”, Chambers and Partners; “Getting the Deal Through – Private Client”, Lexology; and “Colombia: Private Client”, The Legal 500.