The Government filed today a tax reform with Congress aiming at companies and tax evasion. The main changes are:

1.    Normalization tax: 

• For FY 2022 the normalization tax (tax amnesty) in created.
• Income taxpayers that have omitted to report assets or have claimed relief for nonexistent liabilities are subject to this normalization tax.
• The trigger event of the tax is to hold non-declared assets or non-existent liabilities on January 1st, 2022.
• The tax base is the cost basis, or the commercial self-valuation made by the taxpayer (“autoavalúo”).
• The structures made with the purpose to transfer such assets to entities or vehicles with lower cost basis will not be accepted, and the applicable tax basis will be calculated over the cost basis of the underlying assets.
• The tax basis for non-existent liabilities will be its tax value, or the values reported in the last income tax return.
• The applicable rate for the normalization tax will be 17%.
• The normalization taxpayers that have reported assets for a lower value, are able to update their value including the additional amounts as the tax base of the normalization tax.
• When the assets are repatriated and they are invested in Colombia, the tax base will be reduced to the 50% of the omitted amounts.

2.    Corporate Income Tax (“CIT”): 

• As of 2022, CIT rate for corporations and foreign entities increases to 35% (currently 31% for 2021). 
• The possibility of taking 100% of the industry and commerce tax (ICA) paid as a tax credit against the CIT is eliminated. Instead, the ICA tax credit will remain at 50% of the ICA paid during the year.
• Between 2022 and 2025 (this latter included), financial institutions will be subject to a 3% surcharge, for a combined rate of 38% (applicable to entities with a taxable income of at least 120,000 Tax Units).
• Withholding tax reduced to 0% (currently 5%) for foreign portfolio investment in public or private fixed income securities or financial derivates over fixed income securities.

3.    Mechanisms to fight against the tax evasion:

• Public Notaries are obliged to use of the georeferencing system that will be established by the Tax Authority (DIAN) to determine the commercial value of the real estate and to inform the parties involved in the deed process and the DIAN if the determination of the commercial value does not observe the tax law; if the Notary does not inform the parties and DIAN, will be subject to the penalties for not submitting information, for sending erroneous information or for sending the information on an untimeliness basis.
• DIAN may register ex officio in the Tax Registry (RUT) the individual that according to the information available, is subject to tax obligations. For this registration, the DIAN will receive the basic information from the National Planning Department, the National Registry of Civil Status, and the Special Administrative Unit for Migration.
• The billing system is established which states, among others: (i) the documents that are part of the system and their validity, (ii) the prior validation of the DIAN for the tax recognition of e-invoices, (iii) for the acceptance of costs and deductions in the income tax and of input VAT, the documents that are part of the billing system will be required, (iv) the transferor must register the transaction in the RADIAN system carried out in order to formalize the transfer of economic rights contained in an e-invoice that is a security, (v) the penalty for not sending information will be imposed when the documents of the billing system are not submitted in due form, the penalty for issuing invoices without the requirements will be imposed when the documents that are part of the billing system are issued without the requirements and the penalty for not billing will be imposed for the non-issuance of the documents that are part of the billing system.
• The DIAN is authorized to establish the income tax billing that is enforceable. It is highlighted that: (i) the basis to determine the tax is the information obtained from third parties, the e-invoice system and other mechanisms, (ii) the notification of this invoice will be made by inserting it in the DIAN website and it could be done through any other mechanism available; communication to the taxpayer through the forms established in the Tax Statute is an additional mechanism and the failure to comply with this formality does not invalidate the notification made, (iv) if the taxpayer does not agree with the invoice, he/she will be obliged to file an income tax return and pay the tax within the following 2 months after the insertion in the DIAN website, in this case the invoice will not be enforceable provided that the values reported in the e-invoicing system are included in the corresponding return, (v) if the taxpayer does not submit the aforementioned return, the invoice will be enforceable.
• The article on the automatic exchange of information is modified. It is highlighted that: (i) the list of information that must be provided by those obliged to supply it is eliminated and it is established that the DIAN will indicate it by means of a Resolution, (ii) the account would not be opened or might be closed if the information is not submitted, (iii) DIAN will supervise the due diligence procedures.

4.    Beneficial owner

• Article 631-5 of the Tax Code is modified to introduce a new definition of beneficial owner applicable for all tax purposes.
• The new definition sets forth requirements for individuals to be deemed as a beneficial owner of: i) a legal entity, and ii) a special vehicle (e.g., Trusts).
• The new definition of “beneficial owner” establishes that if no individual is identified as having participation in the share capital o as having control over the legal entity, then it is necessary to identify the individual that holds the position of legal representative, unless there is an individual who has greater authority regarding the management or direction functions of the legal entity.
• The term “beneficial owner” is applicable to reference of final or real beneficiary.
• The new definition of beneficial owner should be interpreted in accordance with the recommendations issued by the Financial Action Task Force (FATF), as wells as any updates issued on this regard.
• The Registration of Beneficial Owner (RUB) is also created and will be managed by the DIAN.
• Those who do not comply with the registration or do so incorrectly or incomplete, will be subject to the penalty established in article 658-3 of the Tax Code.
• Additionally, the System to Identify non-legal vehicles is also created.
• The new definition and the registration of the beneficial owner must be regulated by the Tax Authority through a resolution, to ensure its adequate applicability.

Measures for economic recovery

5.    Days without VAT

Up to 3 days a year, the following movable tangible goods will be exempted (cero rated) from value added tax - VAT, without the right to refund and/or compensation, when sold within the national territory, and in the periods defined by the Government.

• Clothing and clothing accessories whose sale price per unit is equal to or less than 20 UVT. 
• Household appliances, computers and communications equipment, sports equipment, and goods and supplies for the agricultural sector whose sales price per unit is equal to or less than 80 UVT. 
• Toys and games whose unit sales price is equal to or less than 10 UVT. 
• School supplies whose unit sales price is equal to or less than 5 UVT. 

The prices of the goods covered by the exemption are calculated excluding VAT. 

Additionally, the following requirements must be met: 

• The VAT agent may alienate those goods covered that are in Colombia and at retail, in-person and/or through electronic and/or virtual means, and directly to the individual who is the final consumer. This solves the problems of the previous rules regarding the limitation of the incentive for face-to-face purchases only.
• The VAT agent must comply with the obligation to issue invoice or equivalent documents through the current invoicing systems, as applicable. 
• Payments may only be made through debit, credit cards and other electronic payment mechanisms. 
• The final consumer may purchase up to 3 units of the same good covered and disposed of by the same VAT agent. 
• Sellers of the covered goods must deduct VAT at the applicable rate from the retail value. In addition, they must send to the Tax Office (DIAN), the information that it defines and on the dates that it determines with respect to the exempted operations. 

6.    Extension of the term of the Formal Employment Support Program (PAEF)

The period of the PAEF (program created to support companies with the payroll of employees, in compliance with the requirements established in Legislative Decree 639 of 2020 and amending regulations) is extended from July 2021 to December 2021 only for those potential beneficiaries who by the contribution period of March 2021 have a maximum of 50 employees. 

If at the time of application, the potential beneficiary has more than 50 employees, it will be able to access the PAEF but will not be able to be beneficiary of contributions for more than 50 employees. If the potential beneficiary has more than 50 employees, priority will be given to female employees.

Individuals with less than 2 employees reported in the Integrated Contribution Settlement Form (PILA) corresponding to the February 2020 contribution period will not be able to access this PAEF extension.

Potential beneficiaries may request the state contribution granted by the PAEF, once a month, for the payrolls of the months between July and December 2021.

The maximum limit of 11 applications contained in Legislative Decree 639 of 2020 will not apply to the applications made under this rule. 

The concept of employees for the PAEF benefit will continue to be the one included in Legislative Decree 639 of 2020 and amendments thereof.

In December 2021, the Government will analyze the possibility of granting a new extension to the PAEF.

7.    Incentive for the creation of new jobs:

The incentive for the generation of new jobs is created and will be directed to employers that generate new jobs by means of hiring additional workers under the following terms:

• In the case of additional workers corresponding to young people between 18 and 28 years of age, the employer will receive as an incentive a state contribution equivalent to 25% of 1 current legal monthly minimum wage (SMLMV) for each of these additional workers.
• In the case of additional workers who do not correspond to the young people referred to in the preceding paragraph, and who earn up to 3 SMLMV, the employer will receive as an incentive a state contribution equivalent to 10% of 1 SMLMV for each of these additional workers.
• This incentive will be in force from the enactment of this law until August 2023. 
• The employer may only receive a maximum of twelve payments during the term of this incentive. In any case, only one monthly payment will be made.
• This incentive may not be granted simultaneously with other non-tax contributions or subsidies at the national level, which have been created with the purpose of encouraging the formal hiring of the population referred to in this article, except with the PAEF, under the terms defined by the National Government.
• To count the additional workers, the number of employees for which each employer had contributed for the month of March 2021 will be taken as a reference, and the number of additional workers will be considered over the total number of those reported in the PILA of the month of the incentive.

8.    Other incentives:

Additional incentives are created such as new support for access to higher education and support for mass transportation systems.

9.    Repeal

The following provisions are hereby repealed and declared effective:

• Paragraph 4 of article 23-1 of the Tax Code is eliminated, related to the current definition of beneficial owner.
• Paragraph 1 of article 115 of the Tax Code: the possibility of taking the tax discount of 100% of the industry and commerce tax (ICA) paid during the year is eliminated. With this derogation, the ICA tax discount would remain at 50% of the tax paid during the year.
• After 5 years, the Government must evaluate if the dispositions regarding the income tax rates and the tax credit for industry and commerce tax paid during the year should continue or should be modified once again. 
• Number 3 of paragraph 7 of article 240 of the Tax Code, the percentage points of the CIT rate applicable to financial entities for the year 2022 are eliminated, considering the new surtax included in the project for these institutions.
• Articles 3 and 6 of Law 1473 of 2011. These articles related to legal definition applicable to the expenditure and balance of the Estate finances, which are eliminated.
• Paragraph 2 of article 13 of Law 2052 of 2020. Dematerialization and automation of electronic stamps.
• Article 11 of Law 1473 of 2011.
• Articles 40 and 45 of Law 2068 of 2020. Tax benefits applicable to the tourism and hotel industry are extended until December 31st, 2022 (initially it was until 2021).