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A Complete Guide to Colombia’s Increasingly Expensive Tax Reform

By: Julián Villabona Galarza - Oct 21, 2016, 8:38 am
The Minister of Finance, Mauricio Cardenas presented the text of the reform to be debated in the Congress of Colombia (Flickr)
Minister of Finance Mauricio Cardenas presented the text of the reform to be debated in Colombia’s Congress (Flickr)

EspañolThe Ministry of Finance, headed by Mauricio Cardenas, presented Wednesday, October 19 a structural tax reform. The tax hike has caused a stir in Colombia in recent days. The reform will seek to cover the fiscal deficit Colombia is currently suffering, thanks to low oil prices and overspending.

For this tax reform, the ministry took some recommendations of the expert commission. However, they claim to have “softened” them as some of the taxes might be considered excessive. The government hopes to raise seven billion pesos (USD $2,401,000) next year and 27 billion (USD $9,261,000) in 2022.

The main points of the tax reform are:

The creation of the unified tax (i.e. tax on small traders); an increase in the value-added tax (VAT); prison for tax evaders; a tax on dividends; a tax on sugary drinks and cigarettes and a tax on banking transactions.

This reform is expected to increase collections by hiking some taxes and creating new ones. All this, despite the fact that the president vowed in his first campaign to not increase the tax burden.

The new unified tax
This is a tax that will be created for small commercial establishments. It includes shops, hairdressers, bakeries and other small stores. According to the minister, the charge rate will be 1 percent for establishments with revenue between 43 million pesos (USD $14,749) and 104 million (USD $35,672) per year.

This tax is an umbrella for other taxes such as VAT and income tax. If it is paid, business owners can access benefits such as voluntary savings and an affiliation with occupational hazard insurance systems.

Value Added Tax (VAT)
VAT is a tax on the purchase of some goods in Colombia. It is a 16 percent charge. However, with the tax reform, Colombians must pay three percent more, so they will pass from paying a VAT of 16 percent to 19 percent.

Drugs and foods like meat, poultry, eggs, as well as school supplies and other products are exempt from this tax so they don’t affect low-income people.

The tax will also apply to cell phones that cost more than 650,000 pesos (USD $222). The poorest regions of the city will not have VAT for internet services, but they will have to pay a five-percent tax on magazines, newspapers and the use of digital platforms such as Netflix.

Sodas and cigarettes in the tax reform
The government’s proposal is to create a tax of 300 pesos (USD $0.102) per liter of sugar-sweetened beverages with the aim of reducing levels of diabetes and obesity. However, it has been widely criticized by the National Association of Entrepreneurs, who said it won’t solve those problems but rather generate increased unemployment.

With this tax, the government hopes to raise approximatley 1.4 billion pesos (USD $480,200,000) pesos to be invested in health. Of that money, 900,000 million (USD $308,700) would be from drinks and 500,000 million (USD $1,708,200) of cigarettes, to which the government expects to increase its collection by charging 2,100 pesos (USD $0.7203) of taxes for each box sold.

Jail for evaders
The government is proposing that those who evade taxes will be punished with jail. This applies to those who do it for amounts higher than 5,000 million pesos (USD $17,082), with sentences lasting four to nine years.

Tax on bank transfers
Following the earthquake in the city of Armenia, the Colombian government has decided to create a tax on bank transfers to rebuild the city. This consists of a 2 x 1,000 tax. Two pesos (USD $0.000686) are charged for every thousand pesos (USD $0.343) of the total amount of the transfer. This means that if a person is transferring or withdrawing 1,000 (USD $0,343) pesos, he will be charged for two ($0.000686 USD) pesos of tax funds for rebuilding the city.

This tax has been increasing over the course of discussion, and today is 4 x 1000 in the tax reform. The government aims to maintain this tax, which had to be dismantled once its purpose is fulfilled. However, the collection is very high, which is why it will continue.

Income tax
The income tax will become a flat rate of 32 percent under the reform. Publishers will not have to pay this tax and conflict areas will benefit form a special, gradual rate. Employee funds, cooperatives and religious cults will not have to pay this tax, but may not distribute surplus.

It also seeks to broaden the base of income filers to include 500,000 new individuals or workers who will have to pay. These would be those who earn more than the 2.7 million pesos (USD 926) salary.  This considerably lowers the value of wages of those who pay rent, as they are currently required to declare those earning more than 3.4 million (USD $1,166).

Minister Cardenas said the rate of new filers will be very low and they will be entitled to a refund that withholds the tax, along with a deduction of 25 percent for employees, which already exists.

The tax reform comes at a time of much change and activity in the Colombian Congress. Just yesterday, the 2017 budget was approved and Minister Cardenas immediately filed a project proposing increased taxes. Now comes a race against time to have it approved, while the legislature must overcome other important obstacles like the election of the new Inspector General.

Source: Revista Semana

Julián Villabona Galarza Julián Villabona Galarza

Julián is a reporter with the PanAm Post with studies in Politics and International Relations from the University Sergio Arboleda in Colombia. Follow him: @julianvillabona.