The tax reform for peace in Colombia
In 2012, and with effects starting in 2013, Colombia carried out its most important tax reform in the last twenty years. With the idea of boosting jobs and the economy, from an economic standpoint, this reform generally reduced the taxation of companies. The effect of this reform, which has just been felt in 2014, indicates that there will be a need in 2015 to cover a hole in the budget of between 12 and 16 billion pesos (1 billion pesos = 400 million euros) for the ordinary financing of the Colombian State.
Additionally, the peace process, much awaited by the Colombians, is expected to result in some post-conflict costs of up to 22 billion pesos per year in public funds.
These two factors have inexorably led the Colombian government to propose a tax reform before the end of 2014, to level off the regular financing of the State, and it is preparing another more in-depth reform for 2015 to generate the resources needed for peace.
The proposed measures can be divided into those already announced as definite and those which have been discussed as potential by the government, trade unions and other forums.
I. Definite measures
- Wealth tax. Although this tax initially was meant to be temporary, it has been in effect for eight years now. The tax base would be net assets, over a minimum base of 1 billion pesos (€400,000), which base would exclude the shares held in national companies. The proposed tax rate would be progressive, from 1.6% to 9%. This tax, as has been the case up to now, is chargeable on a certain day (for example, January 1, 2015) and paid in four annual installments. For some taxpayers, this proposal duplicates their tax payable as compared to that existing previously.
- Tax on financial movements. This tax is generated on any financial transaction (including any bank movements by individuals and by entities) and was supposed to be phased out so that in 2015, the rate would fall by half, from 0.4% to 0.2%, and would subsequently disappear. This reduction was aligned with the requirement that economic transactions be channeled through a bank in order for them to be deductible, as part of a measure according to which the deductibility of cash transactions is not recognized. However, the proposal is to keep the rate at 0.4% without any reduction.
II. Potential measures
- Tax on dividends. This proposal was already discussed in the last reform. Currently, in the Colombian tax system, if a company pays tax on all its income, the dividends it distributes are not taxed. Thus, the Government proposes establishing a tax on dividends, which in the last proposal was around 5%. Spanish investors would be protected from this tax by the tax treaty because they can apply the rate of 0%.
- VAT increase. The VAT rate in Colombia is currently 16%, so consideration has been given to raising this tax. The trade unions consider it feasible to gradually increase the rate by one point in 2015 and two points in 2016, consolidating a rate of 18%. Although in principle the government has not proposed applying this measure in this year’s reform, there is a high likelihood that this measure will be adopted in the 2015 reform.
- Other taxes. Although this has not been proposed by the government, there has been discussion about creating different taxes for different purposes such as education or the environment, but they are not expected to be included in the reform of this year.