Latin America countries are looking to attract business to their country and Colombia is not an exception but it is one of the most complex countries for accounting and tax compliance in Latin America.
With constant legislation changes, companies are challenged when it comes to understanding new legislation, confusing processes as well as possibly penalties for non-compliance when operating in Colombia. The country ranks 6th out of 94 countries as surveyed in TMF's annual Financial Complexity Index 2018, making it one of the most complex countries in the world when it comes to accounting and tax.
There are many taxes that companies doing business in Colombia may be subjected to. The main taxes are corporate income tax, presumptive tax which is the same as corporate income tax (CIT) and it is calculated over the equity from prior period when there is no liquid CIT, value added tax (VAT), financial transactions tax, registration tax, real estate tax, municipal industry and trade tax and consumption tax. The country has a complex tax system and has made several tax reforms in the last few years. Additionally, the wording of the tax rules allows for different interpretations, which increases their complexity.
The latest tax reform, Law 1819 of 2016, introduces a new withholding tax on dividends, increases the general corporate income tax rate, and eliminates the income tax for equality and the related CREE surcharge. The law also adds measures intended to combat tax evasion and tax avoidance. The local Colombian GAAP was transitioned to IFRS in 2016, however for tax purposes there are still some differences between accounting books and tax books.
The application of international accounting standards now allows multinational companies to have a general standard and consistency in their financial statements. Declarations to be submitted from 2017 onwards have been reduced. For example, the CREE equity income declaration was eliminated as of January 2017, and the frequency of VAT declarations reduced (from annual, bi-monthly or four-monthly) to four-monthly and bi-monthly.
Corporate Income Tax
The rate for CIT in Colombia is 33% which is levied on all Colombian firms and branches or permanent establishments of foreign companies in Colombia. Companies operating in the free zones have a special 20% corporate income tax rate.
Taxation is regulated by the Tax Code and the taxes are collected by the DIAN (Direccion de Impuestos y Aduanas Nacionales). The DIAN also collects reports from companies covering all of their clients, providers or any third-party through national and municipal magnetic media reports. These reports are extremely complex but helps to have the most accurate accounting records. It must be reported annually or monthly or annually with monthly periods depending on the type of company.
Strict rules and penalties
Colombia has high tax rates and any late reporting, payment or errors can result in severe sanctions or interest penalties. There are strict rules on document keeping. Commercial documents must be kept for 10 years, however if the company has a way to save the information while retaining its integrity, documents can be destroyed in the 10th year and the documents for tax purposes can be destroyed after 12 years.
However, by bearing in mind this difference of the amount of time for keeping accounting and taxes documents, since both documents are related, it would not be possible to destroy a document that supports the other one.
Colombia welcomes foreign investment in economic sectors. There are incentives for investment in agro-industry, mining, petroleum manufacturing and exports. There are also incentives for companies opening in specific regional areas. The incentives include preferential import tariffs, exemptions and credit or risk capital from the government. Companies in free trade zones can benefit from exemptions on customs duties and VAT.
Knowledge of the tax laws, local requirements, and processes is vital for companies looking to operate in Colombia. TMF Group in Colombia has the experience assisting local and international clients. The global TMF Group network of 125 offices in over 84 jurisdictions, employing more than 7,000 qualified accountants, lawyers, corporate secretaries, HR, and other professionals.
Whether you want to establish a business in Colombia or just want help with understanding the tax environment in Colombia, talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.