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Legal Bulletin

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TAX ACCOUNTING WILL BE BASED ON INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) STARTING TAXABLE YEAR 2017

The bill includes a comprehensive reform on how corporate taxpayers shall realize all items of income, costs, expenses, assets and liabilities in their income tax returns, introducing new realization and recognition rules under IFRS but still allowing some book-to-tax reconciliations.

DISTRIBUTION OF DIVIDENDS WILL BE TAXED IN ALL CASES

The tax reform bill proposes the taxation of dividends distributed as of taxable year 2017.

THE INCOME TAX FOR EQUALITY —CREE TAX— IS REPEALED AND THE CORPORATE INCOME TAX RATE IS MODIFIED INCLUDING A TEMPORARY SURCHARGE

The CREE Tax disappears from 2017 onwards. The general corporate rate would be 32% from tax year 2019, and a surcharge on income tax would be created for years 2017 and 2018. The combined rate for 2017 between income tax and the surcharge would be 39%.

NO CHANGES ARE PROPOSED FOR LONG-TERM CAPITAL GAINS TAX

Long-term capital gains (“LTCG”) subject to 10% would be maintained. LTCG treatment applies to profits derived from the sale of fixed assets held for two (2) years or more, liquidation of companies that have been incorporated for more than two (2) years, among others.

THE TAX REFORM BILL INCLUDES INTERNATIONAL ACCOUNTING STANDARDS FOR COMPUTING THE INCOME TAX ON CONCESSION CONTRACTS OR PUBLIC PRIVATE PARTNERSHIPS (PPP)

Contracts that incorporate construction, administration, operation and maintenance phases will apply the intangible assets model of the accounting regulatory technical frameworks.

TAX REFORM BILL SEEKS TO INCREASE THE INCOME TAX IN FREE TRADE ZONES (FTZ)

The tax reform bill would increase the combined income tax rate for FTZ users in at least seven percentage points.

MODIFICATION TO ADJUSTMENTS FOR CHANGES IN EXCHANGE RATES

Fluctuations in assets and liabilities held in foreign currencies would have tax effects only after the asset is disposed or the liability is totally or partially paid.

PREFERENTIAL TAX RATE OF 9% FOR INCOME OBTAINED BY HOTELS AND ENTITIES BENEFITING FROM LAW 1429, 2010 —LAW FOR EMPLOYMENT CREATION AND FORMALIZATION

Under current law, these items of income are subject to an exemption or to progressive tax rates.

CHANGES IN THE COMPUTATION OF INCOME, COSTS AND EXPENSES OBTAINED THROUGH TRUSTS

The proposed legislation includes an amendment to section 102 of the Tax Code that clarifies some aspects of tax computing regarding income obtained through trusts.

INTRODUCTION OF NEW FORMAL REQUIREMENTS TO JOINT VENTURE AGREEMENTS

Joint venture agreements, consortiums, temporary unions and silent partnership agreements maintain their conditions as non-taxpayers for income tax purposes but acquire new formal obligations before DIAN.

POSSIBLE INCREASE TO THE NOMINAL INCOME TAX RATES FOR INDIVIDUALS

The nominal rates would rise progressively to 35%. Income tax rate schedule of individuals would go between 0% and 35%. The reform bill seeks to implement six (6) different brackets according to the monthly income computed in Tax Units (each Tax Unit is approximately USD 10). Under the current law four (4) rates ranging from […]

CHANGES TO THE INCOME TAX WITHHOLDING SYSTEM FOR EMPLOYEES

The withholding tax rates for labor payments would vary between 0% and 35%.

INDIVIDUALS WILL PAY INCOME TAX DEPENDING ON THE TYPE OF INCOME THEY RECEIVE

Alternative systems for determining individual’s income tax liability (IMAN and IMAS) will disappear, with the introduction of a system of computation by categories depending on the characterization of the item of income.

INDIVIDUALS EARNING A MONTHLY INCOME GREATER THAN USD$900 SHOULD FILE INCOME TAX RETURN.

This may increase the number of individual taxpayers filing tax returns by reducing from 1400 to 1000 Tax Units the minimum total income threshold to file the return.

THE GENERAL RATE OF VAT WILL BE INCREASED TO 19%

In addition to increasing the general rate of VAT from 16% to 19%, some exemptions and exclusions will be modified.

SALES OF NEW RESIDENTIAL REAL ESTATE WILL BE SUBJECT TO VAT STARTING FROM 2017

Sale of new residential real estate worth more than 26.800 UVT (COP$ 797.380.400) would be subject to 5% VAT.

SALES OF INTANGIBLE ASSETS WILL BE SUBJECT TO VAT

The sale of intangible assets would be taxed with VAT at a rate of 19% on the price.

VAT ON E-COMMERCE SERVICES RENDERED FROM ABROAD

Digital services rendered abroad by foreign entities or non-resident individuals would be subject to VAT withholding when paid through Colombian-issued credit or debit cards.

STARTING FROM 2017 THE TAXABLE PERIOD OF VAT WILL BE MODIFIED

The reform will reduce the different taxable periods of VAT to two: bi-monthly and quarterly.

CHANGES TO WITHHOLDING TAX SCHEDULES FOR OUTBOUND PAYMENTS

The reform bill includes the unification of withholding tax rates, creation of a new withholding tax rate for capital gains, and new tax rates for outbound payments.

CHANGES TO THE TRANSFER PRICING RULES, NEW REPORTING OBLIGATIONS AND CHANGES TO THE PENALTY REGIME

A special treatment is proposed regarding the Comparable Uncontrolled Price Method; the preparation and filing of the global information of the multinational group and Country-by-Country reporting according to BEPS standards. Also, changes to the penalty regime are included.

COLOMBIA WOULD IMPLEMENT CONTROLLED FOREIGN CORPORATION RULES TAXING PASSIVE INCOME

The passive income obtained through foreign investment vehicles will be subject to taxation in Colombia in head of the Colombian controller.

NEW TAX PROCEDURES AND PENALTIES RULES

DIAN would be authorized to issue a Special Notice of Deficiency as a mechanism to define and settle taxes and penalties for a taxpayer with unfulfilled obligations.

NEW GENERAL PROCEDURE FOR THE DETERMINATION OF TAX ABUSE

The Government proposes to establish criteria to re-characterize or reconfigure tax abusive operations, and defines a special procedure to do so.

TAX PENALTIES WOULD INCREASE

The Government proposes to increase the penalty for deficiency from 160% to 200%, and new penalties would be create

CHANGES IN THE STATUTE OF LIMITATIONS FOR ASSESSMENT AND COLLECTION OF TAX RETURNS

The Tax Administration will have broader terms to exercise its audit powers over taxpayers.

ESTABLISHMENT OF MANDATORY DISCLOSURE RULES FOR AGGRESSIVE TAX PLANNING STRATEGIES

This will enable DIAN to obtain information from aggressive tax planning structures that involve a risk of base erosion and profit shifting.

PROPOSAL TO INCLUDE THE CRIMINAL OFFENCE OF TAX EVASION

The Government proposes to create a criminal offence of tax evasion, which will involve a prison term of four (4) to nine (9) years and a fine of 20% of the omitted, missing or inaccurate value in the income tax return.

A NEW NATIONAL REGISTRY WILL BE CREATED FOR ENTITIES WISHING TO ACCESS TO THE SPECIAL TAX REGIME OF NON-FOR-PROFIT ORGANIZATIONS

Entities should seek to qualify before DIAN in order to apply the special tax regime, and also must fulfill new reporting obligations online and before the Chamber of Commerce.

ALTERNATIVE METHOD TO DETERMINE UNJUSTIFIED EQUITY INCREASES OF QUALIFIED ENTITIES BELONGING TO THE SPECIAL TAX REGIME

Entities that are part of the special tax regime will be subject of the income tax determination mechanism by equity comparison.

PAYMENTS TO INDIVIDUALS RELATED DIRECTLY OR INDIRECTLY TO THE NON-FOR-PROFIT ENTITY COULD LEAD TO THE EXCLUSION OF THE ENTITY FROM THE SPECIAL TAX REGIME

Payments made in favor of founders, managers, donors, family members among others, which own more than 30% of the entity, will be considered as an indirect distribution, and thus the entity could be excluded from the special tax regime.

NEW ACTIVITIES WILL BE ESTABLISHED FOR BELONGING TO THE SPECIAL TAX REGIME OF NON-FOR-PROFIT ENTITIES

The list of activities subject to the special tax regime is extended to new activities.

TAX ABUSE FOR NON-FOR-PROFIT ENTITIES

The Government proposes establishing a special anti-abuse rule for qualified non-for-profit entities.

CREATION OF THE SINGLE TAX FOR SMALL RETAIL BUSINESS AND OTHER NEW TAXES

The Single Tax, the Sugary Tax and the Carbon Tax would be created as national taxes.