The 2012 tax reform brought about major changes and a welcome introduction of henceforth missing international tax concepts. Nevertheless, there is still a fair share of uncertainty as related regulations and formal guidance are yet to be issued.
This being said, the main tax pitfalls and issues facing non-residents doing business in Colombia or using Colombian jurisdiction to structure cross-border business are:
i) Non-resident foreigners believe they do not have to file an income tax return because they have been subject to withholding tax
Frequently, non-resident foreigners believe that they are not obliged to file an income tax return because they have been subject to withholding tax. This is, however not always the case as not all withholding taxes eliminate the obligation to file an income tax return. Indeed, non-resident foreigners are not obliged to file an income tax return only when all their income has been subject to the withholding tax pursuant to articles 407 to 41125 of the Tax Code. Therefore, non-residents that have been subject to withholding tax pursuant to different articles of the Tax Code (e.g. withholding tax for payments made for machinery rentals) are still required to file an income tax return.
When a taxpayer fails to file an income tax return, the tax authority can make a tax assessment and impose a penalty for not filing the tax return. The penalty is equivalent to the higher of (i) 20% of the bank deposits or gross income of the fiscal year; or (ii) 20% of the gross income as declared in the last income tax return submitted.
ii) Non-residents who sell their investment omit the duty to file a special purpose income tax return within one month following the transaction
Non-resident are required to file a special purpose income tax return when they sell their investment in Colombia. The special purpose tax return has to be filed within one month following the transaction.
Commonly non-residents sell their investment and omit to file the mentioned tax return. When this occurs, the Tax Authority is entitled to make a tax assessment and impose a penalty for not filing the tax return. In addition, the Colombia Central Bank can reject the application to modify the registration of the foreign investment if the investor does not prove the filing of the special purpose income tax return and the payment of the corresponding tax if any.
iii) Non-residents do not analyze whether their taxable presence is constitutive of a permanent establishment under Colombian Tax Law.
The definition of permanent establishment under Colombian law does not entirely follow the one under the OECD model convention. Therefore, it is necessary for non-residents to analyze if they have a permanent establishment under Colombian Tax Law.
Sometimes non-residents do not realize they have a permanent establishment under Colombian Tax Law and consequently omit to apply transfer pricing rules, Colombian accounting standards and fail to file an income tax return. This situation empowers the Tax Authority to impose different penalties for not observing the law and not meeting accounting standards.
iv) Non-residents are not aware of the fact that Colombian Tax Law assigns liability to general commissioners, special representatives, branches and others.
Sometimes non-residents avoid paying taxes and fulfilling their formal obligations, on the assumption that the tax authorities have no recourse or other reienforcement avenues. The assumption is, however, untrue since Colombian law assigns joint and several liability to representatives of non-residents.
According to article 572-1 of the Tax Code, general commissioners and special representatives are severally liable for the payment of taxes, withholdings, penalties and interest when the taxpayer fails to pay the taxes and fulfill formal obligations.
In the same way, article 576 of the Tax Code establishes that branches, permanent establishments, subsidiaries and special agents are obliged to file an income tax return of non-resident tax payers. When they omit to do so, they will be liable for the payment of the corresponding taxes.
v) Companies are not fully aware of the subnational taxes that are levied on the development of their business activity in Colombia.
Under Colombian constitution, subnational entities are not entitled to create taxes by themselves, given that a previous act from the Congress defining the main elements of the tax is always required.
Nonetheless, recent court decisions have granted broad powers to subnational entities for determining the main elements of taxes (tax event, tax base and rate). Consequently, in some cases, depending on the municipality, a tax authorized by the National Congress could cover different events, and could have different tax bases or different rates.
In addition, there are some subnational taxes that represent by themselves great challenges for companies: a) industry and trade tax (ICA), b) public lighting tax, and c) stamp duties.
a) Industry and trade tax (ICA) is levied on the development of industrial, trade or service activities within a Colombian municipality. One of the greatest difficulties associated with this tax is the determination of the municipality that can tax the development of a business activity, given that Colombian tax law has not established express rules for determining where a business activity is deemed to be carried out.
This legal uncertainty increases the risks of discussion and litigation with subnational tax authorities.
b) Public lighting tax is generally levied on . One of the greatest difficulties related to this tax is determining when a person is potentially using the public lighting system. In some cases, subnational tax authorities have considered that the presence of a telecommunication tower in the countryside or a pipeline underground imply a potential use of public lighting system. In those cases it is absolutely arguable that the public lighting system is being used, even potentially.
c) Finally, stamp duties are generally levied on transactions entered into with governmental entities. Currently there are approximately 93 stamp duties in Colombia.
Many taxpayers are not fully aware of all the stamp duties involved in a transaction, and the economic effects related to them.