Assessing the most recent changes to tax legislation

It has been just over a year since the tax reform embodied in Law 1607/12 was applied, and the results so far are not completely satisfactory. First, there is a feeling of deception among taxpayers in the sense that the objectives proposed by the state in the fourth quarter of 2012 were not adhered to by the government itself. Initially, the tax reform package was “sold” to the public as a way to reduce the tax burden by making the tax system more efficient. In practice, what taxpayers found was not only that there were now more rules and articles than before, but also that the tax burden was not reduced because new taxes were incorporated into Colombian tax legislation, namely the income tax for equality (CREE), consumption tax and gas tax.

Equality Tax

The CREE was created for legal entities as a way to offset the eight percentage point reduction in the corporate tax reform (from 33% to 25%). Although, the payment of the CREE was supposed to represent a savings in payroll taxes, this did not compensate for the administrative and financial difficulties of having to assess a new tax and to perform the compliance obligations related to it.

In addition, legal entities were not the only ones affected by the new rules. Individuals were astonished to realise that many of them were now obliged to pay taxes, which was contradictory to the message sent by the government back in 2012, when it stated that higher taxation was going to be applicable only to those with ability and resources to pay more, considering that the government lowered the threshold to became an income taxpayer. Along with the introduction of two new methods to assess the basis for individual income tax, this has resulted in a higher tax burden for all individuals.

Clarity Needed

Second, the enforcement of Law 1607 did not prove as easy as it was intended to be, bearing in mind that the rules established by it brought additional doubts and misunderstandings rather than simplifying the tax regulations already in force. This situation was caused by the fact that the implementation of Law 1607 required several clarifications, which prompted the government to issue a number of decrees during the course of 2013 to explain the “spirit of the law”. However, the government’s efforts have not yet been sufficient, and even today taxpayers are not clear on the rules applicable to determine the taxable basis of the CREE.

Although the intention behind the reform was to simplify the tax system so that it was more coherent, the results, unfortunately, seem to drift away from that ideal. Today, taxpayers find it harder to meet their tax obligations due to the new rules and the lack of appropriate guidelines from the authorities.

Missed Targets

Third, it must be noted that one of the main goals proposed by the government was to increase tax collection. However, based on final numbers for 2013, it appears that despite the creation of a new tax and an increase in the taxpayer base, the state did not collect the amount expected, although it is still measuring the reform’s impact.

Setting Standards

On a positive note, law 1607/12 was a first step towards the adoption of international standards and practices, by introducing into Colombian tax legislation the notion of permanent establishment and thin capitalisation rules. Nonetheless, there is still significant work to be done and 2014 looks set to be a year in which the government will try to redeem itself by trying to amend the tax reform so that it accomplishes its original purpose. Finally, it has to be said that considering all of the complications that the last tax reform has generated since its introduction, it is possible that a further tax reform will be enacted in 2014 in order to clarify matters, and thus it is recommended that some tax principles or a tax code be created to simplify the tax regime and reduce tax informality.