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Tax modifications in the pipeline

Colombia's minister of finance has presented a draft bill to congress "by which new taxes are established, the Tax Code is amended and other regulations are issued". The bill proposes an important new tax reform and includes, among other things: (i) the extension of the 2/1000 tax on financial transactions; (ii) a progressive reduction of the corporate income tax rate down to 32%, as well as a reduction of the income tax rate applicable to individuals; (iii) some restrictions on the income tax deductibility of gifts; (iv) a modification of the withholding tax rate on consulting services, commissions, independent services and services in general; (v) anti-avoidance measures; (vi) measures relating to improving the collection of taxes; and (vii) the introduction of a new substitutive tax (impuesto sustitutivo) that would apply to certain small taxpayers developing commercial, industrial or services activities.

In addition to the above measures, the draft bill also includes two changes that may have an impact on foreign investment in Colombia.

The first measure is an amendment to the article 240-1 regime of the Tax Code which provides the possibility of taxpayers entering into a contract of tax stabilization with the local tax administration. If, under the present regime, this type of contract does not protect taxpayers from any change within the tax base for income tax purposes, under the new regime the contract will cover not only an increase in the tax rates, but also amendments to the tax base, as well as protection ahead of mandatory investments. This type of agreement will have a five-year term.

It must, however, be noted that the new tax stabilization regime, as proposed in the draft bill, only applies to the extent that during the term of the contract, the taxpayer shows for every tax year an increase of net income tax equivalent to the CPI plus 15 points.

The second measure contemplates the implementation of transfer pricing regulations (precios de transferencia). These will apply to domiciled or non-domiciled, individual or corporate taxpayers. With respect to the key notion of related parties (vinculados economicos), the proposed bill refers to the existing provisions of the Commercial Code and Tax Code, while the comparison methods are basically the standard methods suggested by the OECD. The important point is that taxpayers will be able to enter into transfer pricing agreements with the tax administration.

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