How will Colombia's Reforma Tributaria Affect us in 2023? - Medellin Advisors

How will Colombia’s Reforma Tributaria Affect us in 2023?

Reforma Tributaria Colombia 2022

How will Colombia's Reforma Tributaria Affect us in 2023?

The year 2023 begins and with it new fiscal rules in Colombia. On December 17, 2022, Law 2277 was passed by the new government of President Gustavo Petro. This seeks to obtain 25 billions pesos (approximately$5.5 billion USD) or the equivalent of 1.72% of the Gross Domestic Product of this nation. 

This whole issue of Reforma Tributaria has caused a great stir and much concern among the national population and even foreigners who live or have interests in the country. For this reason we have prepared an extensive study of the changes that are in store for this year. Join us in this special edition about taxes. 

New Fiscal Rules
Law 2277 of December 13, 2022 was a promise of the new government of Gustavo Petro

Curiously, unlike his predecessor Ivan Duque Márquez, Gustavo Petro’s Reforma Tributaria did not generate angry and violent protests in the country as it happened in 2021 In fact, it was supported in the Congress of the Republic, and even by some members of the opposition. It was approved after intense debates (122 votes in favor and 27 against). For now, President Petro seems to enjoy a honeymoon with the Colombian people. In fact, at the end of 2022 the new president maintained a solid 48% of favorability in the polls.

Reform Tax in Colombia
After intense debates in Congress, the Tax Reform was approved in December 2022

Through the Reforma Tributaria, the government promises to impose higher taxes on the richest people in the country (with income over COP 10,000,000 per month), reduce some tax exemptions, and create greater burdens for companies and certain sectors of the economy such as: the financial, oil, coal and gold sectors, the consumption of sugary drinks or ultra-processed food and plastics. 

Popularity of Gustavo Petro
Gustavo Petro maintains relatively high levels of popularity in polls to date

Let’s remember that in 2021 when Petro was leader of the opposition, he justified the protests generated by the Reforma Tributaria of the previous government. At that time, the government of Iván Duque had the goal of collecting more than 15 billions pesos, which is less than what Petro’s stated goal is. The detractors of this new reform argue that imposing more taxes on the productive sectors is not the solution to the growing fiscal deficit in the accounts of the National Government. In this sense, Senator María Fernanda Cabal, of the opposition party Cambio Democrático, has stated that the tax burden will discourage investment and will slow down the record growth figures that the country had reached in recent years.

Post reformatributaria
The government plans to receive more tax money in the coming years

Analysis of Some Indicators of the Colombian Economy

In order to understand the tax situation in Colombia, some interesting data points can be considered. First off, although Colombia has had several taxes levied on individuals and companies for some time, the percentage of tax collection is quite mediocre in relation to the size of the Gross Domestic Product, representing only 19% (see the chart below for a comparison with other countries). In reality, unlike in North America or Europe, the culture of paying taxes is not well rooted in this country. So tax avoidance and evasion is high and a real challenge for the authorities is to reduce this gap.

When analyzing GDP versus taxes, we see that Colombia is far from being one of the countries with the highest tax burden.
When analyzing GDP versus taxes, we see that Colombia is far from being one of the countries with the highest tax burden

Informality is a Giant Gap:  According to official figures, 48.2% (approx. 5.65 million) of Colombian workers belong to the informal economy. This means that they have precarious jobs without social security. A good part of them have small businesses that do not exist legally and only deal in cash. It is foreseeable that this huge mass of people will pay little or no taxes to the government for the money they receive, since formally they do not exist.

 
Colombia has high rates of labor informality as do other latin american countries
Colombia has high rates of labor informality, as do other Latin American countries
The government estimates to raise 1.72% of the GDP with the Tax Reform
The government estimates to raise 1.72% of the GDP with the Tax Reform

According to figures from the Departamento Administrativo Nacional de Estadística  (DANE) at the end of 2021, 39.3% of the people in Colombia are classified as poor. These people live on an income of 11,801 pesos per day ($2.50). Another 12.2% live in extreme poverty, with a daily income of 5,730 COP ($1.50). This does not cover the basic minimum food needs of a human being. Added to the problem of informality and poverty, there are 2.64 million people without a job, equivalent to 9.1% of people of working age. These numbers reflect that Colombia needs to improve aspects of its economy urgently. This is the only way to reduce the high levels of poverty and social inequality that exist. 

Basura nino
Unfortunately, Colombia has high rates of extreme poverty

What is The Current Situation of Personal Income Tax?

In Colombia, in theory all individuals earning a minimum monthly income of 4.4 million pesos (approximately $965), are required to declare their income to the government on an annual basis. However, with the established deductions and tax benefits, in practice only those who obtain an income of more than COP 10,000,000 (Approx. 2,195 USD) must pay this tax (see Article 2 and following of Law 2277 of 2022). 

Reformas tributarias en colombia
The tax reform establishes taxes in a progressive manner

Regarding pensioners or retirees, the income tax exemption is maintained for individuals who receive income from pensions, retirement, old age, survivors and professional risks up to 12,000 UVT, which is equivalent to COP 508,944,000 in 2023. This is good news, since the initial draft of the Reforma Tributaria proposed by the government wanted to impose a tax on high pensions and this was rejected by several sectors of the country and by the opposition in Congress. Thus, the government had to give in to these pressures.

Ancla tributaria p y
People with income over COP 10 million pesos monthly will pay income tax according to the rates in this chart

Which are The sectors Most Affected by Higher Taxes in Colombia?

For most of the companies the income tax remains at 35% (see Article 10 and following of Law 2277 of 2022). However, several exemptions that had been established in previous reforms are eliminated. This Reforma Tributaria avoided granting privileges to economic sectors, generating greater equality. Doing so would have encouraged tax evasion or deliberate tax avoidance.  One of the innovations of the law is that it establishes greater burdens on certain sectors of the economy and creates so-called carbon taxes and healthy taxes.  

Mit carbon pricing
One of the aspects of the reform is that it creates taxes on the emission of polluting gases and on junk food

As for the financial sectors (banks, finance companies, insurance companies, brokerage firms, etc.) and the mining and energy extractive industry (coal, oil, gold, etc.), a surtax of 5% is maintained. The remaining rate is 40% of their income provided that it exceeds 120,000 UVT (5,089,440,000 for the taxable year 2023, or just a bit over $1M USD). The electric sector has a tax surcharge of 3% (above the normal rate of 35% which gives it a rate of 38% in total). The raffles and lotteries sector will be taxed at a rate of 35%. Hotel services, ecotourism theme parks or agrotourism will enjoy a special rate of 15%.

Taxes corporates in colombia
Some sectors of the economy will be affected with higher tax burdens

Looking at the table above, we can clearly see how some sectors of the economy were left with higher tax burdens as result of Petro’s tax reform. Critics of Petro will surely argue that these policies hurt jobs, and any slowdown in hiring or the economy at large in the months that come could be, potentially justifiably, attributed to this reform. 

 

Fin utilidadesbancos web
Colombian banks continue to make money by charging high interest rates to customers

The service sector, which had gained momentum in Colombia in recent years, could make tourism considerably more expensive. However, Colombia has maintained the pace of sustained growth. With the exception of 2020 due to COVID19, tourism has increased in Colombia 9 of the past 10 years. Therefore, the challenge will be to compete with other markets to maintain the good pace of growth. 

 

Impuesto de Dividendos (Tax on Dividends)

Dividends are all economic income received by an individual from companies in which is a partner, shareholder or investor. The amount of the tax that you must pay will vary depending on the value of the dividends, profits or participations that you receive and also depends if you are a natural person & resident in Colombia or on the contrary if it is a natural person or company that resides abroad (see article 3 of Law 2277 of 2022). 

Impuesto de dividendos
Dividend tax is for individuals who receive money because of their investment in companies

The good thing about the Reforma Tributaria that was approved is that it maintained a 19% discount of this type of income in favor of the taxpayer that can be discounted from the liquidation of this tax. In the following chart we will see that not every change in the tax reform was a tax hike. Since in some cases the Reforma Tributaria reduces the value of the tax payable on dividends.

Examples dividendos
This example shows that not everything is an increase in the Tax Reform

It is always advisable to hire a trusted public accountant, who knows about these favorable changes in the law, to take advantage of them and avoid making mistakes and incurring penalties. 

Impuesto de Ganancias Ocasionales (Capital Gains Tax)

As for the Impuesto de ganancias ocasionales , this category includes money received from inheritances, legacies or donations and from the sale of assets owned for more than two years. The closet translation in English is capital gains, and here that tax rate is increased to 15% (from 10%). This is a particularly important increase for anyone selling Medellin real estate as, depending on the amount they have on their escritura and how much they sell for, they could be in for a serious tax bill. 

 
Regimen simple de tributacion
It is important to be updated with the new changes when calculating the payment of taxes in Colombia

 Regarding the Impuesto de Ganancias Ocasionales, a tax exemption limit is established for the profit from the sale of a house or apartment up to 5,000 UVT (212,060 millions in 2023) and if the property sold was the taxpayer’s principal residence. The exemption is up to 13,000 UVT (COP 551 millones which is around $120k USD). Those familiar with the tax system in the United States will notice some clear similarity between these rules of the Colombian tax system and that of selling property in the United States. 

 
Ganancias ocasionales
In the 2022 tax reform, the rate of taxation on capital gains was increased and some tax benefit limits were reduced.

Impuesto al Patrimonio (Wealth Tax)

According to Article 38 of Law 2277 of 2023, as of January 1, 2023 this tax is levied on the accumulation of liquid patrimony (assets minus liabilities) or savings of individuals, illiquid successions and even non-residents. With a value equal to or higher than 72,000 UVT (Approx. 3,054 million Colombian pesos). This is undoubtedly one of the most controversial issues of the reform. Experts argue that it is a double taxation, since the patrimony in essence is made up of income that most likely was already subject to income or dividend tax.  The wealth they have in Colombia and even abroad is taxed, and for non-residents, The wealth they have in the country is taxed.

Impuesto al patromonio
El Impuesto al Patrimonio hits the country's wealthiest people

Those individuals with assets over 3,000 million Colombian pesos (about US$ 695,000) would pay 0.5% and the tax rate would double to 1% for individuals whose assets exceed 5,174 million (about US$ 1,157,000). There is a rate of 1.5% for assets over 10.135 million. This tax will be applicable until 2026. Individuals may exclude up to 508.944 million of patrimonial value of the house or apartment used for habitation. But all other assets should be considered. For this reason, many wealthy Colombians have started to sell assets here in Colombian and move them abroad where the DIAN and Colombian Government is less likely to be able to measure them. 

Impuesto de Timbre Nacional

Another new tax that affects the costs of the real estate sector in a certain way is the so-called Impuesto de Timbre, which, according to the new tax reform, will be levied on public deeds through which real estate is sold in Colombia at a rate of one point five percent (1.5%) for properties whose value is between 20,000 UVT (COP$848,240,000) and 50,000 UVT (COP$2,120,600,000), according to Article 77, paragraph 3 of Law 2277 of 2022. Likewise, a 3% tax rate is established for properties whose value exceeds 50,000 UVT (COP$2,120,600,000). As of February 2022 the notaries have not started collecting this tax; it is included in the reform but the actual rollout and collection of the tax is to be determined. 

Impuesto de timbre ranges
This table calculates the different ranges for the new 'Impuesto de Timbre'

Is it a Good Time To Buy a Property in Colombia?

In the normal course of a week I get asked this question a handful of times and my answer is always the same. The appreciation in terms of local currency is essentially guaranteed. The returns are very strong as rental demand is through the roof. The wildcard for many potential investors is the Petro Government and some of the changes that he may make during his tenure. We hope this article provides useful examples to help readers understand what is being proposed and codified into law. It is undoubtedly a shift to the left economically, as taxes and social benefits are set to increase. However, the changes are not drastic to the point where I believe they’ll cause serious disruptions in the growth of the economy here. 

Collage reforma t
Despite the uncertainties, Colombia continues to be very attractive for investment from around the world

This perfect global storm, shows that Colombia continues to be an excellent option to receive investments from all over the world. Let’s also remember that the exchange rate of the Colombian peso vs dollar or Euro, is highly convenient for investors. According to official figures, the Colombian currency devaluated by 18.9% in 2022, this cheapens the cost of buying homes for expatriates. So if your money is in a stronger currency than the Colombian peso. You really don’t have to worry so much. 

 

Why has Petro's Government Started by Raising Taxes?

It is normal for the new government of Gustavo Petro to seek more money to cover the enormous public spending proposals (405.7 billions pesos in 2023) and to bring his electoral proposals to reality. He knows that there are fewer certainties in the global economic outlook, so he must ensure that he can keep the ship afloat despite the storms that could be on the horizon.  

 
Reforma tributaria
The government seeks to raise more money by collecting more taxes to cover the fiscal gap in the national budget

Regarding the protection of foreign investments, Colombia has free trade agreements as well as agreements to avoid double taxation with many countries around the world. Therefore, we consider that there are adequate protection mechanisms in place. Gustavo Petro is a democratically elected president. So there is full application of the laws and adequate political control by the Congress of the Republic. Gustavo Petro is touching economic interests of large monopolies and privileged sectors, that ruled the country for more than three centuries. It is logical that they are now fierce detractors as he seeks to interrupt the status quo. 

Inversionextranjeradirecta
Colombia is a very attractive country for foreign investment

Payment of taxes is an obligation of taxpayers in any country in the world. It serves to finance public spending and contributes to the redistribution of wealth. Doing so in Colombia is no exception. Certainly, the new taxes and the elimination of tax benefits and exemptions are a difficult blow to assimilate, especially for society’s wealthiest – including the business and upper classes. 

Reform taxes
Paying taxes is a duty in any country in the world

Some Conclusions About Petro's Tax Reform

1. A natural person earning more than COP 10,000,000 per month will pay more taxes because they will have less tax benefits and deductions to choose from. It increases the progressivity of the tax system in Colombia.

2. A natural person who has wealth of more than three billions pesos (discounting debts) will pay a wealth tax – another progressive element.

3. A natural person with income of less than COP 10,000,000 will pay less income tax than today if they have dependent children, parents or grandparents. A natural person will be able to reduce his income tax for each electronic invoice he presents for his purchases.

4. For the first time, sugary drinks, ultra-processed food and single-use plastics will pay an extra tax. Taxes are increased for the financial, mining and oil sectors. These are considered health and green taxes and have been gradually rolled out in many other jurisdictions.

5. The mostly likely impact of the Tax Reform on the Real Estate sector is the increase of ganancias ocasionales from 10% to 15% and the likely imposition of an Impuesto de Timbre which will be charged for properties over a certain amount, as described above. 

Questions, comments? Contact me today and I will be happy to discuss any of these issues further with you. 

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