President Santos Formally Presents Proposed Law of First Employment
President Santos formally presented Congress with his proposed “Law of Formal Employment,” which is a bold attempt to increase employment in the formal economy. As I explained in my post on the new “Law of First Employment,” the bill will create incentives (tax breaks, financing options, and the like) to encourage creation of small businesses by, and first time employment (including “telework”) of: youths under age 28; certain technical professions, the agricultural industry; women under 40; and in three specific states. The law also aims to cut red tape and simplify labor-related procedures.
To simplify business procedures, the bill offers major revisions to simplify corporate insolvency law (Law 1116 of 2006) and speed up bankruptcy resolution (see my post on the bankruptcy law reforms and see my translation of the bankruptcy law reform proposal.)
Why The Colombian Trade Agreement Will Go To Congress This Year
During his crucial five-day trip to Washington, D.C. recently, Colombia’s Vice President Angelino Garzon, a former organized labor leader, had to struggle for attention. The week was dominated by the State of the Union address and by other international news – the fall of the Tunisian government, and mass demonstrations threatening the Mubarak government in Egypt. There was also a devastating mine explosion in Colombia that killed 21 miners. Garzon persevered, however. He met a wide array of officials as well as students and human rights groups. The outlook for the US-Colombia Trade Promotion Agreement has improved, and a vote in Congress this year looks like it will happen.
In the Constitutionally mandated annual State of the Union address, President Obama pushed hard for immediate passage of the US-Korean trade agreement, but his mention of the Colombian and Panamanian agreements was anemic and cryptic by comparison. Obama’s cryptic promise? He would pursue the Colombian trade agreement — IF it “keeps faith with American workers and promotes American jobs.” It was anemic, with no timeline and no clarity on where the President stands.
The beltway debate on trade is whether to hold out for more improvements in Colombia or to reward and reinforce progress. No one questions Colombia’s security improvements, dramatically reduced violence, regional leadership against drug trafficking, and rapidly improving economy. Everyone expressed sympathy for the hundreds of victims of recent flooding and the dozens killed in a coal mine blast this week. Those factors strengthen the relationship.
The trade debate rages within the Obama administration as well as outside it. This week, GE Chairman and CEO Jeffrey Immelt agreed to chair Obama’s Council on Competitiveness and promptly called for trade agreement approvals, saying “Those who advocate increasing domestic manufacturing jobs by erecting trade barriers have it exactly wrong.” Less than fully enthusiastic, Secretary Clinton said that Colombia “knows what it needs to do” for passage of the trade agreement.
After meeting with Garzon, Vice President Biden backed sending the trade deal to Congress this year. Secretary Clinton too said there would be a vote this year, but only barely elaborated on the conditions needed for approval in her press conference with Garzon (excerpted below, omitting the Egypt talking points and Q&A). This is her strongest statement yet that Congress would get to vote this year on the agreement, which has deep Republican support and support from moderates such as Rep. Steny Hoyer, the no. 2 Democrat in the House.
Outside the Administration, the US Chamber of Commerce updated its list of who in Congress supports the US-Colombian agreement. Senate Finance Committee Chairman Max Baucus of Montana was in Colombia this week. Baucus called for a prompt vote on the deal. Even Michigan Democratic Congressman Sander Levin, ranking member of the House Ways & Means committee and an opponent, softened his position this week. Levin now sees “a real opportunity” to pass the agreement.
Human Rights Watch Americas softened its opposition somewhat, in an open letter to Garzon and in its annual report chapter on Colombia. While noting the persistent problems it also praised the significant shift in government attitudes and policies in Bogotá. HRW pointed out Santos’ rapid accomplishments such as new laws providing land to the displaced, compensation to victims of state violence, and respect for an independent judiciary, but said that “‘concrete results remain to be seen.” The Washington Office on Latin America, however, emphasized that Obama is skipping Colombia on his Latin America tour this spring, which says everything about its view of the prospects for the trade agreement.
These and other human rights groups hold back praise for their own credibility — and for leverage, but leverage for what? These groups now have unprecedented high-level access and cooperation. Results will only be measured over time (how much time?), but the policy and personnel changes are real. If they are not rewarded and reinforced, then they are weakened. It’s time to shift to a pro-trade agreement position in order to continue to better the lives of all Colombians and instill the democratic and middle-class values that help crowd out those who would commit atrocities.
Colombia’s domestic economy is “roaring” with “strong” industrial production and “stunning” retail sales, according to Bulltick Capital. America’s Quarterly called the merger of Colombia’s stock exchange merger with Chile’s and Peru’s a “milestone for hemisphere finance, economic confidence.“ The Heritage Foundation’s Economic Freedom Report this week cited Colombia as the most-improved country in Latin America, and tenth most improved in the world.
America’s Quarterly also reported this week that the Colombian trade deal is “inching” forward. My judgment is that is correct, but weak. The fundamentals are all there for passage this year, and businesses should launch a full-throated push for approval now.
On the US side, the emphasis is all about jobs; trade and exports are overwhelmingly important. Personnel and attitudes in the Obama administration have shifted remarkably to the center just since November. Colombia’s trade agreement opponents in the Administration have lost ammunition because President Santos’s election and numerous quick achievements convincingly demonstrate concrete progress. Santos’s designation of the labor leader Garzon as his Vice President and Washington point-man was a savvy move to put these issues in the past and catapult Colombia forward. Garzon did pretty well in Washington this week against enormous challenges just for time and attention. Garzon smartly engaged a wide selection of the constituencies with whom dialogue and trust are essential — he did not just rally supporters. All of this bodes well for finding a way to finalize the agreement package and send it to Congress this year. The “High Level Partnership Dialogue” in Bogotá this March presents the opportunity to cement the agreement.
Prompt action is needed, too. This week, peaceful Switzerland approved a Colombia trade agreement, joining the EU, Canada, and the Southern Cone countries that are now displacing US exports to Colombia.
* * *
Here are the Clinton-Garzon press conference excerpts with my commentary:
January 28, 2011
SECRETARY CLINTON: Good morning. I am very pleased to be here with Vice President Garzon of Colombia on his first visit to Washington as vice president. Before discussing the important matters that were part of our meeting, I would like to say something about the unfolding events in Egypt….
Now there is a great deal of concern also in our government, Mr. Vice President, about the mining disaster that killed 21 miners in Colombia. And we will have our translator translate these remarks about Colombia as we go along.
I know that President Santos cut short his stay at the World Economic Forum to join the families of these victims. And I would like the people of Colombia to know they are in the thoughts and prayers of all Americans not just for the mining tragedy, but for the terrible flooding that in the past two months has claimed more than 300 lives, affected more than 2 million people and incurred billions of dollars in reconstruction and clean-up costs.
The Vice President and I had a very productive, wide-ranging discussion on many important issues, and we reaffirmed the resilient, enduring partnership and friendship between our peoples. We share common values and a respect for democratic governance, the rule of law, and self-determination. And the United States has stood with Colombia for more than a decade as they take on security challenges. We’ve made considerable progress together, but we have more work to do on security and other issues. That is why we are hosting the second round of the U.S.-Colombia High Level Partnership Dialogue in March, where we will cover so many of these issues. We are committed to a very broad discussion of issues, from sustainable energy to human rights. And as President Obama said in his State of the Union address, we are committed to a successful conclusion and ratification of the U.S.-Colombia Trade Agreement. And I look forward to working with the vice president and members of the Colombian Government to bring that result about.
I also commended the vice president and the Santos administration for the progress that is being made on resolving long-term disputes having to do with displaced people in the country and reaching out to civil society to add their voices to a national conversation about human rights and labor rights. And I want to thank Colombia for their assistance to other countries in the fight against drug traffickers and criminal organizations, their assistance to the people of Haiti and of Afghanistan and in so many ways the leadership that Colombia is showing in helping to solve difficult issues.
We look forward to continuing and close cooperation, Mr. Vice President.
VICE PRESIDENT GARZON: (Via interpreter) Thank you so much Mrs. Hillary Clinton, Secretary of State of the United States. I want to say on behalf of the Government of Colombia and very especially on behalf of President Santos, I would like to express our thanks to you, Mrs. Clinton, and to President Obama for the solidarity of your government and your people to the people of Colombia on the occasion of the recent floods and in particular the recent mining tragedy, which has cost 21 lives, has left several injured in the area of Santander in our country.
And in our broad-ranging discussions today, we have agreed, among other things, to work together to defend fundamental rights of humankind, the human rights that affect all of us, in particular, labor groups, indigenous groups, women’s groups, and others. And we have also agreed to continue to work and cooperate with all countries to combat organized crime, in particular, transnational crime, which includes drug trafficking, which is – which attacks our democracies.
In our dialogue, we have expressed our gratefulness for the political will of the United States Government and, in particular, President Obama and Secretary Clinton to find all paths necessary to achieve ratification of the free trade agreement between Colombia and the United States. It is an agreement that helps the people and the Government of Colombia, and it also helps the people and Government of the United States. And we also greatly appreciate the willingness of the U.S. Government and the U.S. Congress to extend the Andean Trade Preferences Act, not just to the region, but to Colombia in particular, this is a sign of great solidarity at a time when we are busy with the reconstruction of our country after the devastating floods.
And we also agreed to redouble our joint efforts along with Secretary Clinton and President Santos Calderon regarding Haiti, to support the people of Haiti in their quest to elect, freely and fairly, their own leaders. And we will consolidate our high-level dialogue, a dialogue that we began last year between the United States and Colombia. This has been headed by Secretary Clinton.
We will be strengthening our programs, our – to discuss issues ranging from all kinds of progress in democracy, human rights, new technologies, energy, and also one that we have added after our dialogue today – the environment. And on behalf of the Government of Colombia, President Santos, and the people of Colombia, I want to thank you very much for recognizing the progress that Colombia has made as a developing country to consolidate itself as a modern state in combating corruption, violence and impunity, and upholding human rights.
MR. CROWLEY: First question, the Associated Press.
QUESTION: Yes, Madam Secretary. Excuse me, I have two rather direct questions to ask you about Egypt….
MR. CROWLEY: (Off-mike.)
QUESTION: Madam Secretary, two points. The first one is: (inaudible) Vice President Garzon asked two days ago the Obama Administration to send this year to Congress the Free Trade Agreement. With all due respect, is the – you – Obama Administration going to do that, yes or no?
SECRETARY CLINTON: Yes.
QUESTION: This year?
SECRETARY CLINTON: Yes.
QUESTION: Okay.
QUESTION: When?
SECRETARY CLINTON: When we have an agreement. There are still negotiations[i] that are taking place. And as the vice president and I discussed, when we have an agreed-upon text, we will, as quickly as possible, send it to the Congress.
QUESTION: (Inaudible) time (inaudible)?
SECRETARY CLINTON: It is not yet in the form of agreement that we have been discussing with our Colombian counterparts. They know what we need to do in order to get a successful outcome. We don’t want to send an agreement just for the sake of sending an agreement. We want to send an agreement and get it passed.
QUESTION: What –
QUESTION: So you want to change the agreement” I mean, to –
SECRETARY CLINTON: We are discussing about some clarifications and some concerns that we know will have to be addressed in the Congress. I mean, I’m just being very clear with you. We want to pass the agreement. In order to pass the agreement, we have to be able to make the case to the Congress, and that is what I am intent upon doing.
QUESTION: (Inaudible) –
SECRETARY CLINTON: Excuse me, this gentleman has the microphone.
QUESTION: No, I have a second question. In Colombia, a sector of the public opinion –
QUESTION: (Inaudible.)
QUESTION: Yes.
(Pause during interpretation.)
VICE PRESIDENT GARZON: (Via interpreter) I want to stress what’s really important and basic here. I want to point out the great political will of President Obama, the Secretary of State, and of the U.S. Government and members of Congress from both sides of the aisle to move as soon as possible to achieve ratification of this agreement. I think that’s the most important thing.
SECRETARY CLINTON: And we agree, and that’s why we want to proceed as quickly and effectively to guarantee success as possible.
MR. CROWLEY: Thank you very much.
SECRETARY CLINTON: Thank you.
The Antitrust Review of the Americas 2011, by Brigard & Urrutia
The Antitrust Review of the Americas 2011
Published by Global Competition Review in association with Brigard & Urrutia, Bogotá
In a very careful and detailed piece, the lawyers of Brigard & Urrutia published near the end of last year an excellent overview of the evolving law of competition in Colombia, which was significantly reformed in mid-2009 (see my review of the new law from September 2009). Here is a start – follow the link to read the entire report.
Colombian antitrust laws and regulations have been enacted and issued in furtherance of article 333 of the political constitution. Pursuant to said article, the government is required to intervene in the Colombian economy in order to prevent unfair competition and anti-competitive conduct, and to ensure free and fair competition in all the local markets.
The legal framework governing antitrust matters in Colombia has two main sets of rules, ie,
• Law 155/59 sets forth the basic principles governing the Colombian antitrust and competition regime; and
• Decree 2153/92 determines the basic structure, scope of authority and powers of the competition authority and sets specific
rules governing anti-competitive conducts.Law 155/59 and Decree 2153/92 have been recently amended by Law 1340/09, which was enacted with the purpose of updating certain aspects of the existing framework and improving the Superintendence of Industry and Commerce’s (SIC) ability to enforce the existing laws and regulations.
Lewin & Wills Announces Colombia Tax Flash® 2011, Comments on Colombia’s Latest Tax Reform for FY2011
The end of the year brought news of the 2011 Tax Reform Act in Colombia. Adrian Rodriguez sent this fast and thorough analysis in Lewin & Wills’ Colombian_Tax_Flash®.
By: Adrian F. Rodriguez, Partner – arodriguez@lewinywills.com
On December 29th, 2010 the 2011 Tax Reform Act No. 1430 was enacted, adopting material changes to the current Colombian tax framework. In addition to the national level income and VAT taxes, this act adopts many other important changes in the national net-worth and bank debits taxes, and in certain aspects of local (territorial) taxes, among other changes and measures to increase tax collections.
Please bear in mind that this document presents a selective summary of this tax reform for informational purposes only and it is not intended to be a detailed and comprehensive dissertation of all the topics found therein. Therefore, it is advisable that the readers do not exclusively rely on this document and thoroughly review the measures and changes that could affect them, seeking qualified advice from professional tax attorneys admitted to practice law in Colombia.
The topics of the 2011 Tax Reform Act No. 1430-2010 featured in this issue are: (1) the immediate elimination of the 30% FAID special income tax deduction (as defined in §1, P.2, herein below); (2) the adoption of a 14% withholding tax on certain cross-border financings; (3) the changes to the “one-time” net–worth tax assessable on January 1st, 2011; (4) the unexpected adoption of the 25% surcharge on this 2011 net-worth tax and the adoption of this tax for taxpayers with gross net-worth between USD $500k and USD $1.5m, among other related measures adopted in the year-end “Economic Emergency” decrees; (5) the adoption of an advanced collection “self-withholding tax” on hydrocarbons and minerals exports of up to 10%; (6) the elimination of the zero-rated VAT regime for “intermediate services in the production line” for hydrocarbons and mining export activities; (7) the elimination of the special transfer pricing regime for mining activities; (8) the reduction of penalties in transfer pricing compliance; (9) the amendments to the current statutory foreign tax credit regime for Colombian income tax taxpayers; (10) the changes introduced to the Bank Debits Tax and its progressive sunset scheduled for 2018; and (11) the temporary availability of penalties and lateness interest rebates in national level tax debts.
In matters of taxation the Colombian Congress had a prolific year-end and in addition to Tax Reform Act No. 1430-2010, many other changes were introduced in other pieces of legislation enacted last December, which are not featured in this issue of Colombian_Tax_Flash®.
part of this document is prohibited without the prior written consent of one of the partners of Lewin & Wills.
(1) Immediate Elimination of the 30% FAID Special Income Tax Deduction for all Taxpayers. –
The 2011 tax reform act adopts an immediate elimination of the “popular” 30% Fixed Assets Investments Income Tax Deduction (“FAID”), beginning January 1st, 2011.
Subject to eligibility, for FY2010 income taxpayers are entitled to deduct 30% of their investments in tangible fixed assets used in their income producing activity. Although the percentage varied from 25% to 40%, this deduction was available since FY2003 for both purchased and manufactured (or built) assets, and for both new and used (second-hand) assets. Leased assets were also eligible for this incentive, provided that the taxpayer exercises the irrevocable purchase option in the corresponding agreement. Certain rules and restrictions were applicable (For more information on the creation and evolution of the FAID, see: Colombian_Tax_Flash®: July 2004, yr. 1 – No. 2; November 2006, yr. 3 – No. 7, P.1 [unnumbered item 2]; January 2007, yr. 4 – No. 8, P.2 [unnumbered item 5]; April 2007, yr. 4 – No. 10, P.2 [unnumbered item 6]; October 2007, yr. 4 – No. 12, P.1 [unnumbered item 2]; August 2008, yr. 5 – No. 15, P.2 [unnumbered item 3]; September 2009, yr. 6 – No. 17, P.1, §§2(b) and 2(c); March 2010, yr. 7 – No. 18, P.2, §(b), all found in the Publications tab at: www.lewinywills.com).
Although the change originally proposed by the Colombian Government was the immediate elimination for the hydrocarbons and mining industries and a progressive elimination for all other sectors, the Colombian Congress opted for the immediate elimination of the FAID for all sectors.
Interestingly, the Lawmaker in the 2011 tax reform act provided that any income tax taxpayers that included the 30% FAID in a Legal Stability Agreement (hereinafter “LSA”) filed for before November 1st, 2010, will be entitled to benefit from the 30% FAID for up to three-years. The Lawmaker was silent with respect to those taxpayers with LSAs already executed (vis-à-vis those filed for) that also included the 30% FAID; will they continue to benefit from the 30% FAID for the term of the duration of the corresponding LSA or will this benefit also be limited to a 3-year term? This should be carefully analyzed on a case-by-case basis, as it is likely to be a controversial issue.
As a reminder, since their adoption on 2005, LSAs have become important tools for eligible investors and companies in Colombia seeking to prevent future changes in selected features of the Colombian legal and tax framework, that they consider key to their investments and business activities in the country (see: Colombian_Tax_Flash®, September 2009, yr. 6 – No. 17, P.3, §5, found in the Publications tab at www.lewinywills.com).
(2) 14% Withholding Tax on Certain Cross-border Financing Facilities. –
Pursuant to the 2011 tax reform act and unless otherwise provided for in the applicable regulations, interest payments on certain inbound cross-border “Qualified Credit Facilities” and “Qualified Leasing Transactions” (both as defined further below), shall be subject to a 14% withholding tax. If the 14% withholding tax is not applied, the Colombian payor cannot deduct the corresponding interest payment, without prejudice of its joint and several liability for the tax that was not withheld.
For over 25 years, the Colombian income tax regulations privileged interest payments on certain Qualified Credit Facilities and Qualified Leasing Transactions, by deeming such payments as income not from a Colombian source thus not subject to Colombian Withholding Tax. If the cross-border inbound financing was not qualified or otherwise exempted, the corresponding interest payments were subject to a 33% withholding tax.
Under the previous regime, the following cross-border inbound financings were deemed Qualified Credit Facilities and eligible for the withholding tax-free treatment:
(a) Short-term bank overdrafts and imports short-term financings (without any changes in the 2011 tax reform act).
(b) Exports financings or pre-financings (without any changes in the 2011 tax reform act).
(c) Financings contracted abroad by Colombian financial institutions (in the 2011 tax reform act, Congress adopted certain modifications to this item to include Bancoldex and other financial type entities).
(d) Financings for foreign trade operations contracted through Colombian financial institutions (in the 2011 tax reform act, Congress adopted certain modifications to this item to include Bancoldex and other financial type entities).
(e) Financings with foreign financial institutions, which funds were destined to a “Qualified Activity.” Qualified Activities were those that according to the directives of the Colombian Council for Social and Economic Development (CONPES), were deemed of public interest for Colombia’s social and economic development, which included all activities related to the primary, manufacturing and services sector, including transportation, engineering, lodging, tourism, health, trade, and housing construction.
Under the new regime, item (e) above has been revoked and no longer qualifies as a Qualified Credit Facility eligible for the withholding tax-free treatment, and any cross-border interest payments on such facilities made pursuant to agreements entered on or after January 1st, 2011, will be subject to a 14% withholding tax, provided that the facility’s term is equal or greater than 1-year. If the facility is not within items (a) through (d) and it’s term is less than 1-year, the applicable withholding tax rate on the interest payments should be 33%. For the avoidance of doubt, it is important to highlight that under the new regime, facilities within items (a) through (d) above with a term equal or greater than 1-year, will continue to be deemed as Qualified Credit Facilities eligible for the withholding tax-free treatment.
Under the previous regime, the following cross-border inbound leasing transactions were deemed Qualified Leasing Transactions eligible for the withholding tax-free treatment:
(f) Leasing transactions with foreign leasing providers to finance investments in a “Qualified Activity” (as defined above).
(g) Leasing transactions to finance M&E investments in Colombian export activities.
Pursuant to the changes introduced by the 2011 tax reform act, both items (f) and (g) above have been revoked and no longer qualify as Qualified Leasing Transactions eligible for the withholding tax-free treatment, and the interest component of any cross-border leasing payments on such transactions made pursuant to agreements entered on or after January 1st, 2011, except otherwise provided by applicable regulations, will be subject to a 14% withholding tax, and unless the equipment leased is a vessel, helicopter or airplane, case in which the reduced applicable withholding tax rate will be 1%.
Any interest payments on inbound cross-border Qualified Credit Facilities and Qualified Leasing Transactions under items (e), (f) and (g) above (and also items (a) through (d)), made pursuant to agreements entered on or before December 31st, 2010, shall continue to be eligible for the withholding tax-free treatment. This provision will likely be a source of controversy with the Colombian Tax Service, because of the conflicting measures in this regard adopted by the Colombian Government back on November 5, 2010, through Decree 4145-2010.
IMPORTANT: Under the new regime it is made clear that the offerings of notes, bonds and similar debt securities, are not deemed held in Colombia, provided that the offering is made by a Colombian issuer and that the securities are traded outside of Colombia. In our view, the importance of this provision is that despite the adoption of the new withholding tax regime on cross-border interest payments, cross-border interest payments made pursuant to this type of offerings should not be deemed income from a Colombian source and should not be subject to Colombian withholding tax, when the beneficiary is a non-resident. Nonetheless, please bear in mind that application of this rule should be carefully analyzed on a case-by-case basis.
Cross-border interest payments on inbound cross-border financings where the borrowers/debtors are Colombian governmental entities shall continue to be eligible for withholding tax-free treatment.
(3) 2011 Net–worth Tax Revenue Increase Measures. –
The previous 2010 tax reform act introduced a “one-time” net-worth tax assessable on January 1st, 2011 and payable in 8 semiannual installments through 2014 (Tax Reform Act No. 1370-2009. See: Colombian_Tax_Flash®, March 2010, yr. 7 – No. 18, P.1, §(a), found in the Publications tab at www.lewinywills.com). This tax is almost identical to its predecessor 1.2% net-worth tax in force through fiscal year 2010. In adopting this new “one-time” tax, the definition therein of “taxable base” allowed to construe that upon exclusion from the taxable base of certain non-taxable items, e.g., stock or quotas in Colombian companies, the taxpayer was not subject to this tax if the net taxable net-worth was below the taxable threshold of approximately USD $1.5m (COP $3,000,000,000). The 2011 tax reform act recently enacted by Congress adopts measures to correct this “imperfection” clarifying that the tax is applicable on the taxpayers’ gross net-worth, i.e., before excluding non taxable items, even if after excluding the non-taxable items the resulting net taxable net-worth drops below the lower bracket.
In addition to this clarification, the Colombian Congress adopted a series of measures to “tackle” tax avoidance strategies such as the creation of new SAS companies (simplified stock corporations) and statutory divisions of companies, popular amongst taxpayers as a net-worth partition strategy to avoid triggering the net-worth tax. Pursuant to the newly adopted measures, the net-worth of the target entity (whether resulting from the creation of a new SAS or a statutory division) shall be added to the net-worth of the “contributing” or “divided” taxpayer, in order to determine whether the Net-worth Tax is triggered.
As a reminder, taxpayers subject to the newly adopted net-worth tax would have to assess the tax on their net-worth as of January 1st, 2011. If the taxpayer’s net-worth as of January 1st, 2011 was approximately USD $1.5m (COP $3,000,000,000) without exceeding approximately USD $2.5m (COP $5,000,000,000), the applicable rate would be 2.4%. If the taxpayer’s net-worth exceeds USD $2.5m (COP $5,000,000,000), the applicable rate would be 4.8%.
For purposes of this tax, it is important to keep in mind the change adopted by the previous 2010 tax reform act regarding related party debt deemed as equity (Tax Reform Act No. 1370-2009. See: Colombian_Tax_Flash®, March 2010, yr. 7 – No. 18, P.2, §(d), found in the Publications tab at www.lewinywills.com). Pursuant to the amendment enacted therein, all related party debt would be deemed as equity for tax purposes (Colombian Tax Code, §287).
US dollars figures in this section are approximate values using a COP $2,000 exchange rate.
(4) Year-end “Economic Emergency” Measures Increasing the Reach of the 2011 Net-worth Tax to Taxpayers with a Gross Net-worth between USD $500k and USD $1.5m Tax, and the Adoption of a 25% Surcharge on the Net-worth Tax for Taxpayers with a Gross Net-worth greater than USD $1.5m. –
Motivated on the damages suffered by the victims of the rain-floods catastrophe, the Colombian Government declared the State of Emergency and through “Economic Emergency” Decree No. 4825, issued on December 29, 2010, adopted two new brackets of taxpayers subject to the “one-time” 2011 net-worth tax commented on §3 above. According to these measures, if the taxpayer’s gross net-worth as of January 1st, 2011 was approximately USD $500k (COP $1,000,000,000) without exceeding approximately USD $1m (COP $2,000,000,000), the applicable rate is 1%. If the taxpayer’s gross net-worth was between USD $1m (COP $2,000,000,000) and USD $1.5m (COP $3,000,000,000), the applicable rate is 1.4%. Taxpayers subject to the newly adopted net-worth tax would have to assess the tax on their net taxable net-worth as of January 1st, 2011, and the tax is payable in 8 semiannual installments through 2014. If the taxpayer’s gross net-worth did not exceed USD $500k (COP $1,000,000,000), the taxpayer is not subject to the 2011 net-worth tax.
Additionally, through the year-end “Economic Emergency” measures the Government adopted a 25% surcharge on the “one-time” 2011 net-worth tax for taxpayers with a gross net-worth greater than USD $1.5m (COP $3,000,000,000). Like the reference tax, the surcharge should be assessed on January 1st, 2011, and is payable in 8 semiannual installments through 2014. The adoption of this surcharge results in an effective economic burden (including both the reference tax and the surcharge) of 3% of their net taxable net-worth for taxpayers with a gross net-worth between USD $1.5m (COP $3,000,000,000) and USD $2.5m (COP $5,000,000,000), and of 6% of their net taxable net-worth for taxpayers with a gross net-worth greater than USD $2.5m (COP $5,000,000,000). For the avoidance of doubt, net-worth tax taxpayers in the gross net-worth brackets between USD $500k (COP $1,000,000,000) and USD $1.5m (COP $3,000,000,000) are not subject to the 25% net-worth tax surcharge affecting net-worth tax taxpayers in the gross net-worth brackets greater than USD $1.5m (COP $3,000,000,000).
IMPORTANT: Through the year-end “Economic Emergency” measures the Government adopted additional complex regulations affecting all taxpayers of the 2011 net-worth tax, regardless of the bracket they are in, which are not commented herein and that require careful examination on a case-by-case basis. Among these, are worth noting both (i) the adoption of a measure for purposes of determining whether the net-worth tax is triggering, “disregarding” any net-worth partition strategies implemented by the taxpayer, and (ii) the carve out from LSAs entered pursuant to the Legal Stability Agreements Act No. 963-2005 (see: §1, ¶5, P.2 above), of both the 2011 net-worth tax for taxpayers in the brackets below USD $1.5m (COP $3,000,000,000) and the surcharge for taxpayers in the brackets above USD $1.5m (COP $3,000,000,000).
Through a recent revenue ruling the Colombian Tax Service adopted the “likely controversial and debatable” position that taxpayers subject to the 2011 net-worth tax in the brackets above USD $1.5m (COP $3,000,000,000), cannot benefit from a previous LSA they have entered on that covered previous predecessor net-worth taxes (“Dirección de Impuestos y Aduanas Nacionales” – DIAN, Revenue Ruling No. 098797 – 2010, issued on December 28, 2010).
US dollars figures in this section are approximate values using a COP $2,000 exchange rate.
(5) Advanced Collection Self-Withholding Tax on Hydrocarbons and Minerals Exports. –
Pursuant to the recently enacted 2011 tax reform act, hydrocarbons and mineral Colombian exporters shall assess, and pay within the next month, a “self-withholding” on the gross sales price of their exports. Such withheld amounts are creditable towards the corresponding fiscal year income tax liability of the Colombian exporter, which is assessable and payable on the immediately following year. The tax reform act invests the Colombian Government with the power to determine the withholding tax rate applicable on these exports, which cannot be greater than 10%.
Rather than a real withholding tax burden on the foreign purchaser, this “self-withholding” burden on the exporter constitutes an advanced collection mechanism of its Colombian income tax liability for the corresponding fiscal year.
(6) Elimination of the Zero-rated VAT Regime for “Intermediate Services in the Production Line” for Hydrocarbons and Mining Export Activities. –
Because hydrocarbons and mining exports were zero-rated for VAT purposes, prior to this reform certain “intermediate services in the production line” were also eligible for zero-rated treatment. This will no longer be the case beginning January 1st, 2011.
Provided compliance with statutory requirements, certain “intermediate services in the production line” are eligible for preferential VAT treatment, i.e., taxed at the same VAT rate to which the final product is subject (Colombian Tax Statute, §476, last paragraph). As of January 1st, 2011, this preferential treatment is no longer available for taxpayers in the hydrocarbons and mining industries. Thus, such services in such industries will be subject to the general VAT regime and rate. For the avoidance of doubt the above mentioned preferential VAT treatment continues to be available for other industries.
(7) Elimination of the Special Transfer Pricing Regime for Mining Activities. –
Through this tax reform act and beginning FY2011, the Colombian Congress eliminates the special fix-price transfer pricing regime currently in place for mining activities and adopted back in 2006 (Colombian Tax Reform Act No. 1111-2006. See: Colombian_Tax_Flash®, January 2007, yr. 4 – No. 8, P.2 [unnumbered item 6], found in the Publications tab at www.lewinywills.com). As a result of this change, as of January 1st, 2011, mining activities shall be subject to the ordinary transfer pricing “arm’s-length based” regime.
For Income tax purposes Colombia has a regular transfer pricing “arm’s-length based” regime, which mostly resembles international OECD guidelines (hereinafter the “Regular Regime”). When it comes to mining activities in the country, since 2006, certain Eligible Income Tax Payers (hereinafter “EIT”) were subject to a special transfer pricing “fix-price based” regime (hereinafter the “Special Regime”). Under the Special Regime, semiannually the Ministry of Mines and Energy fixed the deemed price for each exporter for that 6-month period, and that price multiplied by the number of exported tons was the deemed income tax base for mineral exporters.
Both the Regular and Special Regimes are applicable with respect to cross-border transactions between related parties. The Colombian catalog of foreign related party situations is complex and the income taxpayer must review it carefully.
EITs subject to the Special Regime were minerals producers/exporters that in the immediately preceding fiscal year had export sales over USD$ 100m.
(8) Reduction of Penalties in Transfer Pricing Compliance. –
Income tax payers subject to the Regular Regime (see: §7, ¶2, P.7 above) have to comply with certain documentation and transfer pricing returns filing obligations. Non-compliance of such obligations gives rise to penalties. These transfer pricing compliance penalties are being reduced in more than 40% by the 2011 tax reform act.
(9) Amendments to the Current Statutory Foreign Tax Credit (“FTC”). –
The current Colombian income tax regime provides for an FTC, provided compliance of certain statutory requirements and subject to certain limitations. Pursuant to these regulations Colombian companies with operations outside of Colombia are eligible for both a direct and an indirect statutory FTC for taxes levied by the source country on non-Colombian source income and dividends respectively.
The 2011 income tax reform act adopts a series of changes to the relevant regulations, including among others, (a) an additional remote FTC on taxes levied by a Third Country, for Colombian companies receiving distributions from foreign companies that have received a distribution subject to income tax in said Third Country, and (b) the introduction of a 15% minimum interest requirement to be entitled to the FTC.
The new regulations of the FTC are complex and should be carefully examined on a case-by-case basis.
(10) Bank Debits Tax Revenue Increase Measures, Sunset Scheduled for 2018, and Increase of the Corresponding Income Tax Deduction. –
The 2011 tax reform act adopts a series of changes and measures to “tackle” certain alternatives offered by financial institutions and other authorized agents, as planning tools to minimize the economic burden of this tax.
This national level tax has been in place since the year 2000 and currently taxes, among others, all funds withdrawn or transferred from checking or savings accounts in Colombia at a tax rate of 4 per thousand.
In addition to the abovementioned revenue increase measures, the Colombian Congress has approved the sunset of this tax through a phase-out tax rate scale that begins on 2014 with a reduction to 2 per thousand, followed by a further reduction in 2016 to 1 per thousand, and its final elimination beginning 2018.
In addition and subject to certain requirements, as of FY2013, the 2011 tax reform act authorizes an income tax deduction of 50% of the Bank Debits Tax paid by the income taxpayer during the corresponding fiscal year. The current authorized deduction in place through FY2012 is of 25%.
(11) Temporary Availability of Penalties and Lateness Interest Rebates for National Level Tax Debts. –
National level taxes taxpayers that agree to pay their outstanding tax debts corresponding to 2008 and prior taxable periods, are eligible to benefit from a 50% rebate of any outstanding penalties and lateness interest, authorized by the 2011 tax reform act, provided that the owed amounts are paid within the 6 months following the enactment of the 2011 tax reform act, i.e., December 29, 2010, and that the taxpayer continues to timely file and pay her taxes during the 2 years that follow the date in which the owed amounts were paid. If the taxpayer fails to comply with the latter condition, the benefit will be recaptured in full and the Colombian Tax Service is allowed to seek payment of the rebated amounts. Certain rules and restrictions apply.
The 2011 tax reform act authorizes local authorities to adopt measures granting a similar rebate for local (territorial) level tax debts.
(12) Other Important Changes Introduced. –
As mentioned in the introductory paragraphs of this issue, the 2011 tax reform act adopts other material changes not discussed herein that should be carefully studied, seeking qualified advice from professional tax attorneys admitted to practice law in Colombia. Some (not all) of these measures are: changes in the VAT withholding regime for providers of Foreign Trading Companies; changes in the terms and proceedings for VAT refunds; the progressive elimination of deductible expenses paid in cash; the extension of the early expiration term to audit income tax returns subject to the compliance of certain requirements; the VAT rate reduction for certain sports and recreation vessels from 35% to 20%; and the 3-year extension of the contributions for public works contracts, public works concessions and other concessions; among others.
In addition, Congress introduced many other changes in other pieces of legislation enacted last December, which are not featured in this issue of Colombian_Tax_Flash®.
Colombian_Tax_Flash® is being sent to clients, friends and colleagues of Lewin & Wills worldwide, and contains a legal alert and marketing information. If you do not wish to receive this briefing in the future, please e-mail us at Colombian_Tax_Flash@lewinywills.com writing the words “Stop Flash” in the subject.
NOTICE: ©2011 Lewin & Wills. All rights reserved. Colombian_Tax_Flash® is a periodical publication that discusses certain recent tax developments in Colombia. Please be advised that this summary is not intended to be a detailed and comprehensive description of the topics discussed herein. This publication is prepared by Lewin & Wills (Colombia) for informational purposes only and does not constitute legal advice. The statements contained herein reflect the author’s interpretation of current tax rules and may not be shared or accepted by the Colombian Tax Service or by the Colombian Courts or by other persons or authorities. The information contained herein is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon it without seeking qualified advice from professional tax attorneys admitted for the practice of law in Colombia. This publication was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any taxes or tax penalties that may be imposed on such person in Colombia or any other jurisdiction. Prior results do not guarantee a similar outcome. Colombian_Tax_Flash® is copyrighted material. The use, translation, reproduction or retransmission by any means in whole or in part of its contents is prohibited without the prior written consent of one of the partners of Lewin & Wills.
Posse Herrera & Ruiz Names Ernesto Cavelier Partner And Opens Intellectual Property Practice Area
Posse Herrera & Ruiz is very pleased to announce the entry of Ernesto Cavelier as partner of the firm and the opening of its Intellectual Property practice area headed by Mr. Cavelier and supported by Ms. Helena Camargo, patent engineer Julian Diaz, four associates and paralegals, and three litigation associates from the litigation group.
Mr. Cavelier will also be working in the Corporate Law practice area.
Ernesto Cavelier has almost 35 years of experience representing foreign and domestic clients in different sectors. Recent transactions led by Mr. Cavelier include privatizations for the energy sector, foreign investments in the oil service industry, acquisitions in the aeronautical, financial and insurance sectors, and complex technology license agreements.
His academic profile includes studies of Comparative Law at New York University, European Law at Amsterdam University, Business at Peter F. Drucker Management Center (EMBA) Claremont University in California, and Intellectual Assets Management at Licensing Executives Society USA and Canada.
Mr. Cavelier is a former Vice-president of Licensing Executives Society International, is a member of LES Comunidad Andina, American Bar Association (ABA), New York Bar Association (NYSBA), Asociación Interamericana de la Propiedad Intelectual (ASIPI), Mining and Oil Lawyer’s Association, and Colombian Academy of Law.
ERNESTO VILLAMIZAR JOINS POSSE HERRERA & RUIZ TO HEAD REAL ESTATE DEVELOPMENT PROJECTS AND TRUST PRACTICE AREA
POSSE HERRERA & RUIZ IS PLEASED TO ANNOUNCE ERNESTO VILLAMIZAR HAS JOINED THE FIRM AS PARTNER AND WILL HEAD THE REAL ESTATE DEVELOPMENT PROJECTS AND TRUST PRACTICE AREA
Ernesto Villamizar is a Universidad Javeriana lawyer and economist, has studies in Financial and Credit matters with the Chase Manhattan Bank – Banco del Comercio, and Graduate Management studies in the Universidad de los Andes.
He has been a college professor for several years, a domestic and international speaker in trust matters and has occupied important positions in the Financial Sector for more than 25 years, including President of Alianza Fiduciaria, CEO of Banco Union Colombiano and President of Fiduciaria Union.
His experience includes the structuring of trust vehicles for high net worth individuals, real estate developers and government contractors. He also has experience in the structuring and distribution of mutual and private funds.
In a bold attempt to generate greater employment in the formal economy, President Santos has proposed to the Colombian Congress the much-heralded “Law of First Employment.”
As I explained in my post on the proposal, the Government will create incentives (tax breaks, financing options, and the like) to encourage creation of small businesses by, and first time employment (including “telework”) of, youths under age 28, certain technical professions, the agricultural industry, women under 40, and in three specific states. A key part of the program is the progressive implementation of income taxes and “parafiscal” payments (like social security, health insurance, and the like) – initially at zero percent of the norm and phased in over 5 to seven years. These breaks apply to employers of vulnerable groups and low-income individuals. The National Government will also establish a technologically modern national employment search database to help connect workers and jobs.
The bill also aims to simplify labor-related procedures. It prohibits employer discounts from salary payments, provides uniform procedures for employee loans, vacation compensation, and housing support.
To simplify business procedures, there are substantial revisions to the corporate insolvency law, known as Law 1116 of 2006. Reform is needed.
In a post I wrote about dispute resolution procedures in Brazil, Mexico, and Colombia, I found that the World Bank’s 2010 Doing Business survey found, “Colombia compares favorably to Latin America and the Caribbean on closing businesses, with rankings that are fairly high. Colombia’s bankruptcy procedures for closing a business are considerably better-ranked than the LAVCA Scorecard ranks them.” True enough, but the World Bank survey, I also found, was subject to some methodological criticism. Therefore I also looked to the Latin America Venture Capital Association (LAVCA) Scorecard, which ranks Colombia lower. “When it comes to bankruptcy procedures,” I found, “LAVCA scores Brazil 3 out of 4 points, Colombia 2 out of 4 points, and Mexico 1 out of 4 points.”
LAVCA’s leadership knows Colombia quite well, and its criticism and calls for improvement merited a significant response.
What are the changes? Many deadlines have been shortened in the process to identify debts and assets, resolve objections, propose a voluntary agreement for reorganization, or adjudicate the case, if a voluntary plan cannot be agreed up, starting with an attempt to agree on a plan of liquidation.
Procedures have also been established to reverse decisions to liquidate companies, to clarify that companies in reorganization or dissolution may be the subject of mergers and divisions, to adjudicate assets that appear after liquidation, and to specify that debtors may serve as reorganization “promoters.” See translation of new bankruptcy procedures.
