Colombian tax reform rewrites VAT system

June 12, 2013

On 26 December 2012, the Congress of Colombia enacted a tax reform that seeks to simplify VAT legislation in the tax code. This reform means that major changes have been introduced to VAT rates, taxable goods and services, VAT recovery and VAT filings.

Colombia’s VAT system before the changes

In Colombia, VAT is applied to the sale or import of tangible goods into the country and the provision of services within the territory.

VAT rates

The rate of VAT applicable depends upon the type of goods or services supplied.

The general VAT rate in Colombia was 16%, but rates for certain products ranged from 1.6% to 35%. Additionally, an exempt/zero-rate category existed along with a category for “excluded supplies” on which no VAT was chargeable. The difference is that there was a right to recover VAT paid on purchases (input tax) incurred in making exempt/zero supplies, but no right to recover input tax incurred in relation to excluded supplies.

VAT recovery

The recovery of VAT in Colombia followed the normal VAT rules in that input tax could be offset against VAT charged on sales (output tax). However, input tax credit was limited to the output tax rate charged on the corresponding sales. For example, if the input tax incurred was 16% but the VAT charged on sales was a 10%, a VAT refund could be claimed only up to 10%. The remaining 6% had to be treated as part of the cost of the goods or services acquired.

In cases where both taxed and non-taxed goods or services were purchased in relation to a supply of goods or services, additional calculations were required to determine input tax recovery (credit proportionality calculation).

If a VAT credit was earned in a VAT period (input tax exceeded output tax), the taxpayer was in a VAT refund position. However, VAT refunds for excess input VAT were available only for exporters (exempt operations). Taxpayers who did not qualify as an exporter had only refunds over excess withholding VAT, while a credit for excess input VAT had to be carried forward for future offset without any possibility of a refund.

The impact of the VAT recovery for companies was huge as the rate limitation created VAT cash traps that increased business costs. The complexity of the calculations and filings created even more situations where the VAT recovery analysis was too difficult to undertake efficiently, creating further VAT leakage.

Colombia’s 2012 tax reform

VAT rates

Many of the multiple VAT rates were eliminated, leaving only three rates: 16% as the standard rate, 5% for specific goods and services and 0% for exempt goods (that allows the refund of the creditable VAT paid). The excluded category was also retained.

However, the items included in the 5%, exempt and excluded categories were reshuffled. In some cases, the rate changes reflect social initiatives, while others address business, economic or political interests.

VAT refunds

Modifications to the input tax rules make it possible for more businesses to request refunds, which until 2012 were available only for exporters and for excesses derived from the withholding tax system. The new rule states that a taxpayer may request a refund for a VAT credit that originates from a VAT rate difference (that is, from paying VAT at a higher rate on inputs than the rate charged on outputs).

This request may be filed only once a year, after the income tax return for that tax period is filed. However, this rule still constitutes a relief for companies that normally have lower output tax rates, which previously had to carry forward any VAT credit excess for an uncertain (even indefinite) period of time (in the bimonthly returns).

VAT recovery issues

On the downside, a new restriction has been introduced for companies that have had an extended pre-operational period. In these cases, companies accumulate input tax arising from services received, especially in the mining and oil and gas industries, and credit all the input tax against the first operational income they receive.

When such companies were treated as exporters, this situation meant a right to claim a refund of the VAT credits, thus creating a collection gap for the Government. The tax reform disallows accumulated credits for refund purposes, allowing only a refund for the input tax paid in the same bimonthly period in which the sale was executed.

This rule creates a cash trap for start-up companies in this situation as no refund is immediately available. They will need to carry forward the accumulated input VAT and offset it against output tax in future periods, provided that enough output VAT is generated. No refunds are paid, except for refunds of withholding tax.

For exporters, the situation is more difficult, as their output VAT rate is 0%, which means that the input tax incurred cannot be recovered at any time. The tax reform did not address this situation and, unless regulations are enacted to create a mechanism to recover that input tax, exporters will be left with an input tax credit they cannot use in a short period of time.

This will have an important financial impact and may also increase the tax basis for equity-based taxation, as such input tax will be deemed to be an asset for the purpose of calculating these taxes.

The Colombian tax reforms will also have far-reaching effects on many other areas, including capital goods, VAT filings and consumption tax. Read the full version of this article in the Ernst & Young Indirect Tax Briefing, issue 7 (pdf, 7.13 MB).

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