Colombian Tax System: Corporate Obligations

Over the years, it has evolved to adapt to social and economic changes while always respecting the historical principles that have shaped it. Understanding its current structure, the taxes businesses must pay, recent reforms, and future challenges is essential for successfully navigating Colombia’s economic environment.

Current Structure of the Colombian Tax System

The Colombian tax system is organized across three levels of government: federal, departmental, and municipal. Each level has specific responsibilities for tax administration and collection.

Main National Taxes

Among the most relevant national taxes are:

1. Income Tax and Complementary Taxes: Applies to both individuals and corporations. It is levied on net income earned within and outside the country.
2. Value Added Tax (VAT): An indirect tax on the consumption of goods and services, with general and differentiated rates.
3. Wealth Tax: Applies in special circumstances to individuals or entities with assets exceeding thresholds established by law.
4. Financial Transactions Tax (GMF): Also known as "4x1000," it taxes financial transactions carried out through the banking system.

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Taxes Businesses Must Pay

1. Corporate Income Tax

• General Rate: A 35% rate currently applies to taxable net income, although this may vary depending on the type of entity and any applicable special regime.
• Taxable Base: Calculated on net fiscal profit, after authorized deductions and adjustments for accounting-tax reconciliation.
• Filing and Payment: Corporate income tax is filed annually, with monthly or bimonthly prepayments required depending on the taxpayer’s gross revenue.

2. Value-Added Tax (VAT)

• General Rate: 19%, although reduced rates (5%) apply to certain goods or services, and some items may be exempt or excluded.
• Filing Frequency: Companies must submit VAT returns on a monthly or bimonthly basis, depending on their revenue level.
• Input Tax Credit: VAT paid on purchases can be credited against VAT collected on sales, subject to specific conditions.

3. Withholding Taxes

• Companies act as withholding agents when making payments to third parties for services such as fees, commissions, leases, services, and purchases.
• These withholdings must be reported and remitted monthly to the tax authority (DIAN).
• Failure to apply the correct rates or errors in reporting can result in significant penalties.

4. Industry and Commerce Tax (ICA)

• This tax is municipal and levied on the exercise of industrial, commercial, or service activities within a given jurisdiction.

• The rate depends on the municipality and the type of economic activity, and typically ranges between 0.2% and 1% of gross operating income.

• Some cities apply the consolidated ICA (Income Tax) for companies with operations in multiple municipalities.

5. Property and Vehicle Tax

• Companies that own real estate must pay the Unified Property Tax, calculated based on the property's cadastral appraisal.

• If the company owns vehicles, it must comply with the departmental vehicle tax.

6. Parafiscal Contributions

Companies are required to make monthly contributions to entities such as:

• SENA (National Learning Service)
• ICBF (Colombian Institute of Family Welfare)
• Family compensation funds

These contributions are equivalent to approximately 9% of payroll and are independent of social security contributions.

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Challenges of the Colombian Tax System

Despite its consolidated structure and broad regulatory base, the Colombian tax system faces significant structural challenges that limit its collection efficiency, tax equity, and international competitiveness. These challenges must be addressed with a comprehensive approach that combines legal stability with the needs for fiscal modernization and sustainability.

1. High tax evasion and avoidance

One of the main obstacles is persistent tax evasion and avoidance, especially in the informal sector and certain segments of the formal economy. Estimates of lost revenue due to income tax and VAT evasion represent a significant portion of GDP, directly affecting the state's ability to sustainably finance public spending. This situation generates profound inequalities by shifting the tax burden onto compliant taxpayers.

2. Normative and regulatory complexity

The Colombian tax system is characterized by its high legal and administrative complexity, resulting from frequent reforms, transitional regulations, special regimes, and multiple levels of taxation (national, departmental, and municipal). This situation increases the costs of tax compliance, generates some legal uncertainty, and discourages investment, especially in foreign companies that require regulatory predictability.

3. Inequality in the distribution of the tax burden

There is an unequal distribution of the tax burden, both among individuals and among economic sectors. The current system continues to rely heavily on indirect taxes, such as VAT, which tend to affect lower-income households more heavily. Furthermore, some special regimes and tax benefits generate distortions that affect the neutrality of the system and reduce the progressivity of fiscal policy.

4. Lack of Territorial Harmonization

The coexistence of municipal taxes such as the Industry and Commerce Tax (ICA) with national taxes, without adequate coordination between levels of government, has led to problems of double taxation, regulatory disparity, and tax competition between jurisdictions. This fragmentation limits the system's efficiency and complicates compliance for taxpayers operating in multiple regions of the country.

Projections: The future of the Colombian tax system

The Colombian tax system must be built on its best traditions, incorporating improvement proposals that ensure its adaptability and competitiveness. Among the most significant projections are:

• Simplification of the tax system: Reducing regulatory complexity to facilitate voluntary compliance.

• Institutional strengthening: Improving auditing processes and taxpayer service.

• Greater tax equity: Ensuring that the tax burden is distributed fairly, while encouraging investment and economic growth.

With a vision for the future that respects traditional values, Colombia can build a more efficient, transparent, and sustainable tax system.