The New Schedular Income Tax Regime For Individuals In Colombia - Tax - Colombia Law Articles in English - Mondaq Business Briefing - Books and Journals - VLEX 696814409

The New Schedular Income Tax Regime For Individuals In Colombia

Author:Ms Mónica Reyes Rodríguez
Profession:Reyes Abogados Asociados
 
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  1. INTRODUCTION

    One of the motivations of the last Tax Reform -Law 1819 of 2016- was to modernize the Colombian tax system with the objective of making it simpler, progressive and more equitable.

    With the legislation previous to the tax reform, a Colombian fiscal resident, at first glance, had to determine to which of the categories of taxpayers established by Section 329 of the Colombian Tax Code Section (employee, self-employed person, or another kind of taxpayer) did he or she belong to. This, in order to assess the amount payable for Income and Complementary Taxes.

    Depending on the applicable category under Section 329 of the Colombian Tax Code, individuals individuals with fiscal residency in Colombia would assess Income and Complementary Taxes, by applying the ordinary system, the National Minimum Alternate Tax Assessment (IMAN, in Spanish) or the Simple Minimum Alternate Tax Assessment(IMAS, in Spanish).

    Also, under the former tax legislation an individual taxpayer was entitled to deduct most of the the costs and expenses, that were incurred in the production of income.

    Although the principle of causation was befitting with the income generating activity, costs and expenses that exceeded the corresponding income, could still be indistinctively allocated to other activities that produced income during the same fiscal period.

    Under Law 1819 of 2016, however, costs and expenses may only be allocated to the respective category (bracket) of income. This results in a dramatical increase in the tax basis, taking into account the limitations to the expenses and deductions and to the exemptions and the impossibility to deduct payments that are not allocated directly to the realized income.

  2. THE TAX REFORM.

    As explained above, in the explanatory statements to Law 1819 of 2016, it was argued that the modification to the tax system regarding Income and Complementary Taxes for individuals, aimed to generate a more progressive tax system, under the premise that those who received more income should be subject to a higher effective tax rate.

    Nonetheless, because of the modifications introduced to the Bill, the mentioned premise did not fully materialize. Now taxpayers that receive all their income from an employment relation are subject to regulations on the assessment of the taxable basis exemptions and other benefits that applied in the previous legislation.

    The tax reform introduces a Bracket Income System (Sistema de Rentas Cedulares, in Spanish) similar to the one that applies in the United States of America, which determines the procedure to assess the income tax base in accordance to each type of income, with the purpose of securing that the allocations of benefitsregarding non-taxable, excluded, and exempt earnings, of costs and expenses and of other benefits that reduce the tax basis, are only applied to the brackets of income with which the exemption, the cost or the expense, have a causal relationship with, and then only, in the percentage that is established by the new Law..

    Law 1819 of 2016 also restricts the compensation of tax losses, which only proceeds against income of the same bracket, in subsequent fiscal periods and within the established legal limits and percentages.

  3. SCHEDULAR SYSTEM APPLYING TO INCOME TAX ON INDIVIDUALS.

    The Bracket Income System categorizes earnings by brackets in accordance with the type of income that is perceived in an specific taxable period.

    The tax reform includes the following categories of brackets:

    Income from a labor relationship (Rentas de Trabajo, in Spanish); Pensions; Capital Gains; Income not related to a labor relationship (Rentas no Laborales, in Spanish); Dividends and participations IV. INCOME FROM A LABOR RELATIONSHIP

    The bracket that holds income from a labor relationship is integrated by earnings by individuals qualifying as individuals salary, commissions, social benefits, travel expenses, representation costs, fees, emoluments to ecclesiastical dignitaries, compensations received for cooperative work, and in general, as any income originated by the rendering of personal services.

    The following table summarizes the methodology to assess the income tax basis for earnings perceived from a labor relationship under Law 1819 de 2016:

    Assessment of the Taxable Basis for income perceived from a labor relationship: Gross Income from a labor relationship Non-Taxable Income Net Income from a labor relationship Exempt income and deductions (Up to 40% of labor earnings or 5.040 Tax Value Units - (Unidades de Valor Tributario UVT...

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