11 important points in the tax reform

In this post we analyze the tax reform that was presented in the government of Gustavo Petro.

At the head of the Minister of Finance, José Antonio Ocampo, the draft  Tax Reform Law for Equality and Social Justice to the new government of Gustavo Petro was presented, which entered into force on August 7 in Colombia.

We will analyze each of the points and explain how this could affect the business sector in the country.

This project will seek to raise 25.9 billion pesos, to, said the minister, "contribute sufficient resources for social spending: education, health, environmental protection, etc."

The first thing, says the project, is that all taxable net income is added up and a single table of marginal rates is applied, that is, says Ocampo, it is intended to radically simplify the income tax for natural persons: all types of income count equally: salaries, pensions, dividends, occasional earnings, income as independent workers, etc.

Knowing this, people who earn $10 million a month or less will not pay more. However, from $11 million, the Income Tax on Natural Persons (IRPN), which is, says the report, 2.4% of people with higher incomes, and the Effective Tax Rate for companies will change.

‍Another important aspect that it proposes is the reduction of exempt income and deductions by 75%, which will undoubtedly cause a greater impact for the country's middle class.

Additionally, benefits will be limited to people who are within the threshold of more than $10 million, that is, there will be no additional benefits of any kind. A threshold that will not be modified and that was the subject of debate in the country.

Below is the table that explains the current percentages, with the reform and the difference between one and the other:

The reform and the effects on companies: 11 reforms

There are several points that have caused controversy among some industrialists, let's see one by one:

1. The reform aims to eliminate the days without VAT

2. Tax on single-use plastics 

The sale and import of plastic products used to pack, pack or package goods is taxed only once. Rate: 0.00005 UVT for each (1) gram of the container, packaging or packaging. Which is equivalent to $1.9 pesos per gram.

3. Carbon tax

4. Tax on sugary drinks and ultra-processed foods

Soft drinks: Sugary drinks will be taxed based on the sugar content in grams per 100 milliliters of drink. Let us bear in mind that in Colombia approximately 47.2 liters of carbonated beverages are consumed per inhabitant per year, which translates to more than 178,395 COP per citizen.

Ultra-processed: A rate of 10% (ad-valorem) is proposed. It is important to highlight that several of these products belong to the Colombian basic basket, for example, sausages (ham, mortadella, salami, among others).

5. 10% tax on extraordinary exports (on the proportion of the value of exports derived from an international price above the threshold). With this new tax on oil companies, says the document, they expect to collect $5.8 billion.

‍6. Revision of rate of occasional profits of companies to 30%.

7. Elimination of preferential tax treatment for fuel prices in border areas Well, says the minister, that is causing fuel smuggling.

8. Permanently maintain the surcharge of 3 percentage points on the income tax on financial activities.

9. In the case of dividends, change the rate of 10% for the marginal rate of the general table.

10. Impose a cap of three percentage points on tax deductions (exempt income, deductions, discounts, non-income income). Less tax benefits.

11. Eliminate some tax benefits that are considered sectoral and/or regional asymmetric, in order to considerably reduce horizontal inequity.

If we consider the US tax system vs. some Latin American countries, we will see great differences, not only between Colombia and the United States, but in many countries in the region. We wrote a blog on this topic: Why is it cheaper to pay taxes in the United States?