The Colombian government sent a tax bill to Congress with which it will raise taxes on the rich in order to close the fiscal gap for the 2015 national budget, decrease inequality and invest more in social development programs. Here’s how it’s supposed to work.
The tax bill has three fundamental components:
Phasing out Colombia’s transaction tax
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1. Taxes on financial transactions
This tax affects those entities registered and supervised by the financial superintendent, and is accrued on every transaction aimed at withdrawing resources from checking, deposit or savings accounts and cashier checks.
The current financial transaction tax law, known as the GMF, eliminates the current 2×1000 pesos tax rate by 2018.
However, the law’s modification extends a higher rate of 4×1000 until 2019, when phased reductions will be made to completely eliminated by 2022.
2. The income tax for equality (CREE)
CREE is a national tax designed to be a contribution from companies to benefit employees, employment generation and social investments.
The current CREE is a 9% tax for 2013-2015 levied on top of the 25% corporate tax rate, and it reduces to 8% from 2016 and on.
The modification to this tax fixes its rate at a permanent 9%, funneling its revenues to higher education and primary schools starting in 2016.
3. The wealth tax
Income |
Rate |
|
| 500,000 – 1,000,000 | .2% | |
| 1,000,000 – 1,500,000 | .35% | |
| 1,500,000 – 2,500,000 | .75% | |
| > 2,500,000 | 1.5% |
This is a tax aimed at those making over $500,000 a year, structured as follows:
The reform also adds a 3% increase to the CREE tax (bringing the total to 12%) for those making more than $500,000 a year.
The wealth tax would affect 52,000 individuals (0.1% of the population) and 32,000 businesses (9% of the companies that pay income taxes).
Evasion and Enforcement
There will be strict criminal implications for tax evasion in the country. Taxpayers who fail to declare assets or liabilities, both at home and abroad, of more than $ 4 million in value, could face sentences between 4 and 9 years.
However, the draft provides that the penal consequences become extinct with a submission or correction statement and the payment of the taxes and penalties that apply.
Of the $6.25 billion that this bill is expected to raise, $4 billion would come from the existing collections and $2.25 billion would be generated through new taxes, closing the budget gap for fiscal year 2015.
This financing strategy also involves a major effort by the DIAN to boost the collection of an additional $5.25 billion in 2015, of which $2.25 billion should come from increased economic activity and the remaining $3 billion from the fight against tax evasion.
For the period 2015-2018, the fight against tax evasion should bring the state treasury at least $10 billion in additional revenues.
Funding destinations
The general purpose of the tax overhaul is to create more revneue to guarantee continuity in social policy and to achieve the the goals of President Juan Manuel Santos’ second term.
These resources will be used to meet the needs of rural families, will advance the goals of education set by the government and seeks the full coverage of children in Program Zero, an early childhood education and care initiative.
The funds will also support the country’s extremely important security apparatus, where similar wealth taxes in the past have boosted thier strength by creating over 53,000 soldiers and 83,000 police officers.
Sources
- ABC del Proyecto de Ley de Reforma de financiamiento de la paz, la equidad y la educación (Finance Ministry)
- Solo 2,5% de las empresas pagarán sobretasa del Cree (La Republica)
- Taxes in Colombia (ProExport)
- Colombia Scraps Plan to Increase Wealth Tax After Protests (Bloomberg)