The comprehensive tax reform bill 2016 recently submitted by the government of Colombia to the Congress with the following corporate income tax issues:

Rates: The bill proposes to unify the income tax and the Fairness Tax into a single income tax with the following tax rates:

Presumptive income tax: The presumptive income tax rate will be increased from 3% to 4% applicable on the taxpayer’s net equity on the last day of the previous taxable year.

Preferred stock: Shares with preferential dividends will be regarded as debt. In the case of the issuer, preferred stock will have the same treatment as a financial liability, and in the case of the holder, the same treatment as a financial asset. Therefore, the holder will be obliged to recognize taxable financial income derived from the preferred stock. In addition, yields associated to preferred stock will be subject to the rules established for the deduction of interests.

Tax loss carry-forward: The draft legislation proposes that tax losses may be carried forward by up to 8 fiscal years.

Intangibles:

• Amortization deduction: The bill proposes that the depreciation base will be the cost of the intangible asset according to certain rules. The annual depreciation rate may not exceed 20% of the cost basis. Amortization expenses that are not deductible because they exceed the 20% limit may be deducted in tax years following the end of the useful life, without exceeding 20% of the cost basis per year.
• Deduction of royalties: The payment of royalties, derived from the exploitation of intangibles formed in Colombia, to related parties located abroad or in free trade zones will not be deductible.

Master file: Under the proposed draft legislation, taxpayers with either a gross equity of at least 100,000 Taxable Units (TU; one TU is approximately US $10) or gross revenues of at least 61,000 TU that have transactions with related parties must prepare and submit a Master File as of 2016. The Master File contains relevant global information of the multinational group and a Local File information on the inter-company transactions.

Local file: Under the proposed draft legislation, taxpayers with either a gross equity of at least 100,000 Taxable Units (TU; one TU is approximately US $10) or gross revenues of at least 61,000 TU that have transactions with related parties must prepare and submit a Local File as of 2017. A Local File will contain information on the inter-company transactions.

CbC reporting requirement: Draft legislation has been proposed and that will introduce CbCR as of 2016.

International payments: The bill proposes to apply a 15% income tax withholding rate on foreign payments of interests, commissions, fees, royalties, technical services, technical assistance, and advisory services and introducing a 10% withholding tax on dividends paid to non-residents from profits taxed at the corporate level from 1 January 2017.

CFC rules: The Bill proposes that Colombian tax residents who own a direct or indirect participation of at least 10% of the capital of a foreign entity (CFC) must report passive income earned from that CFC as if it were obtained directly by the Colombian tax resident. In this case, the taxpayer can deduct from the passive income any related costs and expenses. However, losses may not be considered by the taxpayer in Colombia. Passive income includes dividends, interest, financial income and leasing income. When passive income from a CFC represents 80% or more of their total income, it is considered that all revenues, costs, and expenses of such an entity will give rise to passive income.

Statute of limitations period on tax audits: The Colombian Government has proposed increasing the standard statute of limitations period on tax audits from 2 years to 3 years. The statute of limitations period where there is a loss or where loss relief is carried forward would be increased from 5 years to 6 years. For taxpayers subject to transfer pricing rules, the statute of limitations period would be 6 years.