Colombia - National Tax and Customs Authority

The Colombian regulator is Direccion de Impuestos y Aduanas Nacionales (DIAN) – National Tax and Customs Authority.

The headquarters of DIAN are located in Bogota, in the following address: Carrera 8 No. 6C - 38 Edificio San Agustin, Postal Code 111711.

The main website page is https://www.dian.gov.co/. On the webpage the following links are the most relevant for transactional purposes:

Login for registered users:

https://muisca.dian.gov.co/WebArquitectura/DefLoginOld.faces

Sign-in for new users:

https://muisca.dian.gov.co/WebArquitectura/DefNuevosUsuarios.faces

Home page: https://www.dian.gov.co/Paginas/Inicio.aspx

Procedures and services:

https://www.dian.gov.co/tramitesservicios/tramites-y-servicios/Paginas/default.aspx

The key individual at DIAN is the General Director, who is currently Mr Lisandro Manuel Junco Rivera; the general director is usually appointed by the finance minister following the recommendation of the Colombian President. The current mandate of the General Director includes, among many other relevant matters, implementation of the Simple Taxation Regime, through which the formal duties of taxpayers are simplified, since the declaration and payment of various taxes are unified; mass electronic invoicing; the modernisation of the entity through the improvement of its IT systems and the hiring of tax official to fill the many existent vacancies that have impacted the auditing capacities of the entities.

DIAN is an entity attached to the Ministry of Finance and Public Credit. It is a Special Administrative Unit and was created by the Decree 2117 of 1992 after the National Tax Authority was merged with the National Customs Authority. Since then, this entity has undergone various reforms and reorganisations in its structure.

Its objectives are to guarantee the fiscal security of the state and the protection of the economic public order. This is done through the administration and control of tax, customs, some exchange obligations and the facilitation of foreign trade operations.

The competences of DIAN are contained in article 1 of Decree 1292 of 2015, as follows:

• Administration of income and complementary taxes, value-added tax, national stamps, customs duties and other internal taxes of a national order; it includes their collection, inspection, settlement, discussion and all other aspects related to the correct fulfilment of tax obligations.
• The direction and administration of customs, which includes the service and support to foreign trade operations.
• The control and surveillance of compliance with the exchange regime regarding import and export of goods, associated expenses and financing in foreign currency.
• Acting as the authority for legal doctrine (ie, general rulings issued by the Legal Direction of DIAN) and statistics in connection with tax, customs and exchange control matters.

The general functions of the DIAN are listed in article 3 of Decree 4048 of 2008 and article 2 of Decree 1292 of 2015.

Reporting and disclosure obligations

The main reporting and disclosure obligations for taxpayers are the following.

Annual income tax return

The taxable year corresponds to the calendar year and the deadlines to file and pay the tax due, initiate in April for legal entities and in August for individuals of the following year. It is the same deadline to file an income tax return, and taxpayers with assets located abroad must file the foreign assets return stating the type of asset, value and jurisdiction in which it is located.

For taxpayers subject to transfer pricing formal obligations, there is yearly informative return that must be filed plus the obligation to submit to DIAN the transfer pricing study on qualified transactions.

Value added tax (VAT) return

The filing of VAT returns and payment of the tax due must be done bimonthly by large taxpayers and those legal entities and individuals whose gross income as of 31 December of the previous taxable year is equal to or greater than 92,000 UVT. UVT is the tax value unit used in Colombia, which for 2021 is equivalent to 36,308 Colombian pesos. Otherwise, the filing and payment of the tax due must be done every four months.

Withholding taxes returns

Legal entities and qualified individuals (ie, withholding tax agents) are required to apply withholding taxes on payments to third parties (ie, for income tax purposes and in specific cases for VAT purposes). Withholding tax agents must also self-withhold on any income received. Withholdings and self-withholdings applied must be reported and paid with the monthly withholding taxes return. Withholding taxes are considered an advance tax payment to be offset against the tax due.

Financial institutions must withhold, declare and pay to DIAN the financial transactions tax, which is levied on non-exempted financial transactions at a rate of 0.04%.

For 2021, there is an obligation for individuals to file and pay and net worth tax return. This applies to individuals with net worth higher than 5 billion pesos. The rate is 1% on the tax base. This tax also applied to foreigners, regardless of their nature, with assets in Colombia worth more than 5 billion pesos but different to shares in Colombian entities, accounts receivables or portfolio investments.

The tax reform enacted on 14 September 2021, contained in Law 2155 of 2021, established the normalisation tax for the year 2022, which is a special tax that is levied on undeclared assets or inexistent liabilities as of 1 January 2022, at a rate of 17%. The deadline to file normalisation tax is 28 February 2022. For undeclared assets located abroad that are repatriated to Colombia, the taxable base will be 50% of the repatriated assets.

Other common reporting obligations:

• yearly exogenous information (ie, information of third-party transactions during the income tax taxable year). This information must be submitted around May of the following year;
• electronic invoicing;
• report of beneficial owner. There is a unified beneficial owner registry created by Law 2155 of 2021 to be implemented by DIAN; and
• registration with DIAN of contracts with foreign parties, which includes the transfer of technology.

Sanctions

Penalties applicable to non or late compliance with tax duties as well for amending mistakes in the tax returns or in the information submitted to DIAN, as well as the sanctioning powers of the regulator are contained in the Tax Code. The most common sanctions are the following.

Penalties for late filing of tax returns

The general rule is that the late filing generates a 5% penalty on the tax due for each month or fraction of a month of delay in filing the return without exceeding 100% of the tax due. If there is no tax due, the penalty will be 0.5% of gross income obtained in the tax period for each month or fraction of month of delay in filing the return without exceeding the lower amount between 5% of said gross income, double of the credit balance if any or 2,500 UVT. If there is no income, the penalty will be 1% of the net assets of the previous year for each month or fraction of the month of delay in filing the return without exceeding the lower amount of 10% of the net assets, double the credit balance if any, or 2,500 UVT. This late filing penalty is liquidated by the taxpayer when filing the corresponding return. If the late filing is made by the taxpayer after receiving a summons to file the return, penalties and limits are doubled.

In the case of a withholding taxes return, if the tax due is not paid within the two-month period following the deadline to file the return, the return will be considered as ineffective, so that it will have to be filed again, liquidating and paying the penalty for late filing.

If the taxpayer never files the return, DIAN will impose penalties of up to 20% of the bank deposits or 20% of the gross income of the previous year. The statute of limitations to impose penalties for the non-filing of the return is five years counted from the deadline to file the correspondent return.

The amendment of tax returns in which a higher tax is assessed, generates a penalty if the amendment is made after the deadline to file the correspondent return

The penalty will be equivalent to 10% of the highest amount to be paid or the lowest credit balance between the initial return and the amendment. This amendment penalty is voided by the taxpayer when filing the correspondent amendment return. If the amendment is made by the taxpayer after receiving a summons to amend the return, the penalty is doubled.

Delay interests

The late filing of a tax return, the amendment of a return assessing a higher tax due, the payment of the tax due after the deadline to file the return, the payment of the higher tax due as consequence as an official liquidation made by DIAN generate delay interest that are accrued for each day of delay in payment at the usuary rate less two points as certified by the Financial Superintendency and published in the web page of DIAN, counted as from the deadline to file the correspondent return.

Penalty for inaccuracy

This sanction is imposed during the audit process carried out by the DIAN and is equivalent to 100% of the difference between the tax payable according to the tax return filed by the taxpayer and the higher tax assessed by DIAN. An inaccuracy occurs when income or taxes are omitted, not all withholdings are included in the withholding taxes return, inexistent or inaccurate costs, deductions or discounts are included, false data is used in the returns or reports, or the purchases or expenses were incurred with entities that DIAN had declared as fictitious or insolvent suppliers. The inaccuracy penalty is reduced to 25% if accepted and paid after the special summons is issued, or to 50% if accepted and paid after the official liquidation is issued. If the taxpayer manages to prove that the inaccuracy was caused by a difference in the interpretation of the rule, the sanction will not be applied, and only delay interests on the higher tax payable will be accrued. Nevertheless, in most cases DIAN and judges do not recognise a difference in interpretation even if there is evidence that there has been no inaccuracy by the taxpayer.

Penalty for not sending the information

A sanction is applied to those obliged to provide information or from whom the DIAN has requested information and do not do so or do so late or with errors. The penalties are 5% of the value information not provided, 4% for the information with errors, and 3% for information submitted late. The penalty is reduced to 20% of the amount assessed if the taxpayer voluntarily and before receiving any summons amends or files the information.

All the penalties may be reduced to 50% of the amount assessed if the penalised action was not incurred by the taxpayer in the previous two years or reduced to 75% if the action did not occur in the previous year. Otherwise, the complete penalty would apply.

An important issue in dealing with monetary sanctions imposed by DIAN is challenging them. On very few occasions, DIAN reconsiders the penalties and/or recognises the difference in interpretation. This is complex because DIAN acts as a judge and as a party at the same time. In most cases, it is necessary to go to court to challenge the sanctions.

In the past, the effectiveness of DIAN's auditing and collecting activities and the number of cases won before the judges were very low. Until recently, DIAN began to improve its information technology systems and with all available information collected from taxpayers and foreign countries therefore, it has managed to improve collecting and auditing processes. This has caused people and companies to consider tax risk as much higher risk and thus being much more careful with compliance with tax duties. In addition to this, there is an increase in the cases won by DIAN before administrative judges.

Non-monetary sanctioning powers and behavior

One of DIAN's sanctioning powers is to close business establishments for a certain period when they are in violation of the law, as follows:

• For three days if no invoice or equivalent document as regulated by law is issued or it is issued in breach of the legal requirements.
• For three days when it is established that the taxpayer uses electronic systems from which income or sales are suppressed, has double accounting or invoicing or the invoices are not registered.
• For 30 days when raw materials or merchandise received violate the current customs regime.
• For three days when the withholding agent or the taxpayer regarding the valued added tax and the national consumption tax, among others, fails to present the return or is in delay for payment, greater than three months.

Other regulations related to penalties on tax matters, although not of competence of DIAN, are those of a criminal nature. Currently, Colombia has two criminal laws on infractions of the tax system:

• Article 402 of the Colombian Criminal Code: omission of the withholding or collecting agent. This sanction refers to a person who has the responsibility of withholding or self-withholding taxes and who then does not pay to the DIAN the amounts that should be paid in that capacity. It also applies to those responsible for sales taxes.

The penalty would be jail for 48 to 108 months and a monetary sanction equivalent to double the amounts not paid, without exceeding 1,020,000 UVT.

• Article 434A of the Colombian Criminal Code: omission of assets or inclusion of non-existent liabilities. This rule gives a penalty of 48 to 108 months of jail for those who, in their income tax return, include false or non-existent liabilities or omit assets that must be declared, as long as these assets or liabilities have a value equal to or greater than 5,000 minimum wages. The minimum monthly wage for 2021 is 908,526 pesos.

Meanwhile, article 434B of the Colombian Criminal Code deals with tax fraud or tax evasion. This sanction punishes with 36 to 60 months of jail those who, having to file tax returns, do not do so or in doing so omit income in their return, include non-existent expenses, claim tax credits, withholdings or improper advances, for a value of at least 250 minimum wages.

In all cases, the criminal action ceases if the taxpayers duly comply with their tax duties and pay the taxes and penalties due.

As in recent years, the DIAN has improved its ability to find and sanction non-compliance, taxpayers tend to take these penalties very seriously. Although to date there have not been any major criminal cases for tax evasion, since criminal penalties for tax matters are recent, the mere possibility of being prosecuted for evading taxes has generated concern in many taxpayers who now avoid incurring penalities by being much more careful in the compliance of their tax duties. Nevertheless, Colombia is a country with a strong tax evasion culture, where high tax rates, corruption and low levels of collection do not help in convincing people to duly comply with their tax duties. DIAN must improve its collecting and auditing activities to show more effectiveness and better results so that people still avoiding taxes are encouraged to change their avoidance culture.

Recent and upcoming developments

On 14 September 2021, by means of Law 2155, a new tax reform was approved in Colombia because of the need for new collection methods due to the devastating effects of the pandemic. Owing to social protests and the crisis generated by said protests, the government retired a first bill presented to Congress and promised that the new bill, which resulted in the approved reform, would not increase the VAT, would not affect pensions and would not impact individuals, especially the middle classes. The tax reform in Law 2155 focuses on higher collections on legal entities by raising corporate income tax from 31% to 35%.

Some other aspects of Law 2155 of 2021 to consider are the following.

As mentioned, Law 2155 increases the corporate income tax from 31% to 35%. In addition, it maintains the possibility of taking a tax credit for 50% of the local Industry and Commerce Tax (ie, a tax on gross income for industrial, commercial and services activities levied by municipalities at rates that range from 0.2% to 1.3%); the tax credit was supposed to increase to 100% as from 2022.

Regarding tax returns, this reform allows the DIAN to use information from electronic invoicing and from third parties to determine income tax through the issuance of an official invoice that can be enforced and replaces the tax return prepared and filed by taxpayers. If the taxpayer does not agree with the official invoice issued by the DIAN, a return in the official form can be prepared and filed by the taxpayer.

DIAN is one of the main actors in the recovery of the economy after the strong effect caused by the pandemic. This is because with all the new regulations and investments in IT and personnel, it is expected that DIAN increases collections and manages to start changing the strong avoidance culture. DIAN must continue to deepen and strengthen the best systematisation to have better control tools and increase its staff, not only in quantity but also in quality.

The Colombian government is counting on the fact that tax audits will reduce the high levels of evasion. However, historically it has been shown that it takes time to achieve any improvement in compliance. In this field, there is a lot of advice coming from the OECD since Colombia is now a member and this will help in implementing rules and mechanisms to increase collection.

One of the challenges in this environment is to change people’s perception that tax authorities are authoritarian, seek to frighten taxpayers instead of collaborating and do not help people to duly comply with tax duties and understand tax rules, but always look for ways to penalise taxpayers and collect the highest amount possible.

Interacting with the regulator

Interacting with the regulator in Colombia has always been difficult. Officials have an aggressive way of interacting with taxpayers, which is frightening for them. In addition, information on how to act or comply with obligations is not always clear and easy to follow. Nevertheless, due to the systematisation, and in this the pandemic helped through reducing people contact, currently virtual proceedings have improved and most of the formalities can be dealt with through DIAN’s website. DIAN has also set up various special websites for taxpayers to be able to ask and follow up on proceedings.

Regarding auditing procedures, the aggressive attitude of officials is even worse. Interacting with them is difficult and they are in most cases very far from accepting or at least discussing taxpayers’ arguments. There is also a legal limit because once the special summons has been issued (ie, requerimiento especial) officials do not have the power to negotiate any of the issues under discussion; it means that there are no powers for officials to convene with the taxpayer on the amount of taxes, penalties and interests, since these are always fixed amounts established by law. In practice, what usually happens is that before the special summons there is a window for the taxpayer to try to agree with DIAN’s officials on the matters to be included in the special summons and the matters that will not be included; but this is an informal negotiation.

It should be borne in mind that for officials the guideline is to collect as much money as possible. This puts them pressure and make the auditing process very stressful for taxpayers and officials. In any case, taxpayers should, under current circumstances, be ready for a tax audit; the most common reason to reject deductions in recent times has been the lack of evidence of the actual rendering of the services paid, especially when it is related to management or similar expenses paid abroad or even inland to related parties. This means that it is very important that taxpayers always keep evidence of the activities that comprise services for which they have paid. Evidence is not only an agreement, the invoice and the correct registration in the accounting records; it also includes any other documents that show what the service provider did, such as reports, emails, description of hours worked and activities performed, etc.

In any interaction with tax officials, taxpayers should always show their intention to help and duly comply with tax duties. But they should always be able to prove that they do things according to the law and that if there is anything to discuss it will be a matter for interpretation. When there are problems to demonstrate due compliance with any tax duty, it is better to amend problems and pay higher taxes and penalties, if any. Tax delay interests are very high, thus during a long discussion the interest cost can even double the higher tax due.

Notes for foreign investors

In Colombia, there is a broad non-discrimination policy, which means that foreign investors have the same rights, restrictions, protections and treatment as any Colombian investor. This can be seen in all legal regulations. This is very important, since a foreign investor can be sure that any limit or risk will be the same regardless of the origin of the investor.

Other regulators it works closely with

In Colombia, DIAN receives information from many public entities or private entities with public functions such as the Chambers of Commerce or the Notaries. Chambers of Commerce are of great support and help newly formed legal entities to file their tax and obtain a tax ID.

The Colombian Central Bank is the entity that manages the registry of foreign exchange transactions. Therefore, this entity is also an important source of information for DIAN that can be the basis for audits regarding tax and exchange control matters.

Unfortunately, what happens in many economic sectors is that while there are public entities trying to promote activities and businesses, DIAN is often trying to press for more collections and undertake massive audit activities against taxpayers of the relevant economic sector. It means that many times DIAN’s interest is contradictory to the interest of other entities and what they are trying to achieve.