Companies in Colombia Will Soon Have to Confront New Minimum Income Tax Requirements

Companies in Colombia will soon have to confront a new tax, the Minimum Income Tax (TTD), that requires them to pay 15% of profits regardless of size.

The TTD — which forces so-called micro, medium, and small businesses (Mipymes) to made federal payments under the same parameters as the large, multinational firms — was included in the tax reform approved in the Colombian congress at the end of 2022, largely so that the country could comply with requirements of the Organisation for Economic Cooperation and Development (OECD).

The regulation, issued as the Law 2277 of 2022, added 28 new articles, modified 56 and repealed 10 in relation to the content of the Tax Statute. Additionally, with respect to the rules outside the said statute, it added 14 articles, modified 16 and repealed 8, for a total of 132 rules affected by this legal code

A New Burden for Small Businesses

Juan Carlos Arbeláez, a tax expert at financial consulting firm Crowe Colombia, told Finance Colombia the measure is generating concern about equity and regressive taxation for entrepreneurs, among others, since it does not consider the overall amount of revenue a company takes in. In general terms, he says, larger companies are typically expected to contribute more to the tax system given their greater financial capacity to apy.

Moreover, Arbeláez said that the TTD implies an ambiguity that arises primarily from the varying interpretation of certain terms and conditions that impact the determination of taxable income and allowable deductions. Colombian tax regulations, he added, consider a series of exceptions and special treatments for certain types of income or economic activities, which adds complexity to the process of calculating this rate.

The tax expert argues that policies such as this could reduce small businesses’ ability to contribute to some fundamental aspects of the economy, and this could negatively impact employment generation, innovation, economic dynamism, regional development, and the overall Colombian economy.

The Challenge for Informal Companies

In Colombia, approximately 43% of merchants are informal and do not pay traditional taxes. While obtaining formality is often a goal, when they clear this hurdle, they run into new tax burdens — which are high in Colombia compared to the OECD average.

Between income tax, value added tax, consumption tax, industry and commerce tax, and registration tax, and more, for Alicia Hinestroza, a public accountant and former entrepreneur in event catering, the combined burden becomes an obstacle that prevents many entrepreneurs from advancing their projects forward.

In the case of TTD, she pointed out that this flat rate prevents the government from seeing the economic reality of entrepreneurs and small business owners who lack financial stability. Hinestroza invited the government to ”look at the reality of the social, economic and political environment of our emerging economy and make adjustments that truly benefit the generators of smaller economies or those that are in the initial stage.”