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The regulation, issued as the Law 2277 of 2022, added 28 new articles, modified 56 and repealed 10 in relation to the content of the Tax Statute. Additionally, with respect to the rules outside the said statute, it added 14 articles, modified 16 and repealed 8, for a total of 132 rules affected by this legal code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

Since June 1, all of point of sale (POS) invoices that exceed 212,000 Colombian pesos issued by supermarkets, restaurants, shops, and other small businesses must be accompanied by an electronic invoice. While the changes have been well publicized since last year, Crowe began warning its clients of the impending change well before it went into force and assisted most of its larger taxpaying clients through the first two waves of implementation in February and April. 

“Now, all of them must take this rule into account for their income statement next year, since from this date on, only expenses formally recorded through the electronic invoice document can be deducted,” said Guillermo Berrío, partner of business process outsourcing at Crowe Colombia.

The phase in of the rule started in February and was outlined through Resolución no. 001092, issued by the National Directorate of Taxes and Customs (DIAN) last year to push a broader acceptance and adoption of the electronic invoicing system in the country.

Specifically, the new rule specifies that “the sale of the good and/or provision of the service that is registered in it does not exceed five (5) units of tax value (UVT) for each POS equivalent document that is issued, excluding the amount of any tax.” The five units of tax are currently valued at 212,000 pesos, or roughly $50 USD at the current exchange rate.

The change also forces businesses to adjust their paperwork come tax season to reflect the 5 UVT stipulation for every issuance of “a bill for a cash register with a POS system,” and it forces those creating invoices in accordance to the resolution to issue an electronic sale invoice “[in] cases where the sale and/or provision of services exceeds five (5) UVTs.”

In the past, the new electronic invoicing push has led to new adjustments from both businesses and taxpayers in order to adopt the new system. For example, taxpayers who will try to use the regular POS receipts from businesses who do not use electronic invoicing need to create e-documents in order to take advantage of any tax deduction in the future.

This is what Crowe Colombia estimates in its study: “How possible is the energy transition in Latin America,” in which it analyzes the possible paths we could take, compared to other countries in the region, and the implication of the decisions taken by the national government in the coming months.

According to Janeth Romero (above photo), a Crowe audit partner, “by way of comparison, it is estimated that in the United States and Europe the energy transition would cost between 5% and 6% of GDP per year. Reducing CO₂ emissions costs money, since it must make a technological transformation for electricity generation, in the mobility of the transport system and support the conversion of sectors that generate large emissions such as agriculture and clothing, among others.”

Taking into account that in the first stage of this transition the great protagonist would be gas, the use and production of oil and coal would tend to be reduced significantly since tangible facts such as the manufacture and sale of electric cars, the race for solar and wind energy, would begin to discourage their consumption.

“This means that total demand for fossil fuels would have to decline steadily until 2050, by an annual average equivalent to the production of a large oil field. On the other hand, offshore oil operations in the exploration stages would become less and less viable and those that are underway would become riskier”, assures Romero.

According to analysis by the University of Texas, the decrease in the fall in demand, due to a hypothetical concerted transition policy at regional level, would affect all oil producers in the region and the impact would be felt more by those that are more dependent on crude oil, which are Venezuela, Ecuador and Colombia.

Historically, before the sharp decline registered in recent years by the state-owned oil company PDVSA and the subsequent sanctions imposed by the United States, around 95% of the foreign currency coming into Venezuela came from oil. Venezuelan crude oil sales in 2019 totaled US$12.2 billion, equivalent to 83% of the country’s exports, according to data from the Observatory of Economic Complexity.

Taking a look at Brazil, this is a country that has become “the great oil producer in Latin America”, with almost three million barrels per day, a figure similar to that reached by Venezuela and Mexico “in their good times”, but despite the size of the sector, Brazil is not dependent on oil, as it produces agro-industrial products on a large scale that position it as a natural exporter.

In the case of Argentina, unconventional crude oil deposits have recently been discovered (known as shale oil) that have great potential, and it is worth noting that this country, together with Chile and Bolivia, is known as the “lithium triangle”, where the world’s largest reserves of this mineral, key for the production of electric batteries and vital for the energy transition, are found.

Now, it is important to analyze that the current context allows us to foresee that, at least in the next three decades, the consumption of fossil fuels will continue to increase, then the countries of the region will be able to continue producing and making the business profitable and thus, obtain sustainable resources to guarantee the adequate energy transition.

However, to ensure an adequate process and the sustainability of the industry, the countries most dependent on oil and its derivatives must focus efforts on efficiency and reducing production costs, and in turn, reduce the intensity of carbon and greenhouse gases.

“For Colombia, on the other hand, these resources continue to be absolutely necessary for the national economy and therefore it is advisable that while a serious strategy is being prepared with truly sustainable projections, it is still necessary for industry players and the government to mitigate the effect of the fall in production, as it will fall faster than demand and there is a risk of losing self-sufficiency, impacting state revenues and its announced social investment plans” concluded Romero.