I. TAX AUTHORITIES RULINGS
1. Ruling 0078 of 2016: Application of the 25% labor income exemption on the computation of the minimum withholding tax on wages
In decision C-492 2015, the Constitutional Court held that the 25% labor income exemption established by Article 206 (10) of the Tax Code also applies to the computation of the income tax under the alternate, so-called IMAN and IMAS methods.
In this context, DIAN was consulted about the scope of this decision of the Constitutional Court of Colombia, in regard to the following:
(i) What is the scope of the expression "first phrase" contained in Decision C-492 of 2015?
(ii) Does the limit of 240 monthly UVTs set by Article 206 (10) of the Tax Code applies to the computation of the 25% exemption under the IMAN and IMAS methods?
(iii) Does the 25% labor income exemption applies also to the computation of the minimum withholding tax provided in Article 384 of the Tax Code?
DIAN replied to these questions in the following way:
(i) Scope of Decision C-492, and application of the 240 UVT cap to IMAN and IMAS
For DIAN, by using the expression "first phrase", the Constitutional Court sought to indicate that the computation of the 25% exempt income for both IMAN and IMAS purposes is not governed by the procedure established in the second phrase of Article 206 (10) of the Colombian Tax Code. This is so given that said procedure includes the deduction of items that are contrary to the nature and purpose of the mentioned IMAN and IMAS systems.
On the other hand, DIAN believes that the expression "first phrase" that the Constitutional Court used covers both the exempt income percentage (25%) and the limit of 240 monthly UVT. In this manner, as taxpayers apply the mentioned exemption under IMAN and IMAS, the actual exempt amount may not exceed 240 UVT per month.
(ii) Application of the 25% exemption to the computation of the minimum withholding tax amount
In this regard, DIAN believes that Decision C-492 of 2015 must be interpreted restrictively. Therefore, this decision may only be applied with respect to the computation of income tax under both IMAN and IMAS; thus it is not valid to extend its reach to aspects that were not treated expressly in the exemption rule (such as the minimum withholding tax amount issue).
In this manner, for DIAN the 25% exemption does not apply to the determination of the minimum withholding tax base regulated by Article 384 of the Tax Code. We at the Firm believe that this interpretation is openly illegal.
2. Ruling 34760 of 2015: Qualification of income items that are not taxable in Colombia in the framework of a DTT and Decision 578 of the Andean Community
In this Ruling, DIAN resolved the following queries:
(i) The business profits that the Colombian state may not tax under double taxation treaties must be treated as "nontaxable income" (ingresos no constitutivos de renta)? Or as exempt income?
(ii) Is there any difference between double taxation treaties and Decision 578 of the Andean Community Commission in regard to the tax treatment of the business profits that are not taxable in Colombia?
DIAN replied to these questions in the following way:
(i) Under the DTTs subscribed with Spain, Chile, Switzerland, Canada, Mexico, South Korea, India, Czech Republic and Portugal, the business profits that the Colombian state may not tax must be reported as "nontaxable income" (ingresos no constitutivos de renta ni ganancia ocasional). This conclusion was grounded on the following considerations:
- For DIAN, when a nonresident realizes or makes a business profit that Colombia cannot tax, [the nonresident] is required to file an income tax return. Indeed, for DIAN, DTTs do not affect the formal duties that the Colombian state imposes under its law; and in this case, there is no rule in the law that exonerates [the nonresident] from his obligation to file an income tax return.
- In the DTTs that Colombia has subscribed, the only state with taxing powers over any business profits is the state of the residency of the party that makes the profits, except where the business profits are obtained through a permanent establishment located in the source country.
In this manner, where Colombia has no power to tax certain business profits, it cannot tax them in any way. To this extent, the Colombian state cannot (i) treat them as exempt income, because in this case it would be taxing them at a 0% rate; and it cannot either (ii) apply a tax credit, because this mechanism is based upon the notion that there is a certain income that two states may tax.
- In this manner, the business profits that Colombia cannot tax under any DTT must be reported as ingresos no constitutivos de renta and not as exempt income.
(ii) On the other hand, DIAN has reiterated its doctrine with respect to the revenues that the Colombian state cannot tax under Decision 578 of the Andean Community Commission. According to this authority, in this case these revenues must be treated as exempt income.
3. Ruling 36304 of 2015: Tax treatment of trust rights
DIAN was queried about the following:
(i) A trust right qualifies as a movable asset. Is this condition modified when the asset is transferred to another person for whom this trust right qualifies as a fixed asset, according to the latter's normal course of business?
(ii) Which is the tax nature of a set of trust rights where the contributed underlying asset is merely cash?
In this Ruling DIAN held the following:
(i) That the assignment of trust rights does not entail the fixed asset or movable asset status of such trust rights.
In this sense, DIAN believes that trust rights have the same tax conditions of the properties or rights that were contributed to the separate patrimony; they do not have the conditions that they would have in the heads of the [new] trust rights holder as a consequence of the assignment.
(ii) Money or cash are neither a movable nor a fixed asset in nature.
In this sense, DIAN believes that money or cash is just a payment means; not a property that may be qualified as a fixed or movable asset.
II. COURT PRECEDENTS
1. Decision C-668 of 2015: Deduction of costs and expenses of employees with no labor or statutory ties.
According to the fourth paragraph of Article 26 of the Tax Code, natural persons who qualify as employees and whose revenues do not originate in a labor contract or a statutory labor relationship cannot claim as deductions any costs and expenses other than those allowed to salaried personnel.
This prohibition was declared unconstitutional by the Constitutional Court, on the following grounds:
(i) By virtue of the principle of equity enshrined in Article 13 of the Colombian Constitution, the tax burden of every person must be in proportion to the person's economic capacity. In this manner, those persons who have similar economic capacity must have an equivalent tax burden; and, for the same reasons, those persons with different economic capacities must have different tax burdens.
(ii) In relation to the challenged rule of the law, for the court the point is clear that salaried people and "employees" which have not been hired under a regular labor relationship or a statutory labor relationship have different situations and economic capacity. Indeed, the cost and expenses that the latter must incur to provide the services are not the same that a salaried person must incur. Accordingly, [as the latter] has to incur greater costs and expenses, economic capacity is different in both cases.
(iii) Accordingly, the fourth paragraph of Article 206 of the Colombian Tax Code violates the constitutional principle of equity, because it levels the tax treatment of persons who have different taxpaying capacity (salaried employees and employees with no regular labor or statutory labor relationship).
2. Decision C-052 de 2016- Foreign-exchange gains
Article 32-1 of the Tax Code reads that "the adjustment for exchange gains on assets denominated in foreign currency which the taxpayer holds on the last day of the taxable year constitutes revenue in the same tax year for those who keep accrual-based accounting books.
For the court, this Article is constitutional, because it does not disregard the principles of justice and equity. Indeed, according to the court–
(i)Foreign exchange gains represent an increase in the economic capacity of the taxpayer; accordingly, it is in conformity with the Constitution that the lawgivers treat this gain as taxable income.
(ii)Any assets denominated in foreign currency are presumed to be profitable, according to Constitutional Court precedent.
(iii)According to tax laws and regulations, foreign exchange gains constitute revenue and foreign exchange losses constitute expenditure. Accordingly, this is not a mere legal fiction but a variable economic reality.
(iv)Foreign-exchange gains represent the ability of the taxpayer to acquire additional units of the local currency using the foreign currency. Accordingly, these gains reflect the taxpaying capacity of the taxpayer.
ARTICLE 206. EXEMPT LABOR INCOME. The totality of payments or credits to account that originate in regular labor relationships or statutory labor relationships are subject to income taxes, except for the following:
10. 25% of the total value of labor payments, which cannot exceed 240 tax units (UVT) per month. This portion of taxable income is calculated after items for nontaxable income, other available deductions and any other available exempt income items are deducted from the total labor payments received by the employee or worker.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.