Colombia’s New Digital Tax Rules Face Implementation Challenges

In an increasingly digitized world, implementation of tax policies faces significant challenges, especially in the context of a digital economy.

Colombia’s recent tax reform, whose final regulations take effect on Jan. 1, marks a clear departure from the OECD’s proposed guidelines for its two-pillar approach. Due to the low probability of ratifying the multilateral convention, adoption of significant economic presence was chosen as an alternative.

Despite discussions about expanding the scope of these digital rules, doing so could increase complexity of implementation without significantly redistributing benefits.

The traditional need for a constant physical presence to properly tax income is distorted, as digital platforms allow relevant economic activities without requiring a physical location. This phenomenon raises questions about how countries can adapt their fiscal policies to address the growing gap between economic reality and existing tax frameworks.

Economic Presence Rules

Under Law 2277 of 2022, nonresident individuals and entities engaged in substantial economic activities in Colombia face income taxation on revenues generated from sale of digital services.

A nonresident individual or entity is considered to have an SEP when deliberate and systematic interactions in the Colombian market lead to gross income exceeding 31,300 tax value units (approximately $330,000) in a fiscal year, for transactions involving sale of goods and services to Colombian customers.

Marketing engagements reaching more than 300,000 users, displaying prices, and accepting payments in Colombian pesos, are considered deliberate and systematic interactions under SEP rules.

Digital services falling under SEP measures encompass various activities such as online advertising, downloadable content, free streaming services, monetization of user data from digital market activities, and services provided by intermediary platforms. SEP rules have a broad scope, covering all types of digital services.

In Colombia, SEP rules offer two options for tax payment: withholding tax or filing an income tax return.

Opting for WHT involves a 10% tax deduction at the source for payments made to entities with an SEP. This deduction represents the final tax obligation, with no additional required formalities. Secondary legislation designates Colombian legal entities, card issuers, and payment gateways as withholding agents.

For those who prefer filing an income tax return, nonresident individuals or entities with an SEP have the option to pay a 3% tax on all gross income derived from sales or digital services provided to users in Colombia.

Potential Challenges

Implementation of SEP rules in Colombia poses various challenges, including defining aggregated activities, criteria for nexus to the Colombian market, and lack of clarity on gross income in different business models.

First, Law 2277 of 2022 establishes that SEP criteria shall be applied in an aggregate manner for activities carried out by related parties. Secondary legislation doesn’t explicitly address what’s meant by aggregated activities or provide clear guidelines on when and where they are considered performed.

This ambiguity may create uncertainty for companies subject to SEP as they seek to understand obligations related to their operations.

Likewise, there’s some controversy regarding criteria for establishing a nexus to the Colombian market. This is mainly due to the lack of clarity in secondary legislation regarding the delivery direction element. Without clear guidelines, interpretations can vary, which can lead to conflicts when determining SEP.

Another potential point of conflict is lack of clear definition of gross income for determining the taxable base. Different business models, such as marketplaces or online intermediary platforms, may interpret this concept differently, generating a risk of double taxation.

Absent these clarifications, general rules, jurisprudence, and the Colombian accounting technical framework, especially in its more conservative application, are likely to be considered. In other words, gross income will be considered as income susceptible to increasing equity, not income received on behalf of third parties.

Despite these challenges and uncertainties, one of the few certainties is that the regulatory decree aligns seamlessly with the legislator’s intended purpose: incentivizing SEP taxpayers to update their tax IDs and adhere to bimonthly returns.

The driving force behind this initiative appears rooted in financial considerations. The taxable base is more favorable if opting to pay a 3% tax on all gross income derived from sales or digital services, versus the 10% WHT for payments to entities with a SEP.

This financial advantage becomes particularly noticeable when secondary legislation introduces additional complexities when opting for the WHT alternative, making the latter less appealing.

The SEP system faces substantial challenges, spanning from the absence of precise definitions to the imperative need for tailored solutions addressing the intricate dynamics of diverse business models.

Clarity and awareness of business nuances becomes paramount, ensuring effective and equitable application of this new tax system.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Juan David Velasco is transactional tax partner and wealth management practice group leader at Baker McKenzie, Colombia.

Juan Diego Fernandez is an associate in Baker McKenzie’s Bogotá tax practice group.

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