Plugging a hole in the fiscal budget by way of new taxes is not a surprise these days. What’s not surprising either is the corporate creativity in avoiding or minimizing them. Take for example Colombia’s recently created “equity tax,” which looks to collect revenues based on companies’ January 1, 2011 net worth.
The equity tax (Law 1370) applies to income-tax-paying legal entities, individuals and “de facto corporations” who have a net worth, as of January 1, 2011, equal or higher than COP3bn (about US$1.5mn). It must be paid in eight equal installments during the years 2011 to 2014; two different tax rates will apply:
- A rate of 2.4 percent for a net worth equal to or higher than COP 3 billion and not exceeding COP 5 billion (approximately USD 2.5 million), and;
- A rate of 4.8 percent for a net worth equal to or higher than COP 5 billion.
The taxable base of the one-time equity tax is the net worth (assets less liabilities) owned on January 1, 2011. From the taxable base it is possible to exclude (among other items) the net value of shares owned in Colombian companies. However, according to Article 287 of the Tax Code, debts owed by Colombian companies or branches of foreign companies to their foreign related parties are considered, as a general rule, as part of the net worth of the Colombian company or the local branch. Therefore, for purposes of income tax and equity tax, such debts are not considered liabilities.
“Without doing anything, we would owe about $1 million in equity tax,” said one treasury manager recently. So, what are the options for reducing the net worth before January 1, 2011? Every company is different and should consult with tax advisers before taking action, but people familiar with Colombian tax codes see two possible avenues:
Loan to pay dividends. If the company has non-distributed profits but no cash flows to pay dividends, it can take a loan from a financial entity in order to do so; the financial liability resulting from the loan decreases the net worth.
Purchase of shares in Colombian companies or in companies located in CAN territory. Article 295-1 of the Tax Code allows for the exclusion of (among other items) the net value of shares owned in Colombian companies from the taxable base, and a legal opinion from the Colombian tax authorities possibly expands this to shares owned in companies in the Andean Community (CAN) countries. The latter may not be a viable option for most companies, depending on their legal entity structure and perhaps lack of natural connections to other CAN countries, but it is yet another topic for the all-important conversations between tax and treasury.