Through a technical document, the Ministry of Finance clarified what the corporate effective tax rate (TET)how it is measured and made some clarifications on this concept, after a debate on the calculation of this rate arose in recent days.
(Effective Tax Rate for companies would reach 29.4%).
According to Minhacienda the TET It is the percentage of the profits that the companies allocate to the payment of taxes.
According to calculations made by the Ministry of Finance and Public Credit (MHCP), the TET in Colombia stands at 25.5%.
This figure is below the nominal income tax rate (35%), mainly as a result of tax benefits, accessed to a greater extent by large companies (revenues greater than $50 billion per year).
The document points out that with the Tax Reform, the TET would reach 29.4%, a figure much lower than the data resulting from omitting tax benefits or due to other inaccuracies. In fact, the Bill seeks to reduce unjustified benefits.
(Effective Tax Rate: Andi’s figure does not coincide with that of the Government).
According to the document, the Ministry of Finance and Public Credit (MHCP) proposes an estimate of the TET that takes into account the corporate income tax and the incidence of tax benefits.
tax collection
On the effective tax burden
In addition, in order to respond to the call for a broader view of the business tax burden, the MHCP estimates include:
– The tax on dividends. The tax paid by individuals on their dividend income is included, taking into account the fact that not all company profits are distributed to shareholders; a fraction of profits is reinvested. Likewise, it is contemplated that the Tax Reform would leave income from dividends subject to the progressive table (article 241 of the Tax Statute) with a marginal discount of 19%.
– Wealth tax. The incidence of this tax is considered, both for the cases in which it is directly levied on companies (as was the case until 2017), and in those cases in which it is levied on shareholders (as has been the case since 2019). The estimates include the portion of equity corresponding to shares.
(How much do companies pay?, the pulse between the Government and Andi).
The increase in the effective tax burden of companies, corresponding to the Tax Reform Project, is estimated at 3.9pp. The largest contributions to this increase correspond to the income tax (4.0pp), while the dividend component decreased by 0.2pp, especially due to the reduction of the burden on smaller companies.
The increase in TET is concentrated almost entirely in large companies. Thus, while for small companies the TET is maintained, the increase for large companies is 5.1pp. This is explained by the fact that large companies have greater access to the tax benefits that are being reduced with the Bill.
According to Minhacienda, in the case of the tax on dividends, the Tax Reform Project reduces the burden for small and medium-sized companies, and only increases it for large ones.. This is a consequence of the implementation of a marginal and progressive scheme on the taxation of dividends.
Finally, the Ministry of Finance highlights that the calculation of effective tax rates carried out by the OECD, with its own methodology, shows that the corporate tax burden in Colombia is less than (or equal to) the rates in Costa Rica, Chile, Argentina and Mexico, and is close to those of Peru and Brazil.
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