Corporate tax policy: 2014-2018 challenge

During the last few years, investor confidence and entrepreneurship in general -both large and small- have suffered from the lack of a Corporate Tax Policy, in three fundamental aspects (which I will develop in three different columns due to the length required to develop the idea correctly): 1) the sudden and unconsulted change of the fundamental rules of the game for investment, 2) the fiscal and anti-business interpretation of certain regulatory provisions, and 3) the preservation in the legal system of institutions that do not meet the current economic reality. I will give some examples of these facts:

1. Sudden change of the rules of the game:

With the issuance of Law 788/2002, the State created a catalog of exempt income for certain industries that since then were considered a priority (sale of wind energy, river transportation, new hotel business, Colombian software production, forest exploitation, etc.). Income from such activities would be exempt for periods of between 15 and 30 years depending on the maturity time of each business. Many entrepreneurs, national and foreign, made considerable investments in such industries and several of them, in order to keep the budgets of the models on which they made their investments, signed legal stability contracts under the framework of Law 963/2005, paying a premium to stabilize the fundamental rules that led them to invest in Colombia (among these, of course, the one of being able to take all their income as exempt). When the investment was foreign, it was normally made through a branch of a foreign company, since it was interesting for the investor to be able to take as a deduction, in the Financial Statements of the Head Office, the loss that this business would naturally generate during its first years given its long maturation period. Then, out of nowhere, Law 1607/2012 arrived with two adverse effects to this investor; the Cree (income tax for equity) and the taxation (as a dividend) of transfers between branches and parent companies. Thus, for the entrepreneur who made his investment under the belief that he would not be taxed on his income for a period of between 15 and 30 years and that he could repatriate it without taxation, and who built his investment models on those premises, he suddenly found himself having to pay a new income tax (of 9%) and a withholding tax of 33% (rate applicable to foreigners who are not taxpayers of the Cree). Even the investor that has stabilized (by signing the legal stability contract) the benefit of exempt income will have to pay this new tax and, unless it has stabilized article 30 of the Tax Statute (which establishes the definition of dividends), it will also have to apply -through its branch- withholding tax on the repatriated income.

Likewise, the depreciation of its assets, amortization of its intangibles and other legitimate tax shields could be made only up to the limit of the new income rate (25%) but not with respect to the additional 9% that makes up the Cree. With this type of changes in the investment rules... Who will invest in Colombia again?