On August 8, 2022, the Ministry of Finance (“MHCP”) of the new government of Gustavo Petro in Colombia, filed before the House of Representatives bill 118/22 (the “Bill”) with a proposed tax reform, aimed at collecting an extra 25 billion COP (approximately US$6.000 million) yearly in new taxes and amendment to existing ones (the “Tax Reform”).
The Bill is currently being discussed in the Colombian Congress and is not yet in force. It may undergo changes in Congress but under the current political environment, there is little doubt that the Tax Reform will be approved within the current year and probably by November 8, 2022, coinciding with the deadline for presentation of the Government’s National Development Plan. When approved, the Tax Reform may be subject to constitutional control by the Colombian Constitutional Court. The Tax Reform, as is, includes new taxes and new rules for taxation for oil & gas and mining activities. These are the most relevant aspects of the Bill related to the extractive industry:
1. General taxation
- General corporate income tax rate remains unchanged at 35%.
- VAT rate remains unchanged at 19%.
- Tax deductions on education of labor force, rural capitalization, environmental investments, technology investments, sports scholarships, profit sharing with labor force, etc. are limited to 40%.
- Elimination on tax deductions for investments, payments or donations to club affiliations, domestic films, contributions to mutual funds, new libraries, and creative economy projects.
- Increase in capital gains tax for companies from 10% to 30%.
- Wider catch-up for foreign companies with significant economic presence in Colombia: The Tax Reform introduces the income tax for foreign companies, individuals, and entities with a “significant economic presence” in the country. The thresholds for stablishing a significant presence are as follows: (i) A gross income of 31,300 tax value units (currently equivalent to 1,189,525,000 COP) or more during the taxable year from transactions involving goods or services with persons in Colombia; or (ii) The use of a Colombian website, a Colombian domain name (.co); or (iii) Maintaining an interaction or marketing display with three hundred thousand (300,000) or more Colombian users during the taxable year, including the possibility of displacing prices in pesos (COP) or allowing payment in pesos (COP).
- National Carbon Tax: Articles 29 and 30 of the Tax Reform seek to amend article 221 of Law 1819 of 2016 (the “National Carbon Tax” or “NCT”), by increasing the general rate of the tax to COP 20,500 per-ton of carbon equivalent, also taxing NCT throughout the national territory. It should be noted that those who certify to be carbon neutral will be exempt from paying NCT.
2. Specific taxation for oil & gas and mining activities
- Tax on exports of crude oil, coal, and gold
The Tax Reform creates a tax for individuals and legal entities exporting crude oil, coal and gold. A 10% tariff will be applied based on a percentage of the total value of exports, which is subject to the international price of the products exceeding a reference price established by law.
The tax is structured as a windfall tax with very low commodity prices thresholds: in the case of coal (Newcastle), the threshold price established is (i) coal: USD 87/ton (Newcastle); (ii) crude oil: USD 48/bbl (WTI); and (ii) gold: USD 400/oz. The international price of the commodities will be published and updated monthly by the Ministry of Mines and Energy.
This means that, for example:
- If the international price per gold ounce is USD 1800, a rate of 10% must be paid on a taxable base of USD 1,404. Therefore, the exporter must pay a total tax on gold exports of USD 138.6 per gold ounce exported.
- If the international price of a barrel of crude oil is USD 99 per barrel, a rate of 10% is payable on a taxable base of USD 50.45. Therefore, the exporter must pay a total tax on crude oil exports of USD 5.04 per barrel of crude oil exported.
- If the international price of coal is USD 120 per ton, a rate of 10% is payable on a taxable base of USD 33. Therefore, the exporter must pay a total tax on coal exports of USD 3.3 per ton of coal exported.
The above data are obtained by applying the following equation:
FOB: is the Free on Board (FOB) dollar value of the export of the commodities.
ObservableP: is the international price of the commodities.
ThresholdP: is the reference price established by the Tax Reform.
The declaration and payment of the tax on exports of crude oil, coal and gold is monthly and must be declared during the first five working days of each month. The tax will be applied on a percentage of the total Free on Board (FOB) dollar value of crude oil, coal and gold exports made in each calendar month.
- Non deductibility of royalties for income tax purposes: The Tax Reform eliminates the deductibility of royalties paid for the extraction of minerals or hydrocarbons, as costs or expenses for income tax purposes.
- Straight 5-year amortization of evaluation exploration assets of nonrenewable resources is eliminated in the Tax Reform and no substitute amortization regime is established.
- Exclusion of hydrocarbons and mining projects from tax regime applicable to “mega-investments”: Current mega-investments regime allows entities making new investments in Colombia with a value equal to or greater than approx. USD 270M in any industrial, commercial and/or service activity and generate at least four hundred (400) new direct jobs associated with the development of this investment, the following benefits: (i) Income tax rate of 27%; (ii) accelerated 2-year depreciation of certain assets; and (iii) presumptive income tax and equity tax not applicable. Mega investments in the hydrocarbons and mining sector will no longer be able to benefit from this regime.