Employer Action Code: ACT

Tax reform that lowers the taxable income rate of legal entities to 25% was approved in December 2012 and became effective on Jan. 1, 2013. It also decreases the employer social tax by 13.5%, from 29.5% to 16%, paid to assist employees earning less than 10 times the monthly legal minimum wage. The employee social tax remains at 8%. At the same time, 8% of the corporate income tax (currently 33%) will be paid directly to the national institutions that currently receive the employer social tax.

Key Details

Social taxes are subject to a ceiling of 25 times the monthly minimum wage, which in 2012 was CP566,664 (US$340), so the ceiling for 2012 was CP14,166,600 per month (about US$8,500). However, there is no ceiling on the employer social tax for family allowances, which is 9% of the 29.5% total. In addition to the social taxes mentioned above, there are employer social taxes for workers compensation (which varies between roughly 0.5% and 7%, depending on the assessed degree of risk for the company, subject to the ceiling) and unemployment (8.3%, with no ceiling) that are unchanged.

Income taxes paid by Colombian and foreign companies will be reduced by 8%, from 33% to 25%. At the same time, a new 8% corporate income tax, Contribución Renta Empresarial para la Equidad (CREE), took effect on Jan. 1, but an additional percent, for a 9% total, will be charged during 2013, 2014 and 2015. This new tax will be committed to the Servicio Nacional de Aprendizaje (National service of apprenticeship, known as SENA) and the Instituto Colombiano de Bienestar Familiar (an institution for child and family well-being known as ICBF). So the modification will only vary the source from which these two institutes are funded.

Implications for Employers

The proposal shifts the tax burden currently imposed on wages to corporate income. The goal is to lower unemployment and decrease the percentage of labor that is “off the books” — i.e., part of the “informal” economy — by reducing employment costs. (A similar reform was recently enacted in Argentina.) The true implication for companies lies in the exoneration of parafiscal payments for workers whose wages do not exceed 10 times the monthly legal minimum wage. This represents a 13.5% decrease in social contributions. This exemption begins when the system of withholding taxes for the collection CREE is implemented (before July 1, 2013). The reform seeks to lower unemployment and informal labor by reducing employment costs. This will benefit employers with a large number of employees or whose workers are not highly paid. Employers will need to adjust their payroll systems and corporate income tax returns to reflect the change.