Interaction of IFRS with tax regulations

It is no secret that Law 1819 of 2016, by means of which the tax reform was approved, was substantially modified in the days prior to its approval.  Such modification was due to the intense lobbying exercised by different interest groups and which led the Government to desist from multiple levies that had been initially proposed and to adopt others that were not proposed in the initial project. In the midst of so much intervention by so many interested parties, many regulations were left with large gaps, others with errors and inconsistencies and others with serious contradictions that, as will be explained, can not only have highly harmful effects on the economy, but also wipe out an industry. Such is the case of river transportation with shallow-draft vessels and flatboats.

River transportation with shallow draft vessels and flatboats was identified as a strategic activity that could dynamize the country's transportation system, which is why, through Law 788 of 2002, it was established that, for a term of 15 years, its income would be exempted from income tax. Other exempted rents were granted for longer terms, as was the case of hotel services rendered in new or remodeled hotels, which was granted for 30 years. Time went by and the Government, faced with the need to increase revenue, decided to wither and/or terminate the treatment of exempt income for certain industries in order to be able to tax them with income tax. However, due to the -legitimate- pressure of those who invested in such sectors, it was necessary to grant a kind of transition regime so that those who had started their activities under the exempt income regime could continue with such treatment for the term granted and not be surprised by the untimely change of the law. Likewise, it was essential for the State to be able to continue giving fiscal privilege to other strategic sectors, on which it based its long-term development bet. Paradoxically, this was also the case of river transportation with shallow-draft vessels and flatboats.

Thus, since the Government wanted to extend the benefits for the river transportation industry for fifteen more years, and given the eagerness and lack of rigor with which the tax reform was finalized, such incentive was granted and, simultaneously, eliminated from the text of the tax reform. Thus, while numeral 8 of article 99 of the reform established that, as from January 1, 2018, the income from such transportation would be exempt from income tax for 15 years, article 98 of the same law established that "as from the taxable year 2018, inclusive, the exempt income provided for in numeral 2 (...) of this article shall be subject to income tax". Number 2 referred to above corresponds to the exempted income for shallow draft river transportation. In other words, the exemption is conferred and simultaneously eliminated, and this will surely be used by the Dian to indicate that, as from 2018 such exemption will not be applicable.

Not even with the greatest hermeneutical effort is it possible to interpret that this contradiction is innocuous and that it does not constitute a final blow to the development of river transportation in Colombia. We will see the Government trying to "clarify" this through "regulatory" decrees or, probably, through the already well-known decrees by which "minor" spelling mistakes are corrected.

Law 1819 of 2016 (tax reform) substantially changed the way Niifs relate and interact with tax regulations. First, by expressly repealing Article 165 of Law 1607/2012 which provided that for the four years following the issuance of such law, Decree 2649/1993 would continue to apply for tax purposes and by incorporating within the Tax Statute (E.T.) Article 21-1, the process of incorporation of Niifs as a tax basis for income tax purposes was accelerated, starting such treatment in 2017.

The mentioned article 21-1 of the E.T., cornerstone of the new Niif/tax standard interaction system, establishes that "for the determination of the income tax and complementary taxes, in the value of assets, liabilities, equity, income, costs and expenses, the taxpayers of this tax obliged to keep accounting will apply the recognition and measurement systems, in accordance with the technical accounting regulatory frameworks in force in Colombia, when the tax law expressly refers to them and in the cases in which this does not regulate the matter (...)". From this it is possible to conclude that, for tax purposes, except for the exceptions made by the tax law, the IFRS will be applied as the basis for determining income tax. The tax reform introduces three (3) systems of interaction Niif/tax regulation: (i) remission system with exceptions, (ii) direct legal regulation system and (ii) direct remission system.

The system of remission with exceptions is based on the provisions of the aforementioned article 21-1, where it is stated that those obliged to keep accounting records shall apply -for all purposes- the IFRS, except for the exceptions established by the tax law itself. Given that the IFRS have their own dynamics (financial) that obliges to consider income, costs and expenses as realized when they are "accrued", and this may generate harmful effects in the tax system, the legislator, through the consecration of the exceptions to the principle of realization of income, costs and deductions, intended to consecrate the exceptions, for tax purposes, of such events.

Thus, in the aforementioned articles 28, 38 and 61 of the reform, the law indicates, by way of exception, when certain income, costs and expenses may be considered realized for tax purposes, thus controlling the tax effect of implementing the NIIF as the tax basis for income tax.

The system of direct legal regulation occurs when the legislator, based on the dynamics given by the Niff to certain operations, regulates their tax effects. This is the case, for example, of the regulation of the tax treatment of preferred shares (art. 35), of concession contracts (art. 31) and of contracts for construction services (art. 97), among others.

Likewise, under this system, the legislator regulates the tax treatment of certain events that may not be taxable under the traditional conception of the income tax generating event, such as, for example, the "liabilities for deferred income resulting from customer loyalty programs", which, for tax purposes, must be recognized as tax income, at the latest, in the following tax period or on the expiration date if it is less. The direct remission system occurs when the tax legislator refrains from intervening in the tax effects of the financial rule and follows what it indicates. This system may generate difficulties when determining the tax effects of the rule. This is the case, for example, of the tax treatment of factoring.