Tax normalization tax

Law 1943 of 2018 - Financing Law - created for 2019 the tax normalization tax as complementary to income and wealth taxes, whose recipients are those taxpayers who as of January 1, 2019, had omitted assets in their tax returns or nonexistent liabilities.

With the issuance of Decree 874 of May 2019, it is important to consider the following aspects:

1.- Although it was not subject to regulation by the referred Decree, it is important to return to the origin of this tax (tax normalization) as a complementary tax to others (income and wealth tax).

The above, based on the assumption that when a taxpayer omits assets or includes nonexistent liabilities in its income tax return (which are supposed to have resulted in the same way in the accounting), they remain as "retained earnings" susceptible (generated by the increase in equity resulting from the normalization) of distribution in the accounting that must subsequently be subject to the rules of Articles 48 and 49 of the Tax Statute (E.T.) in order to determine the classification of taxable or not for the receiving shareholder.

At this point it is important to indicate that, although these "profits" were not strictly speaking subject to income tax, when liquidating the tax normalization tax as a complementary to the income tax return, it should be incorporated within the formulation contained in article 49 of the E.T. as the income tax to which it was subject.

Regarding the taxpayers of the tax, it is highlighted that they will be those who have a real or potential economic use of the assets, understood as such: i) the founder, constituent or originator in case there are conditions on the beneficiaries; ii) the illiquid succession until the reception of the assets by the beneficiaries and, in case there is an intermediary company, the beneficiary will be the one called to declare, thus originating a removal of the corporate tax veil. In this respect, the Decree indicates that this will occur when the assets have been included in the succession process.

3.- Regarding the assets underlying the legal vehicle for the omission, unlike the last standardization (Law 1739 of 2015), the Financing Law brought a slightly more casuistic wording. In this sense, the Regulatory Decree defines that it is understood as an entity with substantially different cost, the underlying assets subject to standardization, making an enunciation of entities whose capital differs materially from the respective underlying asset and the entities that by the applicable regulations in the jurisdiction of domicile are not required to keep accounting, which occurs with the vast majority of jurisdictions of low or no taxation. In this regard, and in order to avoid ambiguities, the regulation should have established a more objective equation that would allow to determine when a substantial deferral is made.

4. - On the other hand, the mentioned Decree specifies the conditions to be met in order to apply the provisions of the second paragraph of article 44 of the Financing Law, regarding the benefit related to the reduction of the taxable base by 50% of the value of the omitted assets, this, for those taxpayers that liquidate the normalization tax having as taxable base the market value of the assets abroad and that repatriate the resources subject to it before December 31, 2019, remaining them in the country for a period of not less than two years.

5.- Regarding the write-off of assets, Law 1943 of 2018 established the possibility to write-off fixed assets whose fiscal cost is lower than the market value, adding the difference between one and the other to the taxable base of the normalization tax.

This generated the possibility of: i) updating the tax cost of those assets owned as fixed assets for less than two years, in order to achieve a lower profit subject to income tax (in case of planning to sell them), whose rate for 2019 is 33% thereby achieving a saving of 20%; and, ii) generating a higher depreciation base, if applicable.

Notwithstanding the above, Decree 874 of May 2019, limited the write-off of assets to those owned for more than two years; it also clarified that the useful life of the assets and the maximum depreciation rate will not have any modification as a consequence of the write-off. 

Finally, it is reminded that the tax normalization tax will be declared, settled and paid in a separate return, which will be filed on September 25, 2019.