Colombia’s magnetic media reports aids input for tax control
Johana Rincón and Paula Martínez of EY explain why taxpayers need to pay attention to the magnetic media reports in Colombia to avoid being penalised.
Magnetic media reports (MMRs) have become an essential device for tax audits conducted by the Colombian tax administrations.
With the help of advanced analytical tools, including big data and artificial intelligence, the information in the MMRs has been used to cross-check the information included in the taxpayers’ returns, finding inconsistencies, omissions or mistakes that may lead to an audit, in a more precise, faster and less expensive way than before.
What are MMRs?
In general terms, MMRs refer to a group of yearly reports that need to be filed by certain taxpayers before the tax administrations. The national tax administration, and some local tax authorities, have introduced their own MMRs to collect information regarding local taxes.
The requirements of MMRs include details related to the figures reported in the tax returns. For example, providing information of the counterparty from which an income is received, or to which a cost or expense is paid (so called ‘third parties’).
Third party information includes names, tax ID and country of location. These details, generally, should be provided in relation to all the operations carried out in the year, in respect to items such as income, costs, expenses (deductible and non-deductible), labour payments, social security contributions, withholding taxes applied, input VAT, output VAT, bank account balances, investments, accounts payable and receivable, and shareholder’s information.
Since the establishment of MMRs in 2005, the tax administrations have been increasing the number of taxpayers, both individual and legal entities, required to provide such reports. For example, at the national level, currently all taxpayers required to apply withholding taxes must report all the payments made throughout the year, detailing the information of each provider, regardless of the value of the operations.
Considerations for taxpayers when preparing MMRs
Preparing the MMRs is a time-consuming process, involving a considerable volume of information, which generally the taxpayers should engage on a yearly basis. Prior to sending the reports to the tax administration, careful review of the information should be carried out, considering that penalties for mere omissions, inconsistencies or delays regarding the information required; could reach up to 15.000 tax units (approximately $143,000).
The starting point to prepare the MMRs is the accounting information. However, the data must be adapted into formats established by the tax administration and reconciled with each item reported in the tax returns. Some aspects that the taxpayers should take into account when preparing their MMRs are:
Ensure consistency between the accounting information and the data in other information systems, such as payroll, procurement software, or electronic invoicing. For these purposes, periodic validations among these tools, in order to identify and correct potential differences, is highly recommended.
Strengthen the accounting information systems considering the MMRs’ requirements. Ideally, the accounting system should facilitate the preparation of the MMRs, through automated reports, preventing manual inputs which can generate information errors.
Involve other areas of the company on the MMRs process and making sure they understand the consequences on the unproper creation of ‘third parties’ (e.g. clients, vendors, employees). This could include establishing adequate processes to identify the ‘third parties’ in the databases of the companies and collect the relevant information.
Introduce appropriate controls if the company considers reporting ‘petty transactions’ (those under certain thresholds) on an accumulated basis (without detail by each counterparty), an under a ‘generic’ Tax ID. In this case, it is important to create controls to ensure that certain ‘third parties’ on accumulated yearly transactions, do not surpass the established thresholds; avoiding unproperly exclude them from the detail report required.
In complex transactions or cases, discussions with the counterparty concerning the information that it would report on its own MMRs is recommended, in order to find consistency among the parties.
Future of MMRs
The Colombian tax administration is currently undergoing an ambitious technology modernisation process to enhance its capabilities to manage and analyse large volumes of information, allowing it to reduce tax evasion in the country.
As part of these developments, for 2020, based on the information of the MMRs, the national tax administration was able to generate more than three million suggested income tax returns for individuals. In 2021, it is expected that the amount of suggested tax returns for individuals will be above four million.
Under the recently approved tax reform – Law 2155, it has been established that the tax administration automatically will be able to issue the tax returns with the determination of the tax due by the taxpayers, in what has been called ‘invoicing of the tax return’, which will become the mandatory amount to pay, unless the taxpayer opposes and files his own tax return in a limited timeframe. Such ‘invoicing of the tax return’ is expected to be prepared based on data from MMRs, as well as from electronic invoicing, which has also been introduced in Colombia.
Even though there is a question as to whether at some point the developments with the electronic invoicing would replace the need to prepare the MMRs, this could take some time.
Therefore, for the time being, the MMRs are a key source of information used by the tax administration on their activities, enhanced by the technological improvements introduced; and the taxpayers should take care on how the information is prepared, validated, and sent, in order to manage the risks of triggering investigations, or to be penalised for not sending the information appropriately.
Associate partner, EY