Challenges of the tax and accounting regulations in Colombia

Historically, taxpayers and tax administrations have faced continuous challenges derived from the fact that there are differences between accounting and tax figures. The most common explanation of this situation is the origin and purpose of the regulations used to construct both sets of information. 

On one side, the financial figures aim to provide a comprehensive overview of the financial situation of a given entity, corporation, or foundation for control, management, and decision-making purposes; while, on the other one, the tax figures intend to serve as the basis to determine one of the most relevant governmental revenue (i.e. taxes) and as a source of information to define economic and social policy. 

Nowadays, it is practically unanimously accepted that the way to manage these differences and make the tax and accounting information comparable is by recognising, as part of the accounting figures, the future effect of those differences that are qualified as timing or temporary as a deferred tax asset or liability; but then, challenges now come from the lack of clarity and correlation of the tax and accounting notions and definitions?

In fact, this is what has become the new origin of discussions and analysis when defining the tax position in Colombia and, in some cases, the possibility of accessing some benefits. 

The latter, moreover considering that neither the tax law nor the accounting principles always include a thorough definition of different concepts therein included, or when they do, they bring different definitions that are not aligned, or, even, include cross-references that are unclear or intricate; situations that bring an additional ingredient to the equation, i.e. the interpretation of tax and accounting notions based on other laws and regulations, which in many cases have not been updated for ages and still consider the economic context of when they were issued.

A clear example of the above, although not the only one, is what happens with tax benefits that require taxpayers to have specific types of assets (e.g. the need of investing in tangible and depreciable real productive fixed assets to treat the value added tax paid in its acquisition as a credit against the corporate income tax) to access to them, and that, based on accounting regulations, they are recognised as an intangible amortisable investment.

When this occurs, the Colombian tax system ends up creating a sort of inequality between taxpayers, since depending on the activity they develop and how much detail there is in the accounting and tax regulations regarding the recognition of the operations in the different stages of the project or service or production chain, some taxpayers will more easily have access to the benefits than some others, reaching some scenarios where taxpayers engaged in a given sector cannot even access to them, unless they assume some challenges risks.

All of this because: 

• Article 21-1 of the Colombian Tax Code indicates that tax figures are determined based on what is provided in the accounting regulations unless there is a specific tax guideline established for such purpose;
• The current accounting principles accepted in Colombia follow IFRS principles, which, in turn, follow international standards;
• The Colombian tax law continues using concepts such as fixed assets, which, although do have a broad definition in the tax law, do not exist in the accounting regulations;
• Something that might fall under the tax definition of real productive fixed asset, might not be depreciable for tax and accounting purposes. The latter, since the fact of an asset being depreciable, is linked to the accounting notion of property, plant, and equipment, limiting somehow the concept of real productive fixed asset incorporated in the tax law;
• Under certain circumstances, the accounting regulations create a fiction where purchases of goods that are, based on the civil law definition of tangible goods, must be recognised as intangible assets for accounting purposes; and
• In practice, what usually occurs is that when tax officers start audit processes, the first approach is to immediately rely on accounting definitions, when they do not find a specific tax definition, not always considering other interpretation criteria that should be considered and taken into account based on the general interpretation criteria established in the Colombian regime.

There is still a long path for tax and accounting regulations to ‘speak the same language’, starting from the foundation of concepts, before going as far as the recognition of deferred tax assets and liabilities; and, in the middle, taxpayers continue struggling making great interpretation efforts to apply the law as most accurately as possible, managing the difficult equation of tax efficiency and audit risks, and facing situations where tax benefits are limited due to the applicability of accounting principles created on a different economic context that could even lead to their unconstitutionality for creating unjustified inequalities between taxpayers. 

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