In general terms, the tax reform introduced 3 major modifications to the VAT and Consumption Tax schemes for international food franchises, as well as to the Withholding Tax rates, and the VAT rates.
Previously, international food franchises were under the obligation of invoicing its products under the VAT System, rather than under the Consumption Tax System. This previous system was prejudicial to the consumer given that VAT was at a 16% rate, meanwhile Consumption Tax was at an 8% rate, however, it was very favorable for companies since the VAT System allows certain deductions to be performed over the paid VAT amount. It is worth mentioning that this structure was only allowed for international food franchises, given that other restaurant services providers were under the obligation to invoice its products under the Consumption Tax System.
Under the tax reform provisions, international food franchises must invoice its products in the same way as any other restaurant services provider does, this is, under the Consumption Tax system at an 8% rate. This modification has generated a negative reaction from several international food franchises, which are headed in this complaint by Subway.
As per the statements provided by Mr. Mateo Liscki, Subway’s spokesperson in Colombia, to the Portafolio Journal “The exclusion of the general VAT scheme will jeopardize the viability of franchising as a source of employment, as generator of investment and as payer of other taxes. Subway estimates that half of its restaurants will compromise its operation and will begin generating losses and closing”. Furthermore, he claimed that “Non-deductibility of VAT is something that worries. International franchises must pay royalties, advertising and assistance to trademark owners abroad and the tax would compromise the viability of our operations, as all our costs would increase more than 15%”.
Furthermore, as to the Withholding Tax rates, previously, as general rule, a Withholding Tax of 33% of the nominal value of the payment of royalties, interest, commissions, fees, rents, compensation for personal services, or operation of any kind of intellectual property or Know-How, and a Withholding Tax of 10% for consultancy, technical services and technical assistance, were applied upon remittance of the money abroad considering this payment arises from a national source that has the ability to increase the foreign franchisor’s equity. However, with the entry into effect of the tax reform, such percentages were modified to 15% each.
Finally, previously, goods sold in Colombia and services provided in Colombian territory were subject to VAT at a rate of 16 %. With the tax reform, such percentage was increased to 19%.
Juan Carlos Uribe, IDI franchising country expert for Colombia and Laura Santos, lawyer at Triana Uribe & Michelsen