Withholding tax, also known as retefuente tax in Colombia, is an advance tax collection mechanism applied to payments made to individuals or legal entities for salaries, fees, services, leases, among others. Its objective is to ensure taxpayers’ compliance with their tax obligations.
Withholding at the source is carried out by those responsible designated by law to do so. These responsible parties may be individuals or legal entities, liquid successions and partnerships, public law entities, investment funds, retirement and disability pension funds, consortiums, temporary joint ventures, among others, that make payments subject to withholding. Article 368 of the Tax Statute indicates which are all withholding agents.
The reason for withholding at source is to ensure that the corresponding taxes are collected in advance, avoiding evasion and guaranteeing tax compliance. Withholding is made on the basis of income or payments made and is applied to income tax.
The withholding at source process involves the designated responsible party applying a withholding rate established by law on the amount of the payment made. This rate may vary according to the type of income or payment and the condition of the beneficiary, whether natural or legal person. The withholding rate is applied on the gross value of the payment, and the result is withheld and delivered to the government, specifically to the DIAN as an advance payment of the corresponding taxes.
The frequency with which withholding tax is withheld at source may vary depending on the type of payment and the regime to which the responsible party is subject. In general, withholding is performed on a monthly, quarterly or annual basis, depending on the characteristics and volumes of the payments made. Applying withholding taxes is an obligation imposed by the government; failure to do so is known as evasion and may result in future penalties.
Withholding at source may be for purchases, services and fees, to which different rates are applied depending on the generating event subject to withholding.
It is important to note that withholding rates, responsible parties and regulations related to withholding at source are subject to periodic changes and updates. Therefore, it is necessary to consult the updated tax legislation and seek advice from a tax professional to ensure proper compliance with withholding tax obligations in Colombia.