Taxing high pensions contributes to tax justice: Colombian retirees in doubt because of their income

What started as a rumor and then as election promises, is now a reality: The Petro government, in its tax reform clauses, wants to tax Colombia’s high pensions.

Finance Minister Jose Antonio Ocampo specified when he introduced the bill, that no retiree earning $10 million or less, just for that concept, would pay income tax on natural persons. Only those who earn more than this cap will do so.

So, in the case of retirees, the maximum exempt income is currently 12,000 UVT ($456,048,000), which would increase to 1,790 UVT ($68,027,160). It should be noted that, according to the text, only 1% of pensioners contribute to the income tax of natural persons.

The article puts it this way: “Pensions, disability, old age, survivors, and occupational risks will be taxed only on the portion of the annual payment in excess of 1790 UVT.”

context

It must be remembered that currently the tax system has a theoretical tax-exempt pension treatment, that is, pensions are exempt from savings, exempt from financial returns and taxed at the time of receiving social benefits. In their pension allowances.

However, in practice, Colombian pensions have annuity benefits, which means that they enjoy preferential treatment and become exempt from exemption. The articles say: “This tax advantage degrades the horizontal equity of the tax, because the tax burden of a non-retired natural person is significantly different from that of a pensioner.”

Based on the above, this means that pensions of less than $38 million per month ($494 million annually) have an effective tax rate of 0%, while an employee with equivalent annual income has a theoretical effective tax rate of 14,6%.

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Because of this treatment, in practice, the national government not only subsidizes pensions under pay-as-you-go system, but also those of individual savings system.

Analytics

Economist Germain Machado, Professor and Master of Economics, explains that Colombia has very few retirees and that almost all of them belong to the high-income group in the country. Of the 6.5 million elderly people in the country, only 1.6 million have a pension.

Despite this, the subsidies for this preferred category are much larger than the poverty alleviation programmes, which is unacceptable. Pension spending in Colombia exacerbates inequality because it helps those who need it most.

To fix that, Machado maintains, the proposal arises to tax people with higher pensions. He says it’s a good idea for a group of 1% of pensioners to contribute to taxes.

“We must not forget that all pensions over $10 million are subsidized by all Colombians, even in the private system. In this sense, taxing higher pensions will help improve income distribution and correct some errors in the pension system.”

That is the view of Andrés Felipe Izquierdo, director of Integral Pension Solutions, who considers the proposal to tax pensions over $10 million viable and necessary.

“The tax is in line with the policies of more advanced OECD countries, such as Canada, Chile, Germany, Japan, Norway, the United Kingdom, and the United States, among others, that have an earnings tax scheme (retirement allowance). Now, if we Analyzing it from the point of view of fiscal spending, the so-called tax is more correct, because the vast majority of pensions in Colombia (including the AFP) receive support from the nation,” Izquierdo explained.

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To the expert, this is a valid step toward tax justice. Likewise, in the face of misinterpretations, where pensions over $5 million are guaranteed to be taxed, state the following: The tax will apply from 2023, with a UVT indication of $41,805. Exempt income is limited to 1,790 UVT per year ($74,830,950), in addition, 1,090 UVT ($45,567,450) must be taken into account, at a marginal rate of 0%, stipulated in Section 241 of the tax code.

“So, adding the above, we have an exempt base equal to 2880 UVT ($123,398,400) per year, the above means that in 2023 pensions with a monthly value equal to or greater than $10,033,200 will be taxed.”

In this way, about 16,700 people will have to pay this tax, of whom 16,004 belong to Colpensiones and 700 to managers of a pension fund or private fund.

Clarification

After crossing copies on social networks, if the tax is on pensions of $5 million or $10 million and above, Diane’s manager, Luis Carlos Reyes, came out to clarify people’s confusion and in statements collected by Semana highlighted that the adjustments, in fact, would be from 10 million dollars onwards.

The official stressed that the $5.2 million is income exempt and from then on, differential rates will be applied to pay the tax.

So the first rent rate is 0% and with the reform adjustments it will apply to those who receive up to $10 million from their pension fund per month.

Thus, this group will not have to pay the weight of the tax involved, and as promised by the government, things will change from $10 million onwards.

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