Accounting in Colombia in Crisis
María Cristina Estrada, CPA (COL).
Accountants are key
There is probably no single figure more important to the success of a business in Colombia than a local accountant. While local attorneys can help develop a solid corporate structure and minimize overall legal risk, it is the local accountant who often becomes the closest advisor to foreign investors interested in maximizing the commercial potential of their business ventures. A great Colombian accountant can maneuver around a constantly shifting tax system in order to ensure that your business is as tax efficient as possible, even as they pivot every time new accounting rules and regulations come into effect.
Accountants get a bad rap
While most foreign investors agree that local accountants are essential, many have had negative experiences with accountants that they cannot easily shake. Much of this is clearly tied to differences in business culture as well as a general frustration with the way businesses in Colombia are regulated. In particular, foreign investors continue to perceive local accountants as lacking the skills and ability necessary to help their businesses grow. For many foreign investors, local accountants refuse to prioritize their needs, provide poor customer service, and are always “too busy” to be much use.
However, all is not as it seems. While some of this criticism is well-deserved, most can be attributed to well-meaning local accountants doing their best to navigate monumental changes in the way Colombia manages and enforces the tax collection process via the DIAN, the local tax regulatory authority. On the one hand, these changes are intended to improve transparency, increase tax compliance, and ensure that Colombia complies with international accounting norms, something local businesses should definitely cheer. On the other hand, these changes have led to a series crisis at the heart of the accounting profession itself.
While accountants in developed economies enjoy a fairly static accounting regulatory space, Colombian accountants have been confronting an increasingly complex tax, accounting, and administrative landscape since 2012. Each new requirement has led to added work obligations and additional administrative headaches all along the way. It has also forced even the most competent and responsible accounting professionals to question whether they can remain in the profession.
Below is a brief, non-exhaustive summary of how corporate tax and accounting norms and obligations have changed over the past decade or so. While this shift started back in 2012, it is clear that the pace of change is actually accelerating.
Compliance With International Norms
- Timeline: 2012-2018.
- Requirements Pre-Transition: Pursuant to Decree 2649 of 1993, local accounting norms were much more flexible and informal. For example, existing norms did not require (1) direct disclosure of specific transaction data; (2) ongoing valuation of assets and liabilities; or even (3) internal corporate accounting policies.
- Requirements Post-Transition: Following the approval of Decree 2784 of 2012, local accountants are now required to adhere to internationally-recognized NIFF accounting norms (or “Normas Internacionales de Información Financiera”), which means managing the accounting process much the same way it is managed in North America and parts of Europe. Obligations applied to large companies starting in 2012 and extended to small businesses by 2018.
Independent Contractors and Social Security Obligations
- Timeline: 2016
- Requirements Pre-Transition: Previously, local businesses could book payments to independent contractors as legitimate business expenses without any additional obligations.
- Requirements Post-Transition: Following the approval of Decree 1625 of 2016, local businesses are now required to confirm that any independent contractor providing services to that business is complying with local social security obligations.
Electronic Invoicing For Services
- Timeline: 2020-2021
- Requirements Pre-Transition: Pursuant to Decree 410 of 1971, businesses could issue invoices directly to clients and book invoice data on local accounting software without any additional obligations.
- Requirements Post-Transition: Following the approval of Decree 358 of 2020, local accountants are now required to submit electronic invoicing reports directly to the DIAN. Obligations applied to large companies starting in 2020 and extended to small businesses by 2021.
Electronic Invoices for Vendors
- Timeline: 2021-2022
- Requirements Pre-Transition: Pursuant to Decree 624 of 1989, businesses could legally deduct payments to local vendors and suppliers utilizing informal (paper) bills without any additional obligations.
- Requirements Post-Transition: Following the approval of Resolution 000167 of 2021, local accountants are now required to submit electronic invoicing reports to the DIAN where vendors/suppliers issue informal (paper) bills. Obligations applied to large companies starting in 2021 and extended to small businesses by 2022.
- Timeline: 2021-2022
- Requirements Pre-Transition: Previously, businesses could legally deduct salaries and social security obligations without any additional obligations.
- Requirements Post-Transition: Following the approval of Resolution 000013 of 2021, local accountants are now required to submit electronic reports detailing salary and social security payments directly to the DIAN. Obligations applied to large companies starting in 2021 and extended to small businesses by 2022.
Validation of Electronic Invoices for Vendors/Supplier
- Timeline: 2022-2023
- Requirements Pre-Transition: Previously, businesses could legally deduct payments made to vendors/suppliers without any additional obligations.
- Requirements Post-Transition: Following the approval of Resolution 000085 of 2022, local accountants will be required to approve/validate third-party electronic invoices via the DIAN before a business can claim them as legitimate business expenses. Obligations applied to large companies starting in 2022 and will be extended to small businesses in 2023.
Actual activities will vary depending on the property involved. Remember that there is not real escrow process in Colombia. This means that you may be acting as your own escrow agent by prepay a ton of expenses/fees weeks, maybe months before you even get title to the property.
Beyond having to manage more numerous and increasingly complex regulatory obligations, local accountants face additional headwinds.
Limitations of Local Accounting Software
Business owners in places like the United States, Canada and much of Europe swear by popular accounting software solutions like QuickBooks. In many of these jurisdictions, companies can use this type of software to easily internalize their bookkeeping, issue invoices and pay employees.
In Colombia, the QuickBooks model doesn’t quite work the same way for any number of reasons:
1. Lack of Functionality: Local software options often lack the functionality necessary to comply with local requirements. And even if they do comply, solutions are usually clunky and inefficient.
2. Software Update Delays: Accounting software companies often take a long time to roll out updates that allow accountants to comply with local requirements. And when they do roll something out, issue #1 above rears its ugly head.
3. Need for Significant Customization: Local software options are often so inefficient, that local accountants usually rely on developers to customize their existing software in order to be able to provide services to clients. This process can get more and more complex and expensive with each new additional requirement.
In practice, these limitations force local accountants to regularly segment portions of the bookkeeping/accounting cycle into much more informal and labor-intensive processes (imagine having to manage payroll, invoice and even some vendor receipt data in an official Excel or Word file on an ongoing basis, separate from the main accounting software of the company). Bottom line, accounting in Colombia has become the art of stitching together numbers and data collected and quantified using different methods that do not always complement each other.
It’s no wonder there are less and less accountants and accounting assistants/clerks (“Auxiliares Contables”) in the market. Accounting has always been a stressful, time-consuming profession, particularly in places like Colombia. All these additional requirements and headwinds have only served to decrease the pool of competent and dedicated professionals in the market. The issue is more acute for foreign investors who expect an added level of service that most local accountants are not used to providing.
The future looks uncertain
Right now, the future of accounting in Colombia can look a bit uncertain. At the very least you can expect the following:
We fully expect that the DIAN will continue to turn the screws in an effort to further centralize data collection while improving their auditing capabilities. Already, large businesses managing Point of Sale (POS) invoicing are required to submit electronic data while smaller businesses will be required to submit such data later this year. In addition, government agencies like the “Departamento Nacional de Estadísticas” (DANE) and the “Superintendencia de Sociedades” are expanding their data collection capabilities and increasing enforcement in order to ensure compliance with local tax-adjacent regulations. More requirements are definitely on the way.
We also expect that the DIAN will turn all that data collection and analysis into increased enforcement over the coming months and years. Efforts to increase tax collection was a political issue in Colombia even before the COVID pandemic blew a huge hole in the country’s fiscal budget. Now the government has a huge incentive to turn even minor accounting mistakes into big fines and penalties that will serve to plug a hole that is only getting bigger every year.
More Headaches For Accountants
For accountants, everything described above will translate into increased obligations, added work stress and a disincentive to continue in the profession. This will affect both the terrible as well as the most competent of accountants, leaving foreign investors desperate to find or even keep what is quickly becoming a true unicorn in the local market: a great local accountant.
Bottom line, if you can find a competent and responsible accountant in Colombia willing to brave these waters treat them well. They are worth their weight in gold.
This post is being published for general informational purposes only and it is not intended to provide specific legal and/or tax advice. It should not be used as a substitute for competent legal/tax advice from a licensed attorney and/or accountant in your jurisdiction.