The Framework

Colombia has adopted a Significant Economic Presence (SEP) framework for digital taxation instead of a traditional Digital Services Tax (DST). Under this policy, foreign companies must pay taxes if they meet specific criteria: having more than 300,000 Colombian users, engaging in systematic interaction with the market, and earning revenue exceeding 31,300 UVTs.[1] The Unidad de Valor Tributario (UVT) is Colombia’s tax value unit, which is adjusted annually to account for inflation. As of recent years, one UVT is roughly equivalent to $10, meaning the revenue threshold for taxation is approximately $313,000. Colombia’s SEP framework provides companies with a choice between two taxation methods: a 10 percent withholding tax or a 3 percent tax on gross income. This approach applies to a wide range of digital services, including streaming, online advertising, digital subscriptions, and data management. By implementing this framework, Colombia seeks to capture tax revenue from the digital economy while allowing businesses some flexibility in compliance.

Implications for U.S. Technology Companies

Colombia’s SEP framework introduces new tax obligations and operational considerations for U.S. technology companies. The 300,000-user threshold ensures that major American digital platforms, including streaming services, online marketplaces, and social media companies, are subject to taxation. The requirement for systematic interaction with the Colombian market, such as pricing services in Colombian pesos, further increases compliance burdens. While the option to choose between tax structures provides some flexibility, most large U.S. companies will need to reassess their Colombian market strategy. Many may adjust pricing or business models to offset tax costs. Additionally, the broad scope of taxable digital services means that even companies that have historically avoided digital service taxes in other jurisdictions may now face taxation in Colombia.

How China Benefits

China’s digital firms could gain strategic advantages from Colombia’s tax framework as part of their broader expansion in Latin America. The clear revenue and user thresholds provide Chinese companies with a predictable timeline for entering the market before triggering tax obligations. The ability to choose between tax methods allows Chinese firms, many of which benefit from state-backed support, to optimize their tax position while expanding market share. Additionally, China’s broader investments in Latin America, including infrastructure and trade partnerships, may allow Chinese companies to absorb tax costs more effectively than U.S. competitors. As Colombia positions itself as a digital hub in the region, Chinese firms could leverage these existing relationships to strengthen their foothold, while U.S. technology companies face increasing regulatory and tax challenges.

Endnotes