Companies with operations in Colombia must be aware of and comply with the Parafiscal and Pension Management Unit (UGPP). Our local expert provides three real-life examples of non-compliance situations that are more common that you would expect.
UGPP is the principal entity in charge of monitoring, controlling and ensuring that all companies operating in Colombia comply with the social security contribution requirements. UGPP is a national administrative entity, with legal and administrative autonomy, and independent assets.
Below are just a few real-life examples of errors committed by both local and international companies – commonly due to unawareness.
1. Failure to comply with Law 1393 – Implemented in July 2010, the law seeks to provide resources to the health system and control evasion thereof. The law states that any employee receiving additional compensations that exceed 40% of their total annual wages must pay contributions to the health and pension systems based on the excess amount.
During their audits, the UGPP has identified that many companies have failed to apply this rule in time, while others have not implemented it at all. These companies are subject to retroactive payment of the debt plus interest and a fine for non-compliance. The fine can be 5 to 60% of the total debt owed. The exact amount will depend on whether the company took action voluntarily (before the audit), at the time of the audit or after.
2. Differences in the interpretation of the rules – The UGPP has encountered issues with lawyers, payroll managers and companies that have different interpretations of certain rules. One of the main issues is the different perspectives between wage and non-wage payments. A second has to do with how the contribution base is determined when an employee has a “holistic salary” (salario integral).
Wage vs non-wage: companies consider annual bonuses (commonly awarded at the end of the year) as a non-wage salary, but the UGPP might consider them as wage payments. In this case, bonuses are then subject to contributions. The UGPP states a wage payment is defined by the ledger account where the company has reported the payment and/or whether the employee's contract specifies that non-wage payments will be made. If the UGPP determines an employer is not contributing the correct amounts, the employer may be subject to a penalty of 5 to 60%, as explained previously.
Holistic salary: For a salary to be legally considered a "holistic salary" it must be the sum of at least 13 minimum wages (this is 10 legal minimum wages plus 30% considered "performance based"). The holistic salary is usually applied to employees with monthly incomes of $2,800 USD or more, but not all employees earning more than $2,800 USD will get a "holistic wage".
3. Contributions of foreign personnel – Every foreign employee has to contribute to the system just as any Colombian national, unless they are making contributions in their country of origin. Yet, UGPP has identified that many foreign employees have stopped contributing at all and sometimes for long periods of time. In these cases, companies can receive penalties of up to $100,000 USD and even be sued by the foreign employee if it is proven that the company is at fault for non-compliance. To avoid these penalties is vital that every company have the necessary (and updated) documentation to prove that the employee is contributing locally or in their country of origin.
In most cases, companies can commit these and other errors due to the lack of knowledge about local regulations and their applications, and the scope of the UGPP. Ultimately, the UGPP is responsible for: determining and collecting social security contributions, keeping track of the processes, sanctioning breaches, developing training programs, communicating issues, and regulatory updates, just to name a few. Companies must be aware of the functions of the UGPP and how each is applied order to maintain their own internal processes up to date and in compliance before, during and after every audit.
If your company is not complying with these or other regulations, it is advisable to seek support from a local expert who can help you make the necessary adjustments before any penalties are applicable.
TMF Group in Colombia has a team of experts with wealth of knowledge on each regulation applicable to companies doing business in the country. Contact the local team for more information.