The city of Bogotá. Photo: Shutterstock

SaaS Business: Why you should care about Colombia's VAT exemption for Cloud Services

The demand for Cloud services in Colombia has shown constant growth and this country has consolidated itself as a propitious scenario for emerging technology businesses. Why is this tax exemption important and who can benefit from it?

The time is now! Latin America is living an ideal landscape for technological development, that’s why startups and fintechs ecosystems are booming. Not for coincidence, some LatAm countries are winning more support from foreign investors every day.

Besides Brazil and Mexico, the countries that stand out when it comes to talking about Software-as-a-service (SaaS) business technology expanding to this region, Colombia appears also in the scenario booming for this market, positioning the country as the #3 Fintech ecosystem in Latin America that has grown 61% in one year. Also, this country is predicted to become one of the three most innovative economies by 2025.

Background on VAT Regulations for Digital Business Platforms in Colombia

Let’s start by understanding the above regulation. The 2016 tax reform in Colombia gave way to a series of stimulations for the digital transformation of companies, promoting economic savings by making use of technological services. One of these benefits has to do with the VAT exemption for cloud computing services.

Cloud Computing is an increasingly indispensable model for the efficient management of the operations of service companies because it offers them the opportunity to focus on their core business and the generation of value for their customers. It is also important to note that it prevents companies from making high investments in infrastructure, thus reducing costs gradually and effectively.

The concept issued by Colombian tax authority (Dirección de Impuestos y Aduanas Nacionales or DIAN) defines five mandatory characteristics for a company’s services to be considered as Cloud Computing and therefore exempt from VAT. These are:

  • Self-service on demand: it means a consumer can unilaterally provide computing capabilities such as server time and network storage as needed automatically, without the need for human interaction with each service provider.
  • Extensive network access: the services provided must be accessible through standard mechanisms and from heterogeneous platforms (computers, mobile phones, and tablets).
  • Common allocation of resources: the resources are made available to consumers following a timeshare model, assigning physical or logical devices, which in turn meet the demand of those consumers.
  • Fast elasticity: the capacities in the resources provided to users must be able to grow or decrease on demand quickly, even through automatic processes.
  • Measurable Service: cloud systems must control and optimize their resources by equipping themselves with the capabilities to measure their performance. In addition, this control must allow it to be reported in a transparent way both to the service provider and to the consumer.

Similarly, at least one of the following three service models must be met:

  • Software as a Service (SaaS)
  • Platform as a Service (PaaS)
  • Infrastructure as a Service (IaaS)

There are also four implementation models and at least one of them must be met:

  • Private Cloud
  • Community Cloud
  • Public Cloud
  • Hybrid Cloud

Why this VAT exemption matter?

One of the biggest fears of SaaS companies to expand to Latin America is exactly the high initial cost of operation to translate and adapt the platform to a new market and high acquisition cost, what leaves to a lot of marketing investment made/needed.

VAT exception means low costs for companies and with this regulation, not only local companies can be benefits but also international business interested in expands their operations in this country.

To mention some of the big announcement this year, Amazon Web Services (AWS), a unit of Inc, said on March it will open a Latin America infrastructure location in Colombia, confirming also will help train 2,000 students in cloud technology.

This is why Colombia can be such a good opportunity and a really profitable market, considering that is a booming market with a low cost. President Ivan Duque is also making efforts to foster a much more conducive environment for foreign investment and support for Colombian ventures in the early stages. This includes cutting regulations, creating artificial intelligence centers, and other incentives regarding new technologies.

Recently Duque made a tour of the United States to speak with representatives of some of the world’s most important technology companies. The president met with Tim Cook, CEO of Apple; Satya Nadella, CEO of Microsoft; Michael Timmeny, vice president of Cisco; and Andy Jassy, president of Amazon Web Services.

One of the most important announcements of this visit to Silicon Valley had to do with the memorandum of understanding signed with 500 Startups, a recognized U.S. accelerator along with iNNpulsa, the Business Growth Management Unit of the Colombian Government, created in February 2012 to promote entrepreneurship, innovation and productivity as axes for business development and competitiveness in the country.

Cloud adoption in Latin America is accelerating

According to Oracle, simplified software, fintech growth and cost-saving benefits for companies are accelerating cloud adoption in the region, where Mexico and Brazil are leading this trend, followed by Colombia.

As per a report by Frost & Sullivan, cloud services are expected to generate around US$ 7.4 billion in revenues in Latin America by 2022, at a compound annual growth rate of 31.9%.

Why consider Colombia?

Cloud Computing is Digital Technology Most Used by Companies in Colombia. According to Andi’s latest Digital Transformation survey (National Association of Businesses of Colombia), 74.5% of companies in the industrial sector and 78% in the service sector do so.

The technology-based business ecosystem in Colombia is advancing very fast. Software developers are migrating faster and faster to the cloud and large global companies operating in Colombia are also making a major shift to the cloud.

Colombia has also made efforts to culturally change the way it buys and adapts technology. Although there are still obstacles in bureaucratic terms, more and more, this country offers a friendly and fluid scenario for local and international entrepreneurs to find in these infrastructure services, applications and software in the cloud, a key tool to be much more competitive and efficient.