Is there an "if -then - else " statement in XPath?

The official language specification for XPath 2.0 on W3.org details that the language does indeed support if statements. See Section 3.8 Conditional Expressions, in particular. Along with the syntax format and explanation, it gives the following example:

if ($widget1/unit-cost < $widget2/unit-cost) 
  then $widget1
  else $widget2

This would suggest that you shouldn't have brackets surrounding your expressions (otherwise the syntax looks correct). I'm not wholly confident, but it's surely worth a try. So you'll want to change your query to look like this:

if (fn:ends-with(//div [@id='head']/text(),': '))
  then fn:substring-before(//div [@id='head']/text(),': ')
  else //div [@id='head']/text()

I do strongly suspect this may fix it however, as the fact that your XPath engine seems to be trying to interpret if as a function, where it is in fact a special construct of the language.

Finally, to point out the obvious, insure that your XPath engine does in fact support XPath 2.0 (as opposed to an earlier version)! I don't believe conditional expressions are part of previous versions of XPath.

Personally, I would use XSLT to transform the XML and remove the trailing colons. For example, suppose I have this input:

<?xml version="1.0" encoding="UTF-8"?>
<Document>
    <Paragraph>This paragraph ends in a period.</Paragraph>
    <Paragraph>This one ends in a colon:</Paragraph>
    <Paragraph>This one has a : in the middle.</Paragraph>
</Document>

If I wanted to strip out trailing colons in my paragraphs, I would use this XSLT:

<?xml version="1.0" encoding="UTF-8"?>
<xsl:stylesheet 
    xmlns:xsl="http://www.w3.org/1999/XSL/Transform" 
    xmlns:fn="http://www.w3.org/2005/xpath-functions"
    version="2.0">
    <!-- identity -->
    <xsl:template match="/|@*|node()">
        <xsl:copy>
            <xsl:apply-templates select="@*|node()"/>
        </xsl:copy>
    </xsl:template>
    <!-- strip out colons at the end of paragraphs -->
    <xsl:template match="Paragraph">
        <xsl:choose>
            <!-- if it ends with a : -->
            <xsl:when test="fn:ends-with(.,':')">
                <xsl:copy>
                    <!-- copy everything but the last character -->
                    <xsl:value-of select="substring(., 1, string-length(.)-1)"></xsl:value-of>
                </xsl:copy>
            </xsl:when>
            <xsl:otherwise>
                <xsl:copy>
                    <xsl:apply-templates/>
                </xsl:copy>
            </xsl:otherwise>
        </xsl:choose>
    </xsl:template>
</xsl:stylesheet>