Viewpoint: Jaime Vargas
For too many years tax reforms in Colombia have been aimed at solving fiscal collection shortages by creating new temporary taxes that, by way of being re-enacted time after time, became permanent, or by increasing the rates of existing taxes. This short-sighted approach has resulted in a disjointed tax system that imposed an excessive burden on companies, with direct impacts such as discouraging investment and challenging economic growth.
In an attempt to remedy this situation, the Ministry of Finance appointed a Commission of Experts for Equality and Tax Competitiveness at the beginning of 2015, with the mission of proposing a structural tax reform that could transform the Colombian tax system into a more unbiased one.
The Commission of Experts released its findings in a report presented to the Colombian state at the end of 2015. The text focused on developing short-and long-term recommendations for tax reform in the country. It concluded, among other points, that Colombia’s tax system generated a low level of collections compared to its potential tax collection; that it did not contribute to a better redistribution of income across the country; that it was horizontally inequitable, as it taxed individuals and enterprises that were in similar fiscal conditions differently; that it was complex and difficult to manage; and that it significantly punished investment, employment, growth and competitiveness.
In 2016 the reduction in global oil prices increased the country’s fiscal deficit to 3.6% of GDP. This led credit rating agencies to call for a reduction in the current account deficit in order for the country to maintain its BBB investment rating.
These factors resulted in a tax bill aimed not only at realigning the tax system, but also at obtaining immediate additional collections given the tight fiscal situation of the country after years of steady income driven primarily by oil exports. The tax reform, officially named Law 1819, was enacted by Congress in December 2016.
With the law being enacted at the beginning of 2017, the reform provides the government with the funds required to face its budgetary needs, and has sent a positive message to the international markets that were expecting a move of this sort, allowing them to maintain their confidence in Colombia.
The future reduction of the corporate tax rate enacted by the law may also bring peace of mind to investors, who during recent years have seen their tax burden grow significantly. However, these and the other changes included in the tax reform represent, perhaps, less than half of what is required.
Among the various measures adopted, the value-added tax (VAT) rate increased from 16% to 19% and, as of January 2017, VAT is applied to a list of digital services supplied from outside the country. This is done via a withholding mechanism that imposes taxes on intangible goods.
More than just tax reforms, Colombia urgently requires a method for controlling evasion. The IMF concluded that the evasion of VAT in Colombia is close to 40%, while the evasion of corporate income tax is just as problematic, at close to 39%. Furthermore, the Colombian Tax Office calculates that evasion of import taxes alone reaches a yearly amount of approximately $7bn.
The government trusts that through the anti-evasion measures included in the tax reform, such as increasing the exchange of financial and tax information with other countries and including anti-tax haven measures, evasion figures will drop.
This is yet to be seen, however. The measures that existed before the recent tax reform could have been used more effectively to fight against evasion, but they were not enforced properly and were ultimately unsuccessful in bringing down the high rates of evasion that persist today.
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