Colombia To Cut Corporate Taxes

by Mike Godfrey, Tax-News.com, Washington

23 November 2005

Colombia last week said it is planning to cut corporate tax from 38.4% to under 30% by the end of the year in order to spur investment.

Finance Minister Alberto Carrasquilla said the government will ask Congress to reduce the tax rate, which is currently one of the highest rates of corporate tax in the region. Businesses have repeatedly begged the government to reduce the tax rate to encourage both local and foreign investment in the country.

"In Colombia, the rate is the highest in Latin America and it dissuades the investment's growth to be as high as in other countries in the region," said Eugenio Marulanda, head of the Confecamaras, a business grouping. Carrasquilla said the government agrees with the business community.

When the tax-cut was foreshadowed in August, the minister said that the new tax reform package will also seek to abolish the 7% tax on profits repatriated by foreign firms based in Colombia. In addition, an unpopular tax on bank transactions will be reduced under the tax reforms. The tax is currently charged at 0.004% when individuals withdraw money from a bank account or cash a check, and Carrasquilla indicated that the levy will be reduced to 0.003% in 2007.

The government intends to claw back some of these lost tax revenues by eliminating certain tax exemptions over the next two years.

Progress made by President Alvaro Uribe in tackling Colombia’s criminality has already encouraged growth in FDI, which was $935 million in early 2003, according to the Economist Intelligence Unit. The vital coffee industry har rebounded from earlier problems.

World Bank data lists the government as consuming 21.28% of GDP in 2002. From 1994 to 2003, Colombia’s weighted average annual rate of inflation was 7.21%.

According to the Heritage Foundation's 2005 Index of Economic Freedom, Colombia has a relatively open foreign investment regime and permits 100% investment in most sectors of the economy. However, some sectors, such as audiovisual services, legal services, insurance, distribution services, advertising, and data processing, remain relatively closed.

Says the US Department of Commerce: “the largest obstacle to greater openness to foreign investment in the country is a high level of legal instability. Excess regulations affect the country’s competitiveness to attract investment, resulting in additional operation costs for foreign firms.”

The Economist Intelligence Unit says that property protections are weak: “Although the Supreme Court is held in high regard, the lower levels of the Judiciary and civil service are susceptible to corruption and intimidation.”

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