Colombian Leader Holds To Tax Cutting Agenda

by Mike Godfrey, Tax-News.com, Washington

11 August 2006

Colombia's President Alvaro Uribe, who was sworn in for an unprecedented second term on Monday, has vowed to continue pursuing the government's policy of pro-business economic reforms, including cuts in corporate tax and the conclusion of a free trade deal with the United States.

Uribe was elected to a second four-year term in May with a comfortable 62% of the popular vote. He is Colombia's first sitting president to be re-elected after the country's constitution was amended to allow him to stand for a second term.

"Our economic agenda is consistent with investors' trust, economic growth and financing social goals," the President stated in his inauguration speech.

A central plank of Uribe's economic policy is a cut in corporate tax by 6.5% to 32% by 2009. The official corporate tax rate in Columbia is currently about 38.4%, but temporary exemptions on corporate taxes for firms that reinvest their profits have lowered the actual rate to 28.5%, a move which has led to rising levels of investment.

However, a myriad of exemptions has made Colombia's corporate code increasingly complex, and the new tax bill will reduce complexity by stripping out about 1,200 articles of the tax code to leave only about 200.

Under the proposals, all exemptions will be ditched to create a level corporate tax playing field for every company.

However, the tax cut may not secure an easy passage because the government has also proposed changes to value-added tax (VAT) by introducing an additional 10% rate to be levied on most foods to compensate for loss of corporate tax revenues. This a deeply unpopular proposal with some in Congress because it is likely to adversely affect the needy the most - half of Colombia's population are said to live on less than US$3 per day - although the government plans to reimburse VAT paid by the country's most vulnerable groups.

Nonetheless, for the economy at large, it would appear that the government's more liberal economic polices are bearing fruit as central bank figures showed foreign direct investment hit a record $5.3 billion in 2005.

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