Colombia's Tax-Cutting Bill Goes To Congress

by Mike Godfrey, Tax-News.com, Washington

26 July 2006

Colombia's Finance Minister, Alberto Carrasquilla, confirmed yesterday that he will send a tax reform bill to Congress this week, which will include a 6.5% reduction in corporate income tax, to 32%, by 2009.

To compensate for revenues lost as a result of the corporate tax cut, the government also proposes changes to value-added tax (VAT) by introducing an additional 10% rate to be levied on most foods, although this may meet stiff resistance in Congress.

The government had also hoped to include removal of the financial transaction tax of 0.04%, but has seemingly been forced to ditch that change. In fact, the bill will probably include a new wealth tax of perhaps 0.3% to be applied to assets above $0.5m.

Last December, Carrasquilla was forced to withdraw a similar proposal to slash the country's corporate tax rate because the idea lacked sufficient support in the legislature.

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 Carrasquilla explains that the current 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.

Businesses have repeatedly begged the government to reduce the tax rate to encourage both local and foreign investment in the country. According to the KPMG and the Latin Business Chronicle Corporate Tax Rate Survey for 2005, Columbia's corporate tax rate, which KPMG put at 35%, is second only in the region to Honduras, where corporate tax is 36.25%.

There will also be a "ruthless" crackdown on tax evasion, warns Carrasquilla.

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