IMF Urges Colombia To Improve Tax System Efficiency

by Mike Godfrey, Tax-News.com, Washington

28 January 2009

The International Monetary Fund on Monday published the conclusions of its Article IV consultation with Colombia, which ended earlier in the month.

Suggesting that the Colombian economy has "performed well in recent years", with economic growth in 2006-07 exceeding the regional average by a substantial margin, the IMF went on to observe that GDP growth had slowed to about 4% (year-over-year) in January-September 2008, reflecting less buoyant domestic demand conditions, and weaker global economic growth.

In a statement, the Fund revealed that:

"Executive Directors commended the Colombian authorities for implementing sound macroeconomic policies and wide-ranging structural reforms, which had contributed to rapid growth and reduced vulnerabilities. Directors considered that, with improved economic fundamentals and a healthy banking system, Colombia is well-placed to confront the challenges posed by the ongoing global downturn. They emphasized nonetheless the need for continued flexible and timely policy responses."

The IMF Directors also encouraged the authorities to further improve the efficiency of the tax system and reduce budget rigidities, and suggested that:

"Medium-term fiscal risks related to the health system and special tax zones should be carefully assessed. Recent rulings by the constitutional court — requiring important changes to the structure and coverage of the health system — could have substantial fiscal costs from 2010 onward. The likely expansion of special tax zones (zonas francas), following the government decree of 2007, could also lead to a significant loss of revenues over time."

The staff team went on to recommend a careful assessment of these risks, including consideration of appropriate policy responses to offset their potential impact on the public finances.

The IMF team went on to argue that:

"The efficiency of the tax system could be improved by phasing out the financial transactions tax, reducing exemptions and the number of VAT rates, and cutting taxes on labor."

And revealed that:

"The authorities broadly agreed on the desirability of these reforms. They saw no political scope, however, for additional tax reform during the remainder of the current administration. On the expenditure side, the mission team urged the authorities to reduce budget rigidities, such as revenue earmarking, which continue to hamper fiscal management."

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