Copyright
© 1995 International Monetary Fund
Library of Congress Cataloging-in-Publication Data
Comprehensive tax reform : the Colombian experience / edited by Parthasarathi Shome.
p. cm. —(Occasional Papers, ISSN 1251-6365; 123)
Includes bibliographical references.
ISBN 1‐55775-430‐6
1. Taxation—Colombia. I. Shome, Parthasarathi, 1950–. II. Series: Occasional paper (International Monetary Fund); no. 123.
HJ2545.C66 1995
336.2’05’09861—dc20
95‐6823
CIP
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Contents
Preface
Introduction
Parthasarathi Shome
A Latin American Perspective
History of Colombian Tax Reform
Objectives and Main Measures of Tax Reforms
II. Value-Added Tax Issues
Parthasarathi Shome
Structural Aspects
Potential Versus Actual Revenue Collections
Calculation Using Input-Output Matrix
Calculations Made on the Basis of Declarations
Revenue Loss from Crediting VAT on Capital Goods
III. Income Tax Issues
Erik Haindl, David Dunn, and Osvaldo Schenone
Tax Reform and Investment
Assessing the User Cost of Capital
Savings-Investment Gap
Effect of 1986 Tax Reform on the Investment Rate
Specific Impacts on the Investment Rate
Potential Versus Actual Revenue Collections
A Summary of Studies Initiated by the DIN
An Alternative Approach
Improving the Procedures
Inflation Adjustment
The Nature of the Problem
Inflation Adjustment in Colombia
Revenue Effects
IV. Customs Tariff Reform
Osvaldo Schenone
Introduction
Developments Preceding the 1991 Reform
August 1991 Tariff Reform
Early Implementation of the Tariff Reform
Tariffs Before and After Decree No. 2095
Surcharges Before and After Decree No. 2096
Impact on Effective Protection
Cost and Financing of Faster Trade Liberalization
Aggregate Procedure
Tariff Item Procedure
A Complementary Policy
An Alternative Complementary Policy
Treatment of Exemptions to Tariffs, Surcharges, and the VAT
Summing Up
V. Conclusions and Future Directions for Reform
Arnold C. Harberger
Customs Tariff Reform
The Income Tax on Juridical Persons
Integration with the Tax on Natural Persons
Dealing with Evasion
The Value-Added Tax
Exempted Sectors
Exemption of Selected Imports
Elimination of Special VAT Rates
The Future of the General Rate of the VAT
Indexing the Tax System for Business Firms
Tax Incentives
Conclusion
Appendices
I. Summary of Tax System as of June 30, 1994
II. Potential VAT Collections from the Input-Output Matrix and Taxpayer Declarations
III. User Cost of Capital
IV. Disaggregated Investment and Savings Model
>V. Adjustments Needed to Obtain Potential Income Tax Base
VI. Customs Tariffs: Computing the Change in Fiscal Receipts
Bibliography
Tables
Section
I. 1. Total Tax Revenue
II. 2. Comparison of Gross VAT and VAT Credited on the Basis of the Input-Output Matrix with VAT Calculated from Taxpayer Declarations, 1988
3. VAT Treatment of Capital Goods Before and After Passage of Law No. 6, 1992
III. 4. Summary of Direct Tax Rates
5. User Cost of Capital
6. Gap in the Savings-Investment Market
7. Market Risk Premium
8. Increase in Investment Rates, 1983–89
9. Impact on the Investment Rate
10. Estimates of Income Tax Evasion by the Center for Fiscal Studies
11. Formula Used by the Center for Fiscal Studies to Estimate Income Tax Evasion
12. Calculation of Potential Taxable Income and Income Tax Evasion
13. Breakdown of the Inflation Adjustment of the 100 Largest Taxpayers, 1993
14. Corporate Income Tax: Adjustment for Inflation, Statutory Deduction, and Net Effect, 1993
IV. 15. Average Tariffs and Tariff Surcharges
16. Effective Protection by Use or Economic Purpose of Goods, Before and After Issuance of Decree No. 2095
17. Estimations of the Fiscal Cost of Accelerated Opening by the National Planning Department (PLAN) and Ministry of Finance (FIN)
18. Effective Rates of Customs Taxes
19. Collections, Exemptions, and Imports at All Customhouses, January-June 1991
Appendices
II. 20. Potential VAT Collections Prior to Passage of Law No. 49
21. Potential VAT Collections After Passage of Law No. 49
22. Potential VAT Collections: An Alternative Structure
23. Collections Calculated on the Basis of VAT Declarations Prior to Passage of Law No. 49
24. VAT Credit for Capital Goods of Large Taxpayers in Bogotá
III. 25. User Cost of Capital
26. Rate of Return on Shares
27. Rate of Return on Debt
28. Rates of Taxes and Margins
29. Present Value of Depreciation (Z)
30. Parameters for Computing the User Cost of Capital
IV. 31. Private Savings Equation, 1970–89
32. Private Investment Equation, 1970–89
33. Estimated Impact of Change in Variables on the Investment Rate
34. Estimated Impact on Variables of Reduction in Tax Gap, 1986–89
V. 35. Calculation of Adjusted Income for Income Tax
36. Calculation of Depreciation Allowances for Income Tax
37. Estimation of Annual Change in Collections of Tariffs and Surcharges in 1992, Based on Alternative Demand Elasticity Values (in 1990 Prices)
38. Estimation of Annual Change in Collections of Tariffs and Surcharges in 1992, Based on Alternative Demand Elasticity Values and a Uniform Surcharge of 8 Percent (in 1990 Prices)
39. Tax Reimbursement Certificates (CERTs)Issued
40. Legal Provisions Concerning Import Exemptions
Charts
Section
III. 1. Investment and Savings
IV. 2. Distribution of Tariffs Before and After Issuance of Decree No. 2095
3. Distribution of Taxation, With and Without Surcharges, After Issuance of Decree No. 2095
4. Distribution of Taxation Using Current and Uniform Surcharges
The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1991–92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial)year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
During 1991–94, the Colombian authorities requested the Fund’s Fiscal Affairs Department (FAD) for technical assistance in their ongoing tax reform. In support of their effort, four studies were undertaken in selected areas of tax policy and administration. These efforts were headed by the editor, who is Chief of the Tax Policy Division of FAD. Other participants in the tax policy area included David Dunn, Economist, FAD, as well as members of the FAD panel of fiscal experts: Erik Haindl, Professor, University of Gabriela Mistral, Santiago de Chile; Arnold C. Harberger, Professor, University of California at Los Angeles; and Osvaldo Schenone, Professor, University of San Andres, Buenos Aires.
The investigations in the above-mentioned tax policy area, conducted in cooperation with the staff of the National Directorate of Taxes and Customs (DIAN), focused on particular areas that the authorities felt needed technical examination and recommendations. The investigations of issues under the value-added tax, income taxes, and customs tariffs thus constituted an examination of the major sources of tax revenue. Given the predominantly technical nature of the analyses and the broad scope of the studies, which touched upon comprehensive tax reform aspects, the authorities encouraged their publication for a wider readership.
This Fund Occasional Paper should therefore serve the dual purpose of elaborating on the technical intricacies behind the undertaking of tax structure reform and providing a representative example of the variety of studies undertaken by FAD in the provision of technical advice to member countries.
A number of background points should be underlined in connection with this study. First, in many ways, the various authors made important contributions to all the topics covered. Therefore, the assignment of particular authors to different sections (as noted at the beginning of each section) reflects the principal author who was clearly distinguishable. David Dunn was responsible for the analysis of potential income tax revenue in the section on income tax issues; Erik Haindl for the study in the same section of the impact of the income tax on investment; Arnold C. Harberger for the section on conclusions and future directions for tax reform (while also collaborating on selected aspects of the section on the value-added tax); and Osvaldo Schenone for the section on the customs tariff reform and the analysis of inflation adjustment in the income tax issues section. The editor was responsible for the introduction, as well as the section on value-added tax issues, while holding overall responsibility as team leader.
Second, the two driving forces behind the endeavor were Mr. Rudolf Hommes, Minister of Finance and Public Credit, who initiated the requests and during whose tenure the visits covering the various topics took place, and Mr. Vito Tanzi, Director, Fiscal Affairs Department, who encouraged and approved their undertaking. Third, the study could not have been completed successfully in the absence of open discussions and full cooperation (including the provision of data) by the staff of the DIAN, in particular, the staff of the Center for Fiscal Studies of the DIAN. Fourth, detailed comments received from the many colleagues who advised the authors on earlier drafts were important in formulating the final version. They include Milka Casanegra-Jantscher, Isaias Coelho, Julio Escolano, Mario Garza, José Gil-Diaz, Jonathan Levin, Claire Liuksila, George Mackenzie, Paulo Neuhaus, Lorenzo Perez, Fred Ribe, and Vito Tanzi. The assistance of Asegedech Woldemariam and Emmanuel Hife in producing Tables 1 and 37–38, respectively, is gratefully acknowledged. The editorial assistance of Tom Walter of the External Relations Department was extremely helpful. Of course, the responsibility of remaining errors remains with the various authors.