This Selected Issues paper and Statistical Appendix analyzes economic developments in Colombia during 1996–99. Output growth slowed sharply in 1996 and early 1997, but subsequently rebounded owing to stronger exports, a temporary boom in world coffee prices, and an easing of credit policy. Despite efforts at addressing the fiscal imbalances, the nonfinancial public sector deficit widened further to more than 4 percent of GDP in 1997. Monetary policy during 1996 and most of 1997 was geared toward stimulating domestic demand.


This Selected Issues paper and Statistical Appendix analyzes economic developments in Colombia during 1996–99. Output growth slowed sharply in 1996 and early 1997, but subsequently rebounded owing to stronger exports, a temporary boom in world coffee prices, and an easing of credit policy. Despite efforts at addressing the fiscal imbalances, the nonfinancial public sector deficit widened further to more than 4 percent of GDP in 1997. Monetary policy during 1996 and most of 1997 was geared toward stimulating domestic demand.

VI. Issues in Tax and Customs Administration32

A. Introduction

83. This chapter provides an overview of the major issues in the areas of tax and customs administration, and a summary of options for improving the effectiveness of revenue administration.

B. Background

84. From 1995 to 1997 central government tax revenue rose from 11.3 percent of GDP to 12.1 percent of GDP. This increase resulted mainly from the 1995 tax reform, which increased the VAT rate from 14 percent to 16 percent; imposed a VAT withholding system; increased the VAT rate on cars from 45.6 percent to 60 percent; and added new services to the VAT base.33

85. As part of the 1995 reform changes were also introduced to the income tax structure, the most important of which was the establishment of a minimum income tax based on 1.5 percent of gross assets or 5 percent of net assets, whichever is the greatest. However, because this change did not take effect until 1996, tax revenue was not affected until 1997.

86. During the first half of the 1990s, noncompliance with respect to domestic VAT payments was in the range of 33-40 percent, which is comparable to the average rate of VAT noncompliance in other Latin American countries. However, noncompliance with the VAT decreased from 1995 to 1996. One of the major reasons for this improvement was the introduction of the VAT withholding system in 1996, which caused a one-time increase in revenue in that year.

C. Tax Administration

87. During the 1990s, the government has made continuous efforts to modernize the organization and functions of the tax administration in order to provide a solid base for revenue mobilization. In 1993, the tax and customs directorates were unified under one administration, the national tax and customs directorate (DIAN).34 Partly as a result of the difficulties which were encountered in establishing a single revenue administration, this decision was partially reversed in 1997 with congressional approval of Law 344, which called for the “functional separation” of the two directorates. Under this arrangement, some of the major functions of each administration, such as tax audit and enforcement, were again separated, but some common functions, such as collections and general administration, have remained unified. Also, in an effort to take more prompt disciplinary action against tax and customs officials who were found to have violated the rules of conduct of the DIAN, a division of disciplinary investigations was established which is responsible for handling cases of such violations.

88. Several changes in tax administration procedures have been introduced with a view to improving the effectiveness of audit and enforcement operations and improving revenue collection. In 1995, Law 223 was passed establishing concrete targets for different types of audits with a view to increasing taxpayer compliance. The SICAT, a computerized audit management system, was also designed. In the area of collection enforcement, the SISCOBRA, a special computerized information system, was designed to improve monitoring and recovery of tax arrears. The DIAN has started developing a system for the electronic filing of returns and electronic transfer of tax payments. Also, penalties have been made more severe with a view to reducing taxpayers’ noncompliance, and in 1997 stiffer sanctions for tax evasion and contraband were introduced.

89. Despite these efforts, officials recognize that there is room for improving the effectiveness of the tax administration’s operations by addressing a number of issues.

90. The first is the high cost of tax collection through the banking system and the poor quality of information from tax returns and payments as reported by the banks. In Colombia, the float period—the compensation to the banks for collecting the DIAN’s payments—is unusually long.35 This effectively represents a hidden cost to the treasury. Minimizing the float period to around 3-4 days would significantly reduce this cost. In addition, the information from returns and payments which is keyed in by the banks often contains errors and is late. To resolve this, the tax administration is planning to introduce an electronic filing and payment system, beginning with the 5,000 largest taxpayers.

91. Second, under the current system, there is an extensive payment (and collection) lag built into the tax system. In contrast to most other Latin American countries with a VAT, in which taxpayers are required to file and pay the VAT monthly, the VAT in Colombia is filed and paid every two months. Also, any income tax annual balance can be paid in one, two, or five installments (by individuals, businesses, and large taxpayers, respectively). This complicates the monitoring of compliance with filing and payment obligations and delays actions to enforce collection of overdue taxes.

92. Third, the system to detect taxpayers who are unregistered, those who are registered but do not file a return (nonfilers), and those who are registered and were filing but have ceased to file their returns (stopfilers) needs to be strengthened. For example, monitoring of compliance with filing requirements for the largest taxpayers, who account for around 70 percent of total taxes collected, is mostly done manually; the computerized information system does not automatically produce a list of stopfilers which can be followed up quickly by tax officials. Control of unregistered taxpayers who are economically active could be improved by ensuring that the taxpayer master file is up to date, that the record of “active” taxpayers is accurate, and by more systematic use of third party information.

93. Fourth, there is significant scope for improving tax auditing: an insufficient number of taxpayers is audited, and too much emphasis is given to lengthy, in-depth audits. The audit plan sets rigid criteria for performing specific numbers and types of audits, and does not allow local offices sufficient flexibility in selecting taxpayers for audit who are suspected of underreporting or evading taxes. The manuals used by auditors to guide their work focus on administrative procedures rather than providing technical guidelines and instructions for different audit methods. Coordination between the audit, assessment, appeals, and collection enforcement divisions is weak. For example, auditors may be unaware of which audit cases have been appealed by the taxpayers and how much of additional taxes assessed as a result of an audit was actually collected.

94. As is the case in tax administrations in many countries, the management of staff needs to be improved. On one hand, there is a large number of employees in relation to the overall tax administration workload (e.g., the number of tax returns and payments received); on the other hand, the salaries of the technical staff (mainly tax auditors) are well below market rates for similar professionals.

95. Against the background of the issues discussed above, several options for improving the effectiveness of tax administration are outlined in Box 1.

Options for Increasing the Effectiveness of Tax Administration

  • Tax collection through the banks. Reduce the float period to three-four days to eliminate “hidden costs” to the treasury of tax collection.

  • Filing and payment schedules. Reduce the collection lags for the VAT and income tax. Require VAT payers to file and pay monthly, and income taxpayers to file and pay any balance of their liabilities in one installment.

  • Stopfiler control. Improve the system for controlling stopfilers. This system should be based on the taxpayer master file, tax return files, third party information, and business taxpayers who had tax withheld but did not file.

  • Audit plan and strategy. Focus audit activities on: (i) the VAT, which accounts for 44 percent of the DIAN’s total collection; (ii) VAT returns of the most recent tax periods; (iii) cross-checking large taxpayers’ and government purchases against import declarations; and (iv) invoice printing control.

To facilitate the broad coverage of the taxpayer population, design and implement programs for computer-assisted issue-oriented auditing of VAT and income tax liabilities, and establish audit selection programs based on comparisons of taxpayers in the same or similar economic sector.

Improve coordination between the areas of audit, assessment, appeals, and enforcement of arrears payments.

  • Staffing. Review staffing needs while increasing the salaries of technical staff so they are closer to those of professionals in similar areas of specialization.

D. Customs Administration

96. The customs administration plays an important role in the mobilization of tax revenue, as approximately 25 percent of total tax revenue stems from foreign trade activity. The customs administration provides services in twenty-six offices around the country, but the agency’s workload in terms of revenue collection is concentrated in four major trade centers—Bogotá (airport), Cartagena, Buenaventura, and Barranquilla (ports)—which account for nearly 67 percent of total tax collections by the customs administration.

97. The increase in the volume of international trade following the opening of the economy in the early 1990s has resulted in a significant increase in the workload of the customs administration. Between 1992 and 1993, the customs administration began to carry out an ambitious modernization program; this took place in the context of the unification of the customs and tax administrations mentioned earlier. The reforms of customs procedures were based on the introduction of a self assessment system, in which importers and exporters assess and pay their customs taxes and duties on their own and without prior intervention from customs officials. Many of the tasks which had been performed by customs officials were transferred to the private sector. In 1995 the government introduced a pre-shipment inspection (PSI) program, which handles some of the merchandise verification tasks (verification of price, quantity, quality, and customs classification) otherwise carried out by customs. The percentage of goods physically inspected by customs officials, which previously was 100 percent, was sharply reduced. Controls over imports (for example, to verify their origin, volume, and value) were simplified under the assumption that the significant reduction in import duty rates would make contraband and tax fraud less attractive. At the same time, as a result of the privatization of key customs administration functions the number of customs personnel was significantly reduced, from around 5,000 to less than 2,000.

98. One of the major objectives of the measures described above was to minimize delays in processing and clearance of imports and exports. This effort was to be supported by new computerized information systems that would allow the customs administration to exercise the needed controls over import and export activity and ensure the appropriate coordination with recently privatized customs procedures. However, there were delays in the introduction of the computerized customs processing systems, and the simplification of customs processing procedures for legitimate importers and exporters did not materialize. Also, the system of controls over imports and exports was dismantled before ensuring proper coordination with the newly privatized valuation and control functions, and without the simultaneous introduction of more selective import and export controls based on risk assessment.

99. As the volume of international trade increased steadily toward the mid 1990s,36 the customs administration was faced with major problems, including increased congestion of the main airports and ports, long delays in the processing and clearance of merchandise, and an apparent increase in the volume of contraband goods and cases of tax fraud.

100. In response to the most pressing problems, a number of measures were initiated toward the end of 1997, including: (i) the separation of the customs and tax administrations within the DIAN; (ii) a new organizational structure providing departments with greater operational independence and flexibility; (iii) staffing of key positions with more qualified managers; (iv) review of basic procedures to identify their weaknesses and ensure better coordination with the private sector; (v) reinforcement of physical control measures; and (vi) development of a computerization plan for the customs administration (the Siglo XXI project).37

101. The new organizational structure, which provides greater independence and flexibility to the departments that perform key customs operations, and the steps taken thus far to establish discipline in the administration of foreign trade taxes, are appropriate. However, there are several issues which will need to be considered in the continuing efforts to improve the quality of customs administration. For instance, the computer modernization program cannot by itself be expected to ensure that needed reforms in customs administration will be implemented. Thus, the Siglo XXI project needs to be coordinated with a program to improve customs procedures with a view to improving service to the trade community and increasing customs revenues collection. Also, the above mentioned pre-shipment inspection program has certain features that limit its effectiveness, including the fact that it covers only about 30 percent of the total value of imports.

102. There is scope for building upon the recent and ongoing changes in customs procedures to improve the effectiveness of customs administration. Several options for achieving this are outlined in Box 2.

Options for Improving the Effectiveness of Customs Administration

  • Customs reform program. Broaden the program to encompass not only computerization, but also simplification of procedures, a review of the customs code, and a strong emphasis in training.

  • Control strategy. Ensure proper control over goods arriving in ports and airports, before transfer to private warehouses; redesign the inspection and postclearance selection systems; analyze the staffing, procedures, and technical support requirements for regional valuation units; and establish post-release review units to examine tariff classification, origin, drawbacks, and valuation issues.

  • Pre-shipment inspection. Develop control procedures to minimize circumvention of PSI and to ensure that proper use is made of PSI findings; and, for the medium to longer term, develop a comprehensive strategy to phase out PSI.

  • Computerization. Proceed on a priority basis with plans to introduce the more advanced version of ASYCUDA (2.6) in the ports of Barranquilla and Buenaventura. Continue with groundwork to define the requirements of the Siglo XXI computer system that will replace ASYCUDA in 1999 for the processing of all import and export transactions.


Prepared by Katherine Baer.


The reform resulted in a reduction of the VAT base, however, because it exempted some products (e.g., tobacco).


In principle, this unification implied that both the administrative and major functional areas of the tax and customs administration were merged into single offices. For example, collection enforcement for domestic and foreign trade taxes was carried out by a single department. In practice, however, the process of unification was not fully completed.


There are several methods which a tax administration can use to pay the banks for tax collection services—banks may charge a fixed fee for processing each tax form, they may charge a percentage of the tax collected, they may keep the totality of taxes paid for a short time period (“float period”), or they may opt for a combination of these options.


The volume of exports increased around 30 percent between 1991 and 1994, and around 9 percent in 1995. The volume of imports doubled between 1991 and 1993, and increased by 10 percent between 1994 and 1996.


The project team is financed by a World Bank loan (Modernization of the Public Financial Administration, MAFP). It is expected that the second phase of this loan, MAFP II, will include a large component for institutional strengthening of customs administration.