A. Introduction

89. This paper provides an overview of the tax and customs changes in Colombia in the last decades, with emphasis on the changes introduced in recent years. Colombia has been involved in a continuous and gradual tax and customs reform effort in the 1980s and 1990s. The authorities have sought to achieve multiple objectives in carrying out the reforms, including to encourage saving, investment, capital inflows, and fiscal revenue mobilization; reduce tax distortions and inequalities; and simplify the system. The main conclusion of the chapter is that the tax and customs reforms in Colombia over the 1980–95 period led to improvements in the tax structure, while subsequently there has been some notable backsliding.

B. Tax Policy Reform

90. The objectives of the tax reforms in the 1980s were to encourage economic activity and to achieve greater neutrality and equity. To achieve this, personal income tax rates were reduced and personal exemptions increased. Regarding the corporate tax, double taxation was eliminated, various incentives were granted, companies were taxed at uniform and lower rates, and attempts were made to correct biases in the debt-equity ratios of companies caused by the tax system. The base of the “income-type” VAT was extended to include several previously exempted services.⁷²

91. In 1990 tax changes were introduced in the context of an overall economic restructuring and modernization program, which focused on encouraging savings and deepening capital markets through—among other measures—the repatriation of capital. In addition to reducing the corporate tax rate, the authorities introduced a much lower rate for income from repatriated capital, exempted stock market income from taxation, and reduced by half the withholding tax rate on repatriated income from foreign capital. The VAT rate was unified at 12 percent, and the tax base was expanded further.

92. In 1992–93 tax changes were introduced with the objective of lowering the fiscal deficit. Increases in selected tax rates were accompanied by a further expansion of the tax base, and an income tax surcharge was introduced to fund national security expenditures. Public enterprises, public funds, and financial cooperatives were made subject to taxation, and the withholding tax on profit remittances abroad was reduced. The VAT rate was increased to 14 percent, the base was broadened, and it was changed to a “consumption-type” VAT in order to reduce cascading. In 1995 the general VAT rate was increased to 16 percent.

93. At the end of 1990s the Colombian government introduced a number of revenue measures to help deal with the difficult fiscal outlook that reflected, in part, the weakening of the economy. The measures included elements such as: (i) the introduction of a financial transactions tax in 1998, initially conceived as temporary to help defray the fiscal costs of financial sector restructuring; (ii) the elimination of the taxpayer’s gross assets as the base for estimating the minimum presumptive income,⁷³ and of the inflation adjustment for inventory in the corporate income tax; (iii) the broadening of the base and the reduction of the general VAT rate from 16 percent to 15 percent; (iv) the introduction of a new intermediate VAT rate of 10 percent, with some items permanently and others temporarily subject to this rate; (v) the conversion of the VAT paid on capital goods into a deduction against the income tax; and (vi) the introduction of an “implicit” VAT, whereby VAT-exempt imports that compete with VAT-exempt domestically produced goods (whose producers cannot claim a credit for VAT paid on their inputs) are subject to a compensating “implicit VAT.”

94. As a result of the reforms the tax structure has become complex and somewhat distortionary, and the tax base has been eroded through incentives schemes and high and multiple exemptions. For the personal income tax, the exemption level remains high and the current structure of rates is very narrow. Under the corporate income tax, various incentives schemes could be eliminated and the inflation adjustment for inventories reintroduced. For both the personal and corporate income tax, the estimation of the presumptive minimum income should be based on gross assets. Goods and services exempted from the VAT should be brought into the base.

95. In October 2000, in an effort to reduce the budget deficit, the government presented to congress a tax package designed to yield revenue of 1.4 percent of GDP from 2001. After deliberations in congress, a package was approved in December 2000 that will make permanent the tax on financial transactions and raise this levy to 0.3 percent from 0.2 percent.⁷⁴ With respect to the income tax, (i) the base was broadened somewhat; (ii) tax withholding rates for professional services was increased from 4 percent to 10 percent; and (iii) the presumptive minimum income was established at 6 percent (raised from 5 percent) of the taxpayer’s net assets. Regarding the VAT, the general rate was increased from 15 percent to 16 percent, and tobacco, airplane tickets, and satellite TV were added to the base.

C. Customs Tariff Reform

96. Historically, Colombia’s trade system has been characterized by high tariff rates extended over a wide range of products, and by an effective level of protection higher than accorded by the tariff structure. In 1984–86 average tariff rates were reduced from 61 percent to 30 percent. However, the reduction in tariffs was partly offset by a 10 percent tariff surcharge introduced on all items; the surcharge was increased to 18 percent in 1987. The tariff reductions were mostly on noncompeting inputs for locally manufactured goods, so that external competition for the domestic industry was not significantly increased.

97. In March 1990 the need for a full-fledged trade liberalization was widely recognized in Colombia, and a more comprehensive liberalization program was begun. The first phase of the program consisted of replacing restrictions with tariffs, while during the second phase the level and dispersion of the tariffs were reduced⁷⁵. These reforms substantially lowered the average effective protection and dispersion, encouraged a more efficient allocation of resources, and reduced the anti-export bias of the trade system by reducing the incentives that made production for the protected domestic market artificially attractive. The reforms coexisted with selective export promotion schemes of varying effectiveness, which the authorities had been implementing since the late 1960s. For example, tax reimbursement certificates (CERTs)—calculated as a flat percent of f.o.b. values—were granted for nontraditional export. CERTs had two components: the tariff rebate of the tax paid on the value of imported inputs, and a subsidy. The reduction of the anti-export bias that occurred as result of the 1990s customs reform argued in favor of eliminating the subsidy component of the CERT scheme, so that it would become purely a duty-drawback scheme.⁷⁶

98. Since joining the WTO in 1995, Colombia’s trade policy has been defined by its WTO obligations as well as by its regional and bilateral commercial agreements. At present, the structure of tariffs remains in accordance with commitments in the Andean Group. The simple average tariff rate is 11.7 percent; the weighted average is around 8 percent and the effective tariff is 7.8 percent. In addition, the VAT is levied on all imports (with a few exemptions) and the “implicit VAT” is levied on imports of products that compete with domestic production that would normally be exempted from the VAT, as noted above. The December 2000 tax package introduced a customs service charge of 1.2 percent applicable to all imports, except to those from countries with reciprocity agreements with Colombia.

D. Tax Administration Reform

99. The tax reforms during the 1980s aimed at facilitating tax administration through the introduction of: (i) presumptive taxation; (ii) tax payments through banks; (iii) the simplification of tax declaration forms; and (iv) the creation of large-taxpayer units. During the first half of the 1990s additional tax administration reforms aimed at increasing taxpayer compliance through: (i) the implementation of audit plans; (ii) the introduction of computerized audit management; (iii) the improvement of the monitoring and recovery of tax arrears; and (iv) the introduction of stiffer sanctions for tax evasion and contraband. Despite the above efforts, officials recognized that there was room for improving the effectiveness of the tax administration’s operations by addressing four additional issues. First, the high cost of tax collection through the banking system—because the banks retained the tax collected for an excessive period—and the poor quality of information from tax returns and payments reported by the banks. Second, the accuracy of taxpayer registers and the monitoring of taxpayers’ compliance with their filing and payment obligations needed to be strengthened. Third, there existed an extensive payment and collection lag built into the tax system.⁷⁷ Fourth, there was significant scope for improving tax auditing through the strengthening of coverage, the use of cross-checking information, and an increase in the number of tax auditors.

100. Moreover, the tax package approved in December 1998 may have complicated tax administration by introducing (i) the “audit benefit” program, a tax amnesty whereby taxpayers who declared an increase in their income tax base for the last few years would not be subject to audits of their income taxes for those years; (ii) the “implicit VAT;” and (iii) a system of presumptive taxation for small and medium taxpayers (simplified regime), which requires the tax administration to calculate and issue tax assessments to all taxpayers in this system.⁷⁸ While audit and collection enforcement operations have improved, and the transit period of taxes through the banking system has been shortened (from 22 days to 14 days), basic tax administration procedures on filing and payments still need to be strengthened.

101. The tax package approved in December 2000 includes several measures that will affect tax administration, such as (i) a special tax amnesty for the four months following the approval of the tax package for undeclared assets (including currencies) held abroad; (ii) a general amnesty for the period 2000–03, whereby taxpayers that declare an increase in their income tax base by an amount that is at least twice the inflation rate will not be audited during the declared year; (iii) an increase from 50 percent to 75 percent in the withholding of small taxpayers’ VAT carried out by large taxpayers;⁷⁹ (iv) an increase in the minimum annual income required to be subject to the simplified tax regime;⁸⁰ and (v) the inclusion of VAT paid on imported capital goods as firms’ cost, which is subject to depreciation.

E. Customs Administration Reform

102. The growth in the volume of international trade following the opening of the economy in the early 1990s resulted in a significant increase in the workload of the customs administration. In the first half of the 1990s, the customs administration carried out an ambitious modernization program with the objective of minimizing delays in the processing of imports and exports. The reform of the customs procedures was based on: (i) the introduction of a self assessment system, in which customers assess and pay their customs taxes and duties on their own; (ii) the introduction of a pre-shipment inspection program, which handles some of the merchandise valuation tasks otherwise carried out by customs, (iii) the simplification of the controls over imports; (iv) the transfer to the private sector of many of the tasks that had been performed by customs officials, including privatization of warehouses. However, there were delays in the introduction of the computerized customs system designed to support the new procedures, and weak coordination in the implementation of these reforms.

103. Additional reforms were introduced in 1999 that included the elimination of pre-shipment inspection programs, the reorganization of customs administration, and the issuance of new customs regulations. The creation of a reform follow-up committee and the introduction of computerized project management tools in 2000 significantly improved the coordination of the reform efforts.

F. Conclusion

104. Considerable improvements were made to tax policy and administration in Colombia during the 1980s and the first half of the 1990s. The income tax was simplified, its rates were scaled back, and the VAT was modified and given a consumption-type structure. In addition, customs tariffs were reduced and customs and tax administration underwent fundamental reforms. As with other Latin American countries during the period, these changes progressively increased the tax revenue to GDP ratio in Colombia. Subsequently, the tax structure has become complex and somewhat distortionary, and the frequent changes in the tax code has made tax supervision more difficult. Future reforms could focus on establishing a stable, broad-based, and simple tax system. This could be achieved with the elimination of the many exemptions and exonerations under the VAT and the income tax, and of the many distortions, such as the “VAT implicit” and the financial transactions tax that were recently introduced.