March 19, 2021
Commission of Experts on Tax Expenditures/Benefits issues recommendations for the Colombian tax system
The Commission of Experts on Tax Expenditures/Benefits suggests increasing certain tax rates and reducing the number of tax exemptions.
On March 17, 2021, the Colombian Government released the report prepared by the Commission of Experts on Tax Expenditures/Benefits (the Commission). The report is key to the tax reform proposal that the Colombian Executive Power has announced it will send to the Congress shortly. The complete report can be accessed here.
According to the report, in 2019, tax benefits in Colombia totaled approximately COP 69.1 billion — COP 51.6 billion for value-added tax (VAT) benefits, COP 17.1 billion for income tax benefits, and the remaining amount for other tax benefits. The total tax benefits for that year represented 6.5% of the Colombian GDP. Tax evasion totaled an estimated COP 20.7 billion for VAT and COP 21.6 billion for corporate income tax. In addition, the rate of labor informality1 is estimated at 49.2%
Colombia needs to increase tax revenue and that need has become more urgent with the growth of the fiscal deficit as a result of COVID-19 pandemic. Additionally, Colombia is at risk of having its credit rating reduced if Colombia makes no tax adjustments in the short term.
The Commission was established by Law 2010 of 2019 to make recommendations for improving Colombia's tax policy and began activities in August 2020. The Commission is led by five international experts2 and has five working focus groups.3
The Commission concluded Colombia has introduced piecemeal reforms to counteract the system imbalances and increase tax revenues. The tax system has narrow tax bases and high tax rates imposed on those who cannot avoid the tax. The tax system is complex and includes distortive taxes (e.g., debit tax, ICA (i.e., turnover tax4), VAT on investment).
The Commission also determined that acting to balance the tax system too quickly may harm economic recovery and abolishing tax benefits within each tax provision may be ineffective. Thus, the Commission suggests ambitious tax base broadening tax packages/reform. Additionally, Colombia needs to consider long transitional periods.
Accordingly, the Commission recommends: (i) requiring the tax authorities to produce annual reports, including item-by-item tax expenditure and benefit reports, (ii) adding a mandatory framework chapter to each law that explains the rationale of the tax reform and provides a detailed economic assessment, and (iii) creating an independent body of public finance experts to assist the Ministry of Finance in developing a strategy for implementing the suggested reform.
The tax benefits were classified by each of the focus groups into the following categories: 1) no reform is needed (at least in the short run); 2) reform is desirable; 3) reform is conditioned (on other reforms); 4) unclear whether to reform or not. A table with these classifications is attached below.
The Commission generally recommended the following changes:
Personal income tax
Business tax regime
1 Informality is defined to include: i) employees who do not pay health contributions; and ii) self-employed who do not pay social security contributions (Brazil, Chile and Turkey), or whose business is not registered (Argentina, Colombia, Costa Rica, Mexico, Peru and South Africa).
2 The international experts are David Rosenbloom, Brian Arnold, Jeffrey Owens, Pascal Saint-Amans, and Kent Smetters
3 The focus groups are:(i) Corporate Income tax, (ii) Non-taxable income and incentives for the countryside, (iii) Individuals, employment and dividends, (iv) Global trade, and (v) VAT.
4 A municipal tax levied on the performance of industrial, commercial or service activities within the territory of a specific municipality.
Report tax benefits commission of experts - Annex