Doing Business in Colombia

The world’s 26th-largest country by landmass and 29th by population, Colombia ranked 53rd in the World Bank’s ease of doing business category for 2017. Down two positions from 2016, this was largely because of difficulties that many firms have in paying taxes, which, contrary to the government’s hopes, have not been made easier since the fiscal reforms introduced in January 2017. As a result, the country dropped a further six spots, from the 133rd hardest place to pay taxes to the 139th, nothing to write home about.

To be sure, it made significant progress in other areas, such as the ease of starting a business, where it climbed nearly 20 places from 80th to 61st in the span of one year alone, or maintained its dominance in others such as access to credit, where it remained the second-best place to do business in the world. This almost makes up for the fact that the country slipped a few places in: protecting minority investors, from 10th to 13th; trading across borders, from 118th to 121st; and getting electricity, from 69th to 74th.
That businesses are having great difficulty in the most basic regards—keeping the lights on and knowing how much to fork over to the state—reflects the chronic political, economic, and infrastructural deficiencies that have plagued the Colombian state for ages, especially when decades of war have bloated the size of the state and a recent overreliance on hydrocarbons for its revenues now forces it to lean on the private sector to make up the slack for depressed energy prices. On the other hand, the ready access to capital and protection of minority investors reflect the investment community’s ultimate faith in the country’s capacity to grow in leaps and bounds in the post-conflict era, not to mention the government’s determination to assure it has the necessary legal protections to actually do so.

Though rightly touted for having one of the most disciplined fiscal regimes in Latin American history, Colombia has struggled since the 1990s to keep its house in order. Thus a new era was born, in October 2016, when Colombia’s congress overwhelmingly passed a series of reforms to raise the VAT from 16% to 19% (excluding basic items like food and medication), gradually lower income tax on businesses from 43% to 33% by 2019 (though companies operating in the free zone regime will only pay 20%), and stiffly increase penalties on tax evasion. There is also an increase in the tax on increases in the value of a taxpayer’s assets from 3 to 3.5%.
Other tax hikes include: the introduction of a “green“ tax on fuels and other oil-derived energy products; a 15% withholding rate on taxable income accrued by non-residents without a permanent establishment; a long-term capital gains tax of 10%; and an increase in the tax on tobacco (to reduce consumption). The reforms also introduced a controlled foreign companies (CFC) regime, a system that limits the artificial deferral of tax through recourse to lower-taxed offshore havens; lengthened the statute of limitations regarding tax returns and assessments; and limited loss carry forwards to 12 years, a method of applying one year’s losses to a future year’s revenues that often artificially lowers a firm’s tax contribution more than otherwise would be the case.
Taken together, these measures are expected to net the state an additional COP6.2 trillion in 2017 and are considered vital to preserving the country’s BBB investment-grade rating. By simplifying and scaling individual contributions to be more progressive, increasing total indirect taxation, strengthening municipal taxation, and lowering corporate tax levels, the state is banking on killing more than two birds with one very nimble stone.