Easy street

How will the new fiscal reform advances by the government change Colombia’s prospects as an investment destination?
The Financing Law is a substantial effort to reduce the effective corporate tax rate to boost investment and short- and medium-term economic growth. The strategy centers on reducing the effective corporate tax rate from 67.9% in 2018 to 50.4% in 2022. The main measures to meet this objective include a gradual reduction of corporate income tax rate from 33% to 30% in 2022; VAT paid on the acquisition, import, or creation of fixed assets may be treated as a credit for income tax purposes; 50% of the industry and commerce tax effectively paid will be deductible if it is directly related to the taxpayer’s income-producing activity; and a reduction of the presumptive income tax rate from the current 3.5% to 1.5% in 2019 and 0% by 2020. Meanwhile, the withholding tax rate for portfolio investment will fall from 14% to 5%. This is part of the comprehensive economic strategy to promote foreign investment and the deepening of the Colombian financial market. The reform aims to promotes competitiveness by reducing income tax tariffs for corporations in an effort to increase formal employment and boost the economy.

The ministry’s growth projections for 2019 stand at 3.6%, a full percentage point higher than 2018. To what factors does the ministry attribute such a notable increase in growth?
The Ministry of Finance expects economic growth to be driven by several main factors: higher investment due to the Financing Law, better perspectives for internal demand growth, and solid institutional framework. The fiscal package implemented a group of measures that will boost economic growth. The Financing Law will create more firms and motivate current enterprises to bring more jobs with better benefits, while expanding private gross capital formation and economic activity in general. Second, we expect private consumption to accelerate in 2019. This will emerge as a consequence of the convergence of annual inflation to the Central Bank’s center target, increased consumer and business confidence that has been recovering in recent periods, and the expansion of real credit. With investment and consumption growing at a higher pace, domestic demand will increase by approximately 4% by the end of 2018.

What major structural issues affecting the economy does the ministry plan to address through policy in the coming years?
One important challenge that has to be addressed is the Venezuelan crisis. The combination of an economic slump in the neighboring country affects Colombia negatively via weaker external demand and higher fiscal costs associated to migration flows. Meanwhile, Colombia remains on the frontlines, responding to the severe humanitarian emergency in Venezuela. Remarkably, more than 1 million migrants from Venezuela currently reside in Colombia, and many more have either transited through the country or crossed the border temporarily. Colombia has demonstrated an unwavering commitment to provide humanitarian support such as healthcare, education, as well as granting labor rights to migrants to help integrate them into the economy. The associated fiscal costs are estimated to be around 0.5% of GDP in the near term. In addition to the migration issue, we highlight the importance of increasing the total factor productivity to narrow the negative output gap. A scenario of strong economic recovery in Venezuela, a lower tax burden for corporates from the Financing Law, and a more efficient public spending will foster productivity as well as medium and long-term economic growth.