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Colombia needs a comprehensive tax reform to boost investment and diversify the economy, OECD says

 

19/01/2015 - The Colombian economy has done remarkably well over the last decade, consistently ranking among the fastest-growing countries in Latin America, but a comprehensive tax reform that promotes investment and diversifies the economy is now needed to put the country on a path toward stronger, sustainable and inclusive growth, according to the latest OECD Economic Survey of Colombia.

The OECD identifies a number of policies critical for future growth and reducing the high levels of income inequality. A comprehensive tax reform is needed to make the tax system more investment- friendly, more efficient and fairer, while pension system reform could reduce old-age poverty. Boosting infrastructure investment - by fulfilling the government’s road concession programme (4G) - and making sub-national investment more effective are also top priorities, the Survey said.   


The Survey, presented in Bogota by Alvaro Pereira, director of country studies in the OECD Economics Department, Mauricio Cárdenas Santamaría, Minister of Finance and Public Credit of Colombia, and José Uribe, Governor of the Colombian Central Bank, notes that Colombia  is projected to grow close to 4.5% in the coming years, despite less favourable external conditions.  

 “The Colombian economy has shown extraordinary dynamism and strength in recent years. Its macroeconomic policies are solid, but the decline in oil and coal prices presents a challenge to sustaining growth,” Mr Pereira said. “While the 2012 tax reform has had very positive effects on formal job creation, and the tax law approved in December 2014 also represents a step in the right direction, further measures are now needed. A comprehensive tax reform can provide the boost to growth and investment that will diversify the economy, further reduce labour informality and improve the well-being of all Colombians.”


Future tax reform must address Colombia’s high tax rates on corporate profits, Value-Added Tax on investment goods and the net wealth tax, all of which combine to penalise investment, the OECD said. The Survey recommends gradually lowering the corporate income tax rate while enlarging the base, to ensure that more firms actually pay taxes.

Strengthening the tax administration and increasing penalties will reduce tax evasion. OECD research shows that a 50% reduction in VAT and corporate tax evasion could bring more than COP 15 trillion (USD 8 billion) in additional revenues. This windfall could help finance social and infrastructure investments, as well as part of the implementation costs of any future peace plan.  
 

Colombia can also make taxation greener, through introduction of a carbon tax, and fairer, by reducing generous personal income tax exemptions and deductions that benefit mainly wealthy taxpayers, notably as concerns high pensions and dividends, the Survey said.

Presentation of the OECD Economic Survey of Colombia
Photo: Ministerio de Hacienda de Colombia

The OECD also recommends an in-depth reform of the pension system to reduce old-age poverty and inequality. Around two-thirds of the elderly do not currently have any form of pension, while the minimum old-age income support is below the national poverty line.


Reforms can simultaneously ensure that the elderly have access to a decent pension while maintaining sound public finances. The OECD supports an expansion of eligibility for the Beneficios Económicos Periódicos programme, alongside increased coverage and benefit levels of the minimum income support Colombia Mayor programme. Furthermore, reforms that reduce informality, such as investing in skills and reducing non-wage labour costs, can expand both coverage and funding for social protection programmes.


An Overview of the Economic Survey of Colombia is available at: www.oecd.org/economy/economic-survey-colombia.htm

An embeddable version of the report is available, together with information about downloadable and print versions of the report.

 


***NOTE TO EDITORS***

The new Economic Survey of Colombia feeds into the country’s ongoing OECD accession process, which was launched in October 2013 in Bogota during a visit by the Secretary-General, on the basis of the May 2013 decision by the OECD Council  to open accession discussions with Colombia and Latvia.

 

Colombia is currently working through an Accession Roadmap, which sets out the terms, conditions and process for its accession to the Organization. The Accession Roadmap calls for a series of in-depth reviews conducted by 23 OECD technical committees, which, in turn, will provide a formal opinion to the OECD Council on Colombia’s willingness and ability to implement OECD standards and of its policies and practices as compared to OECD best policies and practices in the relevant area.

 

These reviews are seen as an opportunity to support the Colombian authorities in pushing forward reforms in line with OECD standards and best practices. There is no set timeline or end date for the accession process, and progress made ultimately depends on the ability of Colombia to respond to recommendations made by OECD committees, formed by its Members, in order to successfully complete the technical reviews.

 

The 34 member OECD promotes policies that improve the economic and social well-being of people worldwide. The Organisation provides a forum in which governments can work together to share experiences and seek solutions to common problems.

The OECD's current members are: Austria, Australia, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

 

For further information, journalists should contact OECD Media Officer Lawrence Speer (Lawrence.Speer@oecd.org, +33 6 0149 6891) or the OECD Media Office (news.contact@oecd.org, +33 1 4524 9700).

 

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