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Financing law: Improvisation and less equality?

The Colombian tax system is evidently lacking planning. It is inconceivable that every two years on average for the last twenty years, there has been a tax reform and turns to even more harmful for those promoting foreign investment as it means economic and legal instability.

However, it is possible that foreign investors do not perceive it badly, as they have been greatly favored by lobbying for certain changes.

In this reform, the focus was generalizing a value-added tax (VAT) to the products of the household basic food basket and although the Minister of Finances said they didn’t have a Plan B, due to the social protest, they changed the reform to suit the general public.

Generally, the reforms are destined to solved temporary aspects and short-term cash flow issues but do have not the sense to do it on the long-term, another symptom of the lack of competent personnel in decision making positions, its lack of conviction or bad decision capability, as a consequence of a real meritocracy system.

The prior due to the clientism present in the country, mainly for the inadequate funding of political campaigns which a priori compromise de decisions of those elected, justifying the autonomy of the Tax and Customs Department.

The reforms have not solved great inequality issues of the country; on the contrary, they have allowed concentrating income, wealth, lands, enterprises, banks and the financial system.

In all cases, the Colombian Gini coefficient is excessively high, implying less development and favoring only a few. After taxes, this coefficient is equal or decreases a little, as opposed to serious countries, where the variation is evident.

Following is a summary of the negative aspects –because they produce greater inequality or do not produce greater tax collection, and despite the new regulations, they are innocuous– as well as the positive aspects, for opposing criteria of the previous.

Positive aspects

It reinstated the tax to profit remittances sent to foreign countries, which had been eliminated back in 2007 by the current Minister of Finance.

Having again a capital gains tax, ideally starting from COL$5,000 million and not starting at COL$1,200 million for instance, as less than 99% of the population has this type of assets; and it is not understandable to charge companies.

Surtax to the finance sector. As a completely intermediary sector without value adding and large profits, it was time the banks began to contribute more to the country, and they will not pay more taxes. With the surtax, they will pay the same, or inclusively a little less, however, they are dramatizing the new tax, exerting pressure over the media; it is important to highlight that the effective rate to the finance sector, excluding some instances, was a little over 9% (without the surtax), and that of the banks was close to 16% between 2000 and 2015.

VAT for selling high-valued properties, producing some progressivity to the sectors of greater wealth.

Diminishing nominal rates to companies, without taking into account that the effective rate can be between 16% and 17 %, according to rigorous academic research and figures of Colombian National Tax and Customs Administration (DIAN, for its Spanish acronym), with the surtax and the income tax for equity (CREE, for its Spanish acronym) did not exceed 23%, but these two will disappear, even worse, placing a lower rate to mega investments, in other words to the most powerful business conglomerates. If the effective rate is added to the Colombian Agricultural and Livestock Institute (ICA, for its Spanish acronym) tax and severance payments, the tax burden rises to close to 27%, a much lower than indicated in Doing Business where Germany and Japan have a tax burden to companies of 48.9% and the United States of 44%; as opposed to the 70% taxes disinformation provided by Colombian industry unions; however, it helps them exert pressure, besides presuming their funding rights over the political campaigns they participate in.

Simple tax for small companies. The effective rate calculated over income in the UNal research for the commercial sector between 2000 and 2015 was 1.2%; however, it starts in the lowest rate of 1.8% up to 5.4% of the income, without analyzing the harmful consequences, as many small companies may disappear. On the other hand, there is no justification for not having rate progressivity for companies as many developed countries do have, i.e. the greatest profits pay more taxes.

Continuing to a tax for dividends breaks horizontal equality, as it is not fair for an employee who earns COL$15 million of a family of five to pay 35% or more tax and an investor who earns more than COL$10,000 million only pays 15%.

Not withholding of tax at source for dividends when paid from company to company facilitates tax evasion.

Provide a tax discount on the VAT for purchasing fixed assets in only justified for industrial companies of important value addition; it is inconceivable, for instance, that financial entities enjoy this benefit, which is also an opportunity for tax evasion, which represented the government more the COL$4 billion in the past.

Hundreds of unjustified tax benefits were not eliminated; many as a consequence of clientism, lobbying, and corruption. This produces vertical and horizontal inequality, as opposed to what is written in the Colombian Constitution. The sum of all the tax benefits between 2000 and 2015, according to a research project carried out by Professor Carlos Quimbay and with figures taken from DIAN, for all economic sectors was COL$ 349.6 billion. This total value, seen as an income tax which the government did not receive was of COL$122.8 billion.

Lack of jail time for tax evaders of important amounts, for instance, greater than COL$1,000 million, incentivizing tax evasion. No measure was taken toward Panama, which has denied automatic exchange of financial information, protecting people with businesses and equity in the fiscal paradise.

Granting amnesties again, as done in the name of “normalization”, disincentives disciplined tax contributors.

Introducing and increase so unsubstantial to high incomes –the highest of 37%- and with exaggerated benefits that have been demonstrated to be more than 4% in the highest 10% is not comparable to countries of the OECD who have figures in the highest ranges between 45 and 59%, producing a real equality in society, without not staying affluent.

 

Consejo Editorial