Colombia’s Tax System Ranked Absolute Worst Among All OECD Countries

A new report from the Tax Foundation, an independent tax policy nonprofit, has ranked Colombia’s tax system as the least competitive among all 38 member countries of the Organization for Economic Co-operation and Development (OECD). The 2024 International Tax Competitiveness Index, which benchmarks tax systems on their neutrality and competitiveness, placed Colombia 38th overall for the second consecutive year.

The comprehensive report analyzes over 40 variables across five categories: corporate taxes, individual taxes, consumption taxes, property taxes, and cross-border tax rules. While Colombia has some bright spots in its tax code, significant weaknesses in corporate and property taxation drag down its overall score, making it the most challenging tax environment for businesses and investment within the OECD.

The Colombian government’s tax authority, the Dirección de Impuestos y Aduanas Nacionales (DIAN), is responsible for administering this complex system. The Tax Foundation’s report suggests that Colombia’s current tax structure may hinder economic growth and foreign investment.

Strengths of the Colombian Tax System

Despite its low overall ranking, the report highlights some positive aspects of Colombia’s tax policies:

• Low Burden on Average Workers: A worker earning the nation’s average wage faces the lowest tax burden in the OECD. This is a significant advantage for the country’s workforce and can help to stimulate consumer spending.
• Competitive Dividend and Capital Gains Taxes: Colombia taxes dividends and capital gains at relatively low rates of 15% and 20%, respectively. These rates are attractive to investors and can encourage capital formation.
• Average VAT Rate: The Value Added Tax (VAT) rate of 19 percent matches the OECD average and is applied without a minimum earnings threshold, creating a broad and relatively efficient consumption tax base.

Weaknesses of the Colombian Tax System

However, the report also identifies several critical weaknesses that contribute to Colombia’s poor ranking:

• High Corporate Income Tax: At 35 percent, Colombia’s corporate income tax rate is the highest in the OECD and significantly above the 23.9 percent average. This high rate can discourage business investment and make it difficult for Colombian companies to compete globally.
• Worldwide Corporate Tax System: Colombia is one of the few OECD countries that operates a worldwide corporate tax system, meaning it taxes the foreign profits of its multinational corporations. This is in contrast to the more common territorial system, which exempts foreign profits from domestic taxation. This can lead to double taxation and reduce the competitiveness of Colombian businesses abroad.
• Additional Taxes: Colombia levies a net wealth tax and a financial transactions tax. These taxes are considered to be some of the most distortive and harmful to economic growth, as they discourage savings and investment. The presence of these taxes further complicates the tax system and adds to the burden on individuals and businesses.

Colombia’s tax environment works to retard growth and investment opportunities in the country, and encourages taxpayers to seek complex tax shelters, often abroad. The country’s worsening fiscal deficit crisis also means that significant tax relief is probably not likely soon. While the country has some competitive features in its tax code, the significant drawbacks, particularly in corporate and property taxation, create a challenging environment for economic growth. Addressing these weaknesses will be crucial for improving Colombia’s competitiveness on the global stage.

DIAN team on the ground. Photo credit: DIAN Dirección de Impuestos y Aduanas Nacionales de Colombia/Facebook.