OECD Urges Colombian Tax Reform For Economic Diversification

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 recently released OECD Economic Survey of Colombia.

The OECD identifies a number of policies that it deems 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 poverty late in life. Boosting infrastructure investment  by fulfilling the government’s “4G” road concession program  and making local investment more effective are also top priorities, the survey said.

The survey, presented in Bogotá 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 favorable regional conditions and global economic factors.

“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 labor 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 penalize investment, according to the OECD. 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.

The OECD also recommends an in-depth reform of the pension system to reduce elderly poverty and inequality. Around two-thirds of the elderly do not currently have any form of pension, while the minimum pensioner’s 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 program, alongside increased coverage and benefit levels of the minimum wage, currently under $300 USD. Furthermore, reforms that reduce informality, such as investing in skills and reducing non-wage labor costs, can expand both coverage and funding for social protection programs.

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.

Headline photo credit OECD: 19 January 2015 – (From left) José Uribe, Governor of the Colombian Central Bank; Mauricio Cárdenas Santamaría, Minister of Finance and Public Credit of Colombia and Alvaro Pereira, director of country studies in the OECD Economics Department at the presentation of the Economic Survey of Colombia. Bogota, Colombia.