Colombia Finalizes Pacific Alliance Tax Agreement to Entice Mexican Pension Funds to Invest in the Country

The ministers of finance of Colombia and Mexico reached an agreement this week to incentivize Mexican pension funds to invest in the country. Momentum for the development was established by a reform provision of the Pacific Alliance trade bloc both countries belong to allowing for a 0% income tax on pension funds, said Colombian Finance Minister Mauricio Cárdenas Santamaría.

The minister says that this change, which eliminates a previously existing 14% tariff, effectively offers Mexican pension account managers the same tax conditions in the country that a Colombian firm would be subject to.

Photo: Mexico is the latest Pacific Alliance country to agree to tax agreement that Colombian Finance Minister Mauricio Cárdenas believes will encourage more pension funds to invest in the Andean nation. (Credit: Alejandro Islas Photograph AC)

As a result, approved companies in Mexico, known as Retirement Funds Administrators (AFORES) and regulated by the National Commission of the Retirement Savings System (CONSAR), are now being encouraged to invest portions of the $150 billion USD they manage in assets into Colombian interests. Mexico has at least 11 AFORES and they are permitted to invest up to 20% of their funds overseas.

“It is one of the most important bets on the development of the local capital market, which will allow the number of participants to increase and attract new resources to finance companies and projects in the country,” said Cárdenas.

Colombia’s finance minister added that both he and Mexican Finance Secretary José Antonio Meade are hopeful that Colombia will see Mexican pension funds beginning to invest in securities, the nation’s Bolsa de Valores stock market, and projects within the country’s massive highway modernization strategy, known as the Fourth Generation, or 4G, plan.

“This agreement is fundamental for the stock exchange, for deed issuers, for 4G routes,” said Cárdenas. “It’s all about investment that will come into Colombia because of the good opportunities in the national economy, and because without income tax, it’s much more attractive for Mexican institutional investors to take part in the development of the Colombian capital market.”

The agreement with Mexico is much like those Colombia has already forged with Chile and Peru, two other members of the Pacific Alliance. As with those relationships, the new pact with Mexico will also help facilitate the exchange of information between stakeholders in both countries.

“It is part of the financial integration of the Pacific Alliance, so that there will be fewer barriers between our countries and integration — not just commercial but also financial integration,” said Cárdenas. “This is a key agreement in the integration of the alliance … More actors allow for more competition, improve the liquidity of the market, and positively impact financing conditions.”