In the event that the shareholders’ meeting decides to distribute profits through dividends, this distribution will be made at the head of each of the partners or shareholders in proportion to their investment.

This is how the taxation of dividends was born. For this kind of tax, three elements are taken into account:

• The status of taxpayer vis-à-vis each shareholder, i.e.:

1. If it is a natural person or illiquid succession, resident of the ordinary regime.
2. If it is a non-resident natural person.
3. If it is a foreign branch (in this case it is called a permanent establishment of a foreign company).
4. If he or shee is a natural person of the simple regime.

Everyone has a different treatment at the time of taxation.

• The tax rate

1. Rates are for resident natural persons and allowances and donations and modal donations. According to article 241 of the Tax Statute, the tax rate of the year 2022, went from zero to ten percent, by 2023 from zero to 39 percent..

1. With regards to the rate for non-residents located in countries with agreements to avoid double taxation, the agreement must be reviewed to apply the corresponding rate with the country in agreement.
   

   Attorney and tax expert Humberto Rodriguez

2. In the event that there is no double taxation agreement with other countries, the rates must be revised in accordance with the case provided for in the following articles: 242, 242-1, 245, and 246 of the Statute.
3. In the case of the foreign branch, the rate will be 20%, in accordance with article 245 of the Tax Statute. For this case it is worth noting that this rate applies to those residing in countries with which Colombia currently has no agreement to avoid double taxation.
4. In the case of a natural person of the simple taxation regime, they are only taxed at the rates corresponding to the activity that is developed, in accordance with article 908 of the tax statute.
5. In this same sense, the status of a legal entity that has issued the dividends must be taken into account, that is:
6. If it is a national company that carries out the “mega investments” referred to in articles 235-3 and 235-4 of the Tax Statute.
7. If it is a company that does not carry out “mega investments” and that is not covered by the company regime (CHC) dealt with in articles 894 to 898 of the tax statute. Or
8. In the case of dividends issued by a national company of the ordinary regime that does not carry out “mega investments” of article 235-3 but that is covered by the company regime (CHC) of articles 894 to 898 of the Tax Statute.

For questions about taxation in Colombia, please do not contact Finance Colombia! Instead, contact Rodriguez & Asoc. Bilingual tax specialists in Colombia at info@rodriguezasociados.co or click on the banner below.

This guest article is published as a courtesy to readers. Finance Colombia is a news publication and does not provide financial, legal, or tax advice. This information is provided as general news and the reader must consult is or her own counsel in order to make qualified, informed decisions. Information, rules, procedures, and laws may (and almost certainly will) change, and Finance Colombia assumes no responsibility for accuracy or timeliness of information.

]]> https://www.financecolombia.com/understand-the-potentially-costly-laws-regarding-tax-residence-in-colombia/ Tue, 21 Feb 2023 13:51:58 +0000 https://www.financecolombia.com/?p=25979 For tax purposes, natural persons who meet any of the following conditions are considered residents in Colombia, in accordance with Article 10 of the Tax Statute:

1. Stay continuously or discontinuously in the country for more than one hundred and eighty-three (183) calendar days including the days of entry and exit from the country, during any period of three hundred and sixty-five (365) consecutive calendar days.
2. Be found, by their relationship with the foreign service of the Colombian State or with persons who are in the foreign service of the Colombian State, and by virtue of the Vienna conventions on diplomatic or consular relations exempt from taxation in the country in which they are on mission with respect to all or part of their income and occasional gains during the respective year or taxable period.
3. Be nationals and that during the respective year or taxable period: a) Your spouse or permanent partner not legally separated or minor dependent children, do not have tax residence in the country; or, (b) Fifty per cent (50%) or more of their income is from domestic sources; or, c) Fifty percent (50%) or more of their property is administered in the country; or, d) Fifty percent (50%) or more of their assets are understood to be owned in the country; or, e) Having been required by the Tax Administration to do so, do not prove their status as residents abroad for tax purposes; or, f) Have tax residence in a jurisdiction qualified by the National Government as a tax haven.

Tie Breaker Rules

It is important to know in view of the above scenario, that multiple situations can arise, that is, it may be the case in which being a tax resident in Colombia, eventually also, one is tax resident in another country. In this instance, the case must be submitted to the Tie Breaker Rules (law 1459 of 2011).

Where a natural person is a resident of both contracting states, his (or her) situation shall be resolved as follows: (a) Such a person shall be considered to be a resident only of the state where he has a permanent dwelling at his disposal, if he has permanent dwelling at his disposal in both states, he shall be deemed to be a resident only of the state with which he maintains closer personal and economic relations (center of vital interests). (b) If the state in which the person has the center of his vital interests cannot be determined, or if he does not have a permanent dwelling at his disposal in any of the states, he shall be deemed to be a resident only of the state where he habitually lives. (c) If he habitually lived in (d) If he is a national of both states, or is not a national of either state, or is not a national of either state, the competent authorities of the contracting states shall decide the case by mutual agreement.

For questions about Colombian taxes, please do not contact Finance Colombia! Instead, contact Rodriguez & Asoc. Bilingual tax law specialists in Colombia at info@rodriguezasociados.co or click on the banner below.

This guest article is published as a courtesy to readers. Finance Colombia is a news publication and does not provide financial, legal, or tax advice. This information is provided as general news and the reader must consult is or her own counsel in order to make qualified, informed decisions. Information, rules, procedures, and laws may (and almost certainly will) change, and Finance Colombia assumes no responsibility for accuracy or timeliness of information.

The United States has tax treaties with 68 different countries. A tax treaty is primarily used to clarify the following questions –

• When can a country impose and collect tax on a foreign business?
• What rate of tax is to be imposed?

Businesses whose home countries have tax treaties with the US have clear guidelines to follow when expanding to the US. Countries that do not have tax treaties with the US must operate according to the standard US regulations and filing thresholds. The tax rates imposed on businesses from countries without tax treaties are less favorable. This does not mean Colombian companies shouldn’t do business in the US, but that extra planning must be taken, as mistakes and mis-classifications are more expensive as a business from a country without a US tax treaty.

The subsequent sections refer to the US tax rules applicable to Colombian based businesses expanding operations to the US

Permanent Establishment (PE) – When can a country impose tax?

If a company established in Colombia is doing business in the United States both the United States and Colombia have the legal right to impose tax. This is true whether there is a tax treaty or not.

Doing business in a country = Permanent Establishment (PE).

The thresholds for determining PE for businesses from countries with no US tax treaty are lower and there are no exceptions to the rules. If a Colombian based company is doing any of the following in the US, PE would be triggered. Does the company:

• Have an office located in the US?
• Have employees located in the US?
• Have sales people in the US?
• Negotiate contracts with US clients while in the US?
• Send technicians to the US to service clients?

The PE laws are subject to interpretation, but generally if a business has a physical connection to the US, the US government will impose tax on profits. For a Colombian S.A. (Sociedad Anónima) the tax would include the US base 21% corporate tax, plus the branch profits tax which is 30%. The branch profits tax applies to foreign corporations doing business in the US

All these taxes on top of the 34% tax in Colombia make doing business unsustainable. This is a global 85% tax rate.

There is a simple solution to avoid this level of taxation. The Colombian company would open a subsidiary or separate entity in the US Usually the US company would be set up as a C-Corporation but this isn’t always the best option.

This would stop the direct double taxation and allow each country to tax the income earned only by the entity established in its borders. The CO company can ship products to the US company or provide remote services for the clients of the US company, it just cannot do any of the activities that would trigger PE.

Once a US subsidiary is established, the manner in which the US and CO entities do business must be reviewed.  US and CO related entities can do business together, however many types of transactions are subject to US withholding.

Tax Withholding – What rate of tax is imposed?

The most prevalent US law which mandates tax withholding for payments made from US persons to Colombian companies is the Foreign Account Tax Compliance Act or FATCA. FATCA requires a US person (or company) making specific types of payments remit a percentage to the US government.

If the rate of withholding is higher than the actual tax that is assessed, the foreign person can file a tax return at the end of the year to claim a refund for the difference.

To reiterate, FATCA requires tax withholding for certain payments from US persons to non-US persons.  FATCA impacts most non-US entities which are receiving US source income. The base rate of withholding is a flat 30%.

Payments that are “Fixed Determinable Annual or Periodic” would fall under the FATCA regime. The most common payments are Interest, Dividends, Royalties and Capital Gains. A US company paying a Colombian company any of these types of payments must send 30% of the payment to the IRS to comply with FATCA withholding rules. If the withholding payment is sent late or not at all, the US company is liable for the full amount in addition to expensive penalties and interest.

The withholding rates with tax-treaty countries are usually much lower.

Example – a Colombian company licenses out its software to a US business. The US business must remit 30% of the royalty payments to the IRS. If the company was from Italy instead of Colombia, the withholding would be 8%.

Example 2 – A US subsidiary of a Colombian company has record profits and wants to pay out a dividend. The US business must remit 30% of the dividend payment to the IRS. If the company was from Mexico instead of Colombia, this tax would be 5%.

“Bonus” – Death Tax Treaties

Completely separate from income tax treaties there exist death (estate) tax treaties. The US has death tax treaties with only 15 countries; Colombia is not one of these countries.

The US estate tax is assessed on the transfer of a person’s assets to their beneficiaries after death. A person is subject to the US estate tax rules only if they were a US citizen or resident, or had US based assets.

The estate tax exemption for a non-resident is $60,000 and the estate tax rate is approximately 40%. A US non-resident will only pay taxes on US based assets.

US citizens and residents have an estate tax exemption of $11,180,000 USD, so only estates in excess of this amount will have to concern themselves with estate taxes.

Generally speaking, the benefit of the death tax treaty is that the large $11 million USD exemption for residents is also extended to non-residents. This eliminates the estate tax for many people that would otherwise be subject to this tax.

The best way to illustrate this tax is with an example.

Juan Carlos is a Colombian citizen who owns a vacation home in Miami with a fair market value of $750,000. There is no mortgage. Juan has an estate of $7,500,000 back in Colombia. Unfortunately Juan dies.

$750,000 Market value of the vacation home

-$50,000 Expenses

-$60,000 Estate tax exemption

$640,000 Taxable US Estate

40% Estate Tax Rate

$256,000 US Estate Tax Liability.

 In the exact same scenario, if Juan Carlos was a citizen of Canada, he would have no estate tax liability in the US. This is because the US and Canada have a death tax treaty and Juan can utilize the $11,180,000 US estate tax exemption.

What this means

It is easy to see that tax treaties are beneficial for international business owners and investors. These agreements provide clear guidelines and reduce the withholding required on FATCA transactions between related parties.

All said, the lack of a tax treaty should not deter Colombians from doing business in the US, it only requires forethought and additional planning. Businesses from countries with and without tax treaties have the same opportunities to be successful; some just have it a bit easier.

Jim Baker CPA is a managing partner of Mata & Baker Tax Consultants, P.A. Mata & Baker is a boutique CPA firm with offices in Coral Gables and Fort Lauderdale specializing in multi-jurisdictional taxation issues for businesses, investors, and individuals. The firm is staffed with multilingual accountants, attorneys, enrolled agents, and other practitioners, and is equipped to service its international client base in English, Spanish, and Portuguese. In addition to domestic and international tax planning and preparation, the firm’s professional services also include accounting for small and mid-size businesses and Tax Dispute Resolution.

He won convincingly in a second-round run off election today over leftwing candidate Gustavo Petro, a controversial former M-19 guerrilla member and former Bogotá mayor whose populist ideas were unable to gain him a coalition of political support.

Photo: Iván Duque, the new president of Colombia, outlined his economic agenda recently in a televised interview with Bloomberg.

With more than 99% of the votes counted, the Bogotá-born Iván Duque held a 54.0% to 41.8% lead over Petro. The vote count stood at 10.3 million to 8.0 million for the victorious Democratic Center candidate who will assume the presidency from President Juan Manuel Santos in August.

In a polarized election that was fiercely debated all year long, more than 4.2% of the those who voted cast blank ballots — “voto en blanco” — and preferred to vote for neither candidate. In all, there were more than 806,000 “votos en blanco” out of the more than 19 million cast.

The election results are historic in that Duque’s running mate, Marta Lucía Ramírez, will become the first woman to serve as vice president of Colombia. Duque himself, at just 41 years old, will also be the youngest president in more than 100 years.

The outcome will also have a significant impact on the peace process that the government signed with the Revolutionary Armed Forces of Colombia (FARC) in 2016.

While a key court decision last year ruled that aspects of the historic accord cannot be altered for at least a decade, the 41-year-old Duque has pledged to make major alterations.

Though it remains to be seen exactly what the new president can do to dismantle the agreement, implementation of the deal has continued to lag even under a government more supportive of the process. Simply failing to push implementation forward would represent a major disruption, and changes to its justice and political participation provisions, among other key aspects, could have severe effects on the now-demobilized guerrilla group’s actions going forward.

While no political party controls a majority in Congress, Duque’s Democratic Center party has been working to forge a coalition with the other right-leaning parties. Gaining wide support in the legislative branch could offer Duque wide latitude to carry out his agenda.

Many key economic organizations, labor unions, and private sector stakeholders had publicly offered their support for Iván Duque before today’s election. While he represents potential disruption to the peace process, many more business-minded Colombian were concerned that the uncertainty of the leftist policies of Petro would negatively affect the country’s economic recovery.

The nation’s gross domestic product (GDP) grew by just 1.8% in 2017, the lowest figure since the height of the global recession in 2009. This followed the disappointing 2.0% growth in 2016.

Between the end of the global crisis and the major drop in oil prices a few years later, the Colombian economy grew by at least 4.0% each year from 2010 to 2014, hitting a high during this stretch of 6.6% in 2011.

Duque has pledged to cut the corporate tax rate below 30%, something he told Bloomberg in an interview would make Colombia more competitive “as we’ve seen other countries in Latin America.”

He added that cutting this tax rate would help “get the economy and investment reactivated and be able to generate the type of employment that we need and also put the target of getting the economic growing above 5% of GDP.”

While many in the private sector are happy with the outcome, critics have also highlighted Duque’s inexperience. While he was elected to serve a first term in the Colombian senate in 2014, his youth and lack of executive experience in any form of government — or even at any organization in the country — has been called a red flag by the opposition.

READ MORE: Iván Duque Wants to Cut the Corporate Tax Rate Below 30% in Colombia

Before becoming a protege to Uribe and running for his Senate seat in 2014, Iván Duque, who holds a law degree from Sergio Arboleda University in Bogotá, was a relative unknown in Colombia who had spent more than a decade previously working for the Inter-American Development Bank in Washington.

In the late 1990s, he also began a stretch serving as an advisor in the Colombian Ministry of Finance and Public Credit under then-President Andrés Pastrana.

This article has been updated with additional information following the final election results.

Duque, the candidate of the Democratic Center party and protege of former President Álvaro Uribe, received nearly twice as many votes as Colombia Humana representative Petro.

The final polls released the week prior to the two-man runoff vote also showed Duque with more than 50% of the support and Petro trailing significantly. Many Colombians, displeased with some of the more extreme position of both men, have indicated they will fill out a blank ballot, or voto en blanco, rather than giving their vote to either.

Among the voto en blanco voters will be Sergio Fajardo, the former Medellín mayor who came in third, narrowly losing out to Petro, in the first round of the election, and Humberto de la Calle, the former vice president and peace negotiator, who placed fifth.

The two defeated, more-centrist candidates have both said they do not support Duque’s pledge to try to unravel key parts of the peace accord signed with the Revolutionary Armed Forces of Colombia (FARC) in 2016 and the more socialist policies advocated by Petro.

The winner will take over the Casa de Nariño in August from outgoing, two-term President Juan Manuel Santos.

Polls in Colombia are notoriously unreliable, but Duque has experienced what Bloomberg recently categorized as a “meteoric rise” to the “cusp of Colombia’s presidency” in the lead up to the May 27 election.

“Tax rates in Colombia are pretty high … If you ask me about a competitive [corporate] rate, I think it should be below 30% — as we’ve seen other countries in Latin America.” – Iván Duque

The right-wing candidate and former senator’s ascension has largely been attributed to the fact that he was handpicked by former President Álvaro Uribe, who led the country as it beat back the guerrilla threat in the early 2000s and continues to have as much political sway as anyone in Colombia despite ongoing controversy and ever-present allegations of human rights violations from his tenure as a hardline head of state.

While advocates of the country’s peace process, finalized in late 2016 to end a half-century of conflict with leftist FARC rebels, fear that Duque will work to dismantle the accord if he wins the presidency, many in the business world believe he will be good for markets in a nation that has seen sluggish growth for the past two years.

Plenty of analysts, including New York-based credit rating agency Fitch Ratings, believe that Colombia’s stable fiscal policy and market-friendly policies will continue regardless of who takes office. But Duque nevertheless has so far talked the talk more loudly than the rest of the field when it comes to promises of fostering a climate for greater investment and economic growth.

To elaborate on his economic platform, Duque recently sat down with Bloomberg reporters for a televised interview. During the conversation, he explains — albeit without many specifics — that he wants to pursue polices that can get Colombia back toward the 5% annual GDP growth it was experiencing before the price of oil plummeted in 2014.

Among the focus areas to get there, he is pushing for a larger trade relationship with the United States, tax reform that will create a “competitive” corporate tax rate below 30%, a ramped-up fight against tax evasion, and further development of domestic capital markets.

To hear Duque’s comments from his Bloomberg appearance, watch the video here or read the transcript in full below.

Bloomberg: How concerned are you by the apparent turn away from free trade that we’re saying obviously in the U.S. but elsewhere as well?

Iván Duque: I think the concept of trade wars is not good for the world at this moment. We want the U.S. economy to grow, and if the U.S. economy starts growing above 3% that will help emerging markets and it will help Latin American a lot.

But if you start having measures in order to limit free trade — or to put additional tariffs — it would hurt emerging economies. So if you want the whole economy to grow in a comprehensive way, you need to get the biggest economies growing, and don’t blockade the development of the access to free markets.

Bloomberg: What kind of relationship do you foresee Colombia having with the U.S. under President Trump?

Iván Duque: There is an important thing and it is that Colombia has always had bipartisan support. We got support from the Clinton administration, the Bush administration, the Obama administration, and now President Trump is visiting Colombia a few weeks from now. And he’s supporting our anti-drug agenda.

“I want the local capital markets to develop. We need to have more IPOs, and we need to develop new instruments that are attractive for investors.” – Iván Duque

But I also believe that we need to strengthen commercial ties, trade ties. We want Colombia to participate actively in aggregated value chains, and we want also to expand and diversify our export offer to the U.S. That’s part of my goals. Because, as of today, 75% of Colombian exports to the U.S. are limited to very few products. We want to broaden that so that we can have better opportunities of growth in specific sectors.

Bloomberg: So, as I mentioned in the intro, Colombia’s growth right now is not very impressive. Under your Administration what would be the central plank of reviving that growth?

Iván Duque: First of all, tax rates in Colombia are pretty high. When you look at corporate tax rates in Colombia, we’re above the average of OECD member countries, and we’re above Latin America — and even the world average.

So part of the things that I am proposing is to eliminate unnecessary spending, do a reform in central government so that we can be more efficient and use better technology and eliminate duplicities in many works that we have among agencies. And also fighting the tax evasion on VAT and corporate taxes. We can lower the rate, increase investment, and make that the trigger of productivity and new formalization in job creation.

Bloomberg: When it comes to those tax cuts, are the Trump, Bush, or Reagan tax cuts any kind of model for you to look at?

Iván Duque: I don’t think you can have a one-size-fits-all agenda on tax cuts. But I think what we should do in Colombia is definitely become more competitive in tax rates for corporations, because they are the generators of formal labor force.

READ MORE: Petro, Duque To Be Left and Right Coalition Candidates in Colombian Presidential Race

So if you ask me about a competitive rate, I think it should be below 30% — as we’ve seen other countries in Latin America. Chile has undertaken a tax reduction that has been efficient and also Peru. And I think we should follow that trend in order to get the economy and investment reactivated and be able to generate the type of employment that we need and also put the target of getting the economic growing above 5% of GDP.

Bloomberg: You mentioned paying for tax cuts by doing a better job cracking down on tax evasion. How do you actually do that? Because is great to say that you’re going to reduce evasion, but what steps can you take?

Iván Duque: I think the usage of technology — the usage of big data, blockchain — and the supervision of corporate accounting helps a lot. The SUNAT in Peru is doing good work. The tax administration in México is doing good work. And there is a recent study from MIT that showed that the right combination of technology and fiscalization officials can be more efficient in terms of reducing evasion in corporate tax.

And also, on VAT, you need to formalize. And maybe you need to have three levels for taxation for micro, small, medium and large sizes so you can get the right incentives for formalization in the way companies are registered in a country like ours.

Bloomberg: Now, if you look at the equity market, a lot of people use that as a gauge for how the economy is doing. Certainly President Trump likes to do that. Colombia’s benchmark stock index is the world’s worst performer over the last five years, according to Bloomberg data — and we track more than 100 primary indexes here. What do you think has been the root of the problem? Certainly, you could point to in efficiencies in government spending but that’s been the case for a much longer that.

Iván Duque: I think there are two reasons. One is that our development of local capital markets was highly dependent on oil. We had the oil companies being the ones who had more trading in our local capital markets.

READ MORE: Colombian Economy Grew by 2.2% in the First Quarter of 2018

And there are two objectives that I want to achieve. First of all, I want the local capital markets to develop. We need to have more IPOs, and we need to develop new instruments that are attractive for investors, not only on government bonds but all the other areas.

In Colombia, there no longer will be a value-added tax (VAT, or IVA in Colombia) on software licenses for various programs commonly used in so-called “Orange Economy” content development fields such as graphic design, animation, and 3D printing, among others. The benefit is even more significant now given that a nationwide tax system overhaul raised the VAT from 16% to 19% in December.

There will also no longer be a VAT included for online educational services that help train people to enter these and other fields, including the development of analytics, big data, the internet of things, and video games, said the president.

“This is a great opportunity for all producers of this type of content,” said Santos, adding that “we know that these incentives are what boost the sector.”

The tax break is part of a wider push to kickstart innovation that Santos detailed in an hour-long address on Friday in Cartagena at Andicom 2017, the largest IT and communications conference in the country.

Colombia Creates Vice Ministry of Digital Economy

In addition to the VAT exemption, Santos also formally launched the nation’s new Vice Ministry of Digital Economy in a ceremonial signing with David Luna, minister of information technology and communications.

The stated goals of the new agency are to support Colombian companies undergoing digital transformation, promote public/private partnerships, advance the adoption of tech tools, and generally track various indicators and figures of the “digital economy.”

Under current measurements, the digital economy accounts for at least 100,000 jobs in Colombia, according to the government, and it generated some $4.5 billion USD (13 trillion pesos) in sales last year. By 2022, MinTIC estimates that there will be 300,000 direct jobs within the digital economy.

The new office will be run by Vice Minister Daniel Quintero Calle and fall within the Ministry of Information and Communication Technology (MinTIC).

“The digital economy is gaining momentum and preparing our industry, labor market, and regulation to allow us to better position ourselves in the global landscape,” said Quintero Calle during a presentation during the conference.

“Having access to technology transforms people’s lives,” said President Santos speaks at Andicom 2017 in Cartagena. (Credit: Jared Wade)

Expanded “Digital “Citizen Services”

On Friday, Santos also signed the new “Digital Citizens Services Decree,” which aims to give Colombians better access to the important forms and documents in their life. Through the creation of a “citizen folder” for each Colombia, people will now be able to have access their own medical history, employment records, and other administrative documents involving the government. They will also have a digital signature that allows for faster digital processing of official forms.

Additionally, the decree aims to improve the inter-departmental communication between governmental agencies so that people do not have to continually provide information two or three times during the administration of routine processes, as has long been the case. “It is a necessary evolution,” said Santos.

The addition of the citizen folder aligns with the county’s “No Más Filas” (No More Lines) initiative to streamline processing times across governmental agencies that oversee everything from immigration and taxation to licensing and legal matters

“We seek to facilitate users’ relationship with the state,” Luna told Finance Colombia in an interview this week. “Therefore, we have made available the webpage No Más Filas, which was previously called Sí Virtual. This is a national government, multi-channel platform where the general public can find state services and perform transactions completely online. In total on this website, there are 714 online transactions and 3,485 partially digitalized transactions available to Colombians.”

President Santos was joined on stage by indigenous Colombians who have benefitted from improved connectivity in their rural Amazon community. (Credit: Jared Wade)

The Benefits of Connectivity in Colombia

Throughout Andicom 2017, the president, David Luna, and other public officials praised the recently released results of the country’s “First Great ICT Survey,” which through polling across the country found that almost two-thirds (64%) of Colombians now have an internet connection in their home and 75% of Colombians used the internet within the past year.

Of the 36% surveyed who do not have a connection in their home, only 8% said it was because their community has no access in logistical terms. Nearly half of those without a connection (48%) say it is because connectivity is too expensive, while roughly one-fourth (24%) say they don’t consider it necessary.

The governmental push to increase connectivity numbers in Colombia has focused on its Vive Digital (Live Digital) initiative that, among other investments, has brought digital kiosks to both poor urban areas and lowly populated jungle, coastal, and mountain communities. In the Amazon/Orinoco Basin region, 56% of people have used these kiosks, according to the MinTIC study. This is compared to an 11% usage rate nationwide.

The government says that the kiosks are also intended to help teach Colombians how to use the internet. Among the 25% who had not accessed the web in the past year, the top reason given was that they don’t know how to use the internet.

To put a face to how these and other tech-focused initiatives can improve the lives of Colombians, Santos invited several Colombians to join him on stage. A woman and young man from the Amazon, using both Spanish and their native language, explained how they have begun to sell clothing and products online thanks to Vive Digital bringing internet connectively to their small indigenous community. A young woman who is studying to be an electrical engineer, with the help of public financial aid, also spoke to the audience about her desire to work in technology .

“Digitizing the country means deepening the state/citizen relationship through the use of the internet,” said Santos. “Having access to technology transforms people’s lives.”

(Photo credit: Jared Wade)

As a certified sommelier, Bernal is a member of the Association of Sommeliers of Colombia. He is a member of Certified Sommeliers and was declared last year as Sommelier by the Association of Sommeliers of Colombia. In 2016, Beral also won first place nationally as best “Sommelier Revelación” in the 12th annual “Premios La Barra.”

Finance Colombia Executive Editor Loren Moss recently made the trip to Manizales to discuss the progression of Colombia’s wine scene with Bernal and also to understand why someone in the wine industry would abandon an international capital like Bogotá for a small, mountainous city in the middle of coffee country like Manizales, the middle-sized capital of the department of Caldas.

Buffalo meat hamburgers are the specialty at Buffalo Republic.

Bernal mentioned that raising a young family was part of it. The quality of life in Manizales for raising children was a major factor. However, surprisingly, and maybe not in small part because of Bernal, Manizales is not without fine dining options.

Starting in Buffalo Republic, a gourmet hamburger restaurant specializing in true buffalo meat, Bernal (shown above, left, with Buffalo Republic proprietor Diego Gutierrez) paired a Paolo Angelo Pinot Grigio by Piazza with a lunch of gourmet buffalo burgers.

Bernal also introduced us to one of several authentic French restaurants in town. His selection for us was L’ange Vin, established by French immigrant Alex Burgy and Caterin Franco in Manizales’ trendy Barrio Milan. Though Bernal wasn’t able to join us for this meal due to family obligations, he had pre-selected for us a 2014 Rio Albo Valpolicella by Ca’Rugate, which balanced nicely against entrées of pork loin over rustic Alsatian handmade pasta, and sirloin with scalloped potatoes.

(When still to early in the day for wine, Bernal also introduced us to gourmet coffee purveyors Kafetto, which Finance Colombia wrote about here.)

L’ange Vin is an open-kitchen French bistro in Manizales’ upscale Barrio Manilla.

Finance Colombia:  Do restaurant owners in Colombia understand the importance of having experts? How has the Association of Sommeliers developed here? I didn’t know that something like that existed in Colombia.

Hector Bernal Rozo: It has been growing. This was an undertaking by a group of adventurers that was led by John Jairo Hernandez, the president of the Association of Sommeliers of Colombia. He, together with sommelier friends — Jose Rafael Arango, Daniel Morales, and others — decided to create the Association of Sommeliers of Colombia in the hope of generating a culture of study. They hoped that a lot of people might get interested, not only in being waiters, but also that they might specialize in areas like being a sommelier. And this has kept on growing. The association gave them relevance.

Fortunately, nowadays in Colombia we have a great number of restaurants that have their floor sommelier in addition to importers that have sommeliers and send them to the different restaurants to provide their service. This offers a greater sommelier service. And they are the ones who, in the end, carry the consumption culture in Colombia.

Some of them are university professors. Others are salespeople for importers or specialize in writing in the media — sommelier journalists — and still others have to get our suitcases and travel around the different regions. We bring the culture and teach people how they can enjoy a good wine. Because before, here, we only used to drink other kinds of beverages.

Finance Colombia: My first time in Colombia, about 13 years ago, I was disappointed because at that time there was almost no fine wine in Colombia. Back then the only options were Gato Negro or Casillero del Diablo — there wasn’t much else in the stores. But it has developed a lot, and now in Colombia you can get some good wines. You can get imported wines from all over the world. Why has there been such a change? Why has there been so much growth and sophistication in the wine market in such a short time?

Hector Bernal Rozo: Well, we can separate your question and comment into several parts. The first thing is that a sommelier is a specialist in wines — it’s true. But also we are experts in all kinds of drinks, everything you can put on the table: tea, coffee, tobacco, liquors, rums, whiskies, water, cocoa. That’s the first thing.

The second thing is that you are quite right that both consumption and the sommelier’s knowledge have been increasing in Colombia. Ten, or 13, years ago there were only a few sommeliers, who we can call patriarchs even though they were young. There were about six sommeliers in Colombia. Nowadays there are about 420 to 500 sommeliers here between graduates and non-graduates.

Our task is to take the culture of wine consumption — to take the culture of spirits consumption — in a more cultural way. It is not just a question of whether I drink to get drunk. It has been a task of going about generating a culture of consumption. Good drinking for good living.

Finance Colombia: When did the change begin in the market here in Colombia? Apart from the sommeliers in fine restaurants, why now can you go to a shopping center and there are stores dedicated to wines and liquors with a much wider selection? What pushed those changes in the market?

Hector Bernal Rozo: Well, in the last decade, the very important thing that has happened is that — along with the growth in sommeliers’ knowledge and the growth in the number of sommeliers carrying out the task — there is also a better consumption in quality.

We have already changed. Before, not only did we not have good consumption in quantity, but also in quality. Nowadays, people consume with knowledge. We as sommeliers have the job of recommending consumers and diners what to drink, what to accompany their food with, what will come with a meal. It’s more than a dish — it’s a moment.

This Pinot Grigio from Piazza paired well with buffalo burgers and is an example of inexpensive quality wine now available in Colombia.

Thanks to this — to a greater knowledge — a demand for good products has been brought into the country. At the beginning, as you say, there were only industrial-type brands. Today, fortunately, thanks to this growth that we have seen in the per-capita wine consumption, low-production brands have been brought in from boutique sellers and handcrafted wines, which before 10 years ago were not available in the country. The only ones that were brought in were mass-produced wines at supposedly affordable costs. But if you compared the cost at origin and the price to the consumer, it was a gigantic gap.

Finance Colombia: There are also now some wines produced in Colombia. Why is Colombia not a wine producer like other countries in South America, like Argentina and Chile? What are the limitations that Colombia has in that respect?

Hector Bernal Rozo: Well, the truth is that to produce wine, the absolutely necessary condition is to have four seasons — and four very-well-defined seasons. This is for the production of a good wine. Colombia has been developing some plans, or pilot projects, where some wine sellers — between Santa Fe (tourism friendly wineries with on-site hotels such as Viña Sicilia and Portón del Sol) and Olaya in Antioquia — have been making some tests. They have been producing some interesting wines, some drinkable wines, some wines pleasing to the palate.

But since we don’t have four seasons for the vegetative cycle of the vine — which are short vegetative cycles — we don’t really have the conditions. That’s really what happens. We don’t have the conditions of climate and soil in this country that are needed to produce a good wine.

Finance Colombia: We’re talking here in Manizales, and I’m surprised — it’s not that I was expecting it to be bad — but surprised by the quality of the restaurants here. Manizales is known as a second-level city here in Colombia. Not as big as Cali, Medellín, Bogotá, or Barranquilla. How is the growth of wine production going in areas like Manizales, Pereira, Bucaramanga? And in all of Colombia?

Hector Bernal Rozo: Yes, it’s true. The fact that there are many of us sommeliers now living in medium-sized cities, and who like to offer our services in medium-sized cities, means we like to carry forth that culture.

Why do we go out to medium-sized cities? Why are we in cities like Pereira, Manizales, Bucaramanga, Cúcuta, where it should be said that consumption is increasing? It’s because there are people there who dedicate themselves to being in the restaurants, to putting the house in order, to being present at the most important events in the city.

In my personal case, we have even made administrative plans — city plans — where the public administration has been in charge of contracting our services to teach the restaurants how to organize their wine cellars, how to handle a good wine service, and how to choose some good wines. To be a bridge between producers, importers, and the end consumer by means of the restaurants — and in these cases also through city programs.

Finance Colombia: What is your prediction about the wine market in the next five years? Is it going to continue growing stably as it has been growing or are we going to see an acceleration? What changes can we expect in the market — and not only wines but all alcoholic beverages, especially at the high-end?

Hector Bernal Rozo: Up to 2013, we had an important growth in the consumption of wine. In 2013, there was a cutback due to a strong hand that came to establish laws about the control of the consumption of alcohol, including breath tests and campaigns against alcohol consumption while driving. This caused a cutback — which in some ways is very good, as social growth, because there are no longer irresponsible consumers who drink and drive.

That’s one part of it. Now, in 2017, they have tried to pass a new law about wines and alcoholic beverages, and that has also brought about a cutback. Because, unfortunately, it is making wine in Colombia very expensive. Foreigners come here, like in your case or many other cases, and they say, “I find wine at one price in my country, and now that I come here I find it at an exorbitant price.” The first thing they think is that the restaurant owner is overcharging them. No!

Really today, the taxes that have come into effect are very exaggerated, and this means that this is felt when the product is taken to the table. On the one hand, that has made us think that we in the next five years may see a deceleration — or even a loss of terrain that we had gained.

What do we need to maintain growth? To have some offers where the origin price is very good, and above all — and this “above all” is very important — for it to be given over to importers or traders here in the country who are fair when it comes to pricing. That means putting a price between the one they pay when they purchase at origin and the one they come and charge to the end customer, which in some cases is where a very high rise in price is generated.

While the public was widely opposed to a measure that will raise the value-added tax (VAT) from 16% to 19% on many items, the overhaul is expected to raise an additional $2 billion USD (6.2 trillion Colombian pesos) for the government in 2017 and lower the risk that credit agencies will downgrade Colombia’s sovereign rating.

Photo: Finance Minister Mauricio Cardenas says the overhaul “is a difficult measure that will require a large sacrifice of all Colombians — but it is necessary.” (Credit: World Economic Forum)

Fitch Ratings and Standard & Poor’s both put the nation on negative outlook this year and Fitch dropped the country’s long-term local currency (LTLC) issuer default rating (IDR) and its long-term senior unsecured local currency bonds to BBB from BBB+ — just two notches above junk status.

Finance Minister Mauricio Cardenas, just after submitting the plan to Congress in October, highlighted the importance of preserving Colombia’s investment-grade rating and how much that factored into the administration’s push to pass the reform this year. “Colombia has a BBB rating,” he told Bloomberg in an English-language interview on U.S. television. “I think this is something we’re going to preserve. And we’re going to introduce all the decisions that are necessary to keep our BBB rating.”

Private Sector Burden

In addition to raising sales tax — known as IVA locally — the so-called “reforma tributaria” will reduce the overall tax burden for companies. Due to the number of Colombians who work in the informal economy on top of widespread evasion, the private sector currently pays an abnormally high percentage of the total taxes collected by officials in Bogotá.

The new provisions, which come into force on January 1, will lower the overall tax rate for companies from 43% now to 33% by 2019. “We don’t need all the revenues at once,” Cardenas told Bloomberg. “This is something that would need to be something that is eased in, introduced in terms of revenues during the next few years to comply with our fiscal rule — and our fiscal rule is quite strict.”

New protocols to detect and punish tax evaders are also included in the reform, something that the government has trumpeted in recent months to counterbalance the widespread opposition to the tax raise. Those found guilty of evading taxes can now face up to nine years in prison.

Spending Political Capital

President Juan Manual Santos’ peace accord with the Revolutionary Armed Forces of Colombia (FARC) guerrilla group passed Congress earlier this month. But the original agreement was rejected by a popular referendum in October — by just over 50,000 votes out of some 13 million cast — and the amended deal still faces ongoing opposition from rival legislators who boycotted the ratification vote in Congress.

Though the president has controlling support within the Congress, doubt had swirled earlier this fall as to whether the administration would still have enough political capital left to also hammer through an unpopular tax code overhaul following the unexpected complications getting peace approved.

After the approval, Cardenas lauded Congress members for making the right call. “These decisions aren’t easy,” he told the press. “They are unpopular on the first reading. But behind that is the greater interest of the nation.”

Popular Disapproval

Nelson Fabian Rubio, a taxi driver in Bogotá, was clear about why he voted against Santos’ peace in the nation’s October 2 referendum: it would affect his wallet. He admits being uncomfortable with the relative impunity for FARC guerrillas who committed heinous crimes when he voted “No.” But his decision was rooted in fear that his meager salary would be cut even more.

Living in a country where inflation hit a 16-year high and economic growth is slowing, he is struggling to get by. The extra costs needed to fund post-conflict social programs — along with a feared tax hike — mean that he sees the accord as wrong for his family and wrong for Colombia.

Whether such fears are real or perceived, they drove some to reject the deal. Nelson, a Bogotá-born 33-year-old with two kids, has never really known the war. Even Pablo Escobar’s terrorist bombing campaigns on the capital in the early 1990s occurred when he was just a kid.

Instead, Nelson, and millions like him, worry more about rent, groceries, car maintenance, and medical bills than the contents of the rejected peace agreement. He doesn’t trust the government to spend revenue wisely and he certainly had no interest in seeing more of his paycheck going to federal coffers.

Too Little, Too Late?

Some have been skeptical that the proposed reforms would go far enough to stave off more negative action from the ratings agencies. Sergio Clavijo, head of the Bogotá-based economic think tank ANIF, told Finance Colombia earlier this fall that this move should have come years ago. He questions whether it will bring in revenue quickly enough to appease the international investment community.

“Too late,” said Clavijo. His organization advised the government to make the VAT changes in 2012. “They didn’t hear us,” he said. “And now they are in shambles.”

Even with more incoming revenue, he was still wondering in October if this would make Fitch, Standard & Poor’s, and Moody’s hold off from further downgrades. “It’s going to be very hard actually to avoid at least the reduction of one of the two notches that holds us above the investment grade,” said Clavijo. “Very likely, I reckon that, in a year time, once markets realize that the expected additional tax revenue is coming too late and too little, one notch will be gone.”

The Big Sacrifice

The government had to make some concessions in order to get the measure approved. One major change from the initial proposal was killing the planned tax on sugary drinks. This measure does not appear in the final reform and that loss will lower the amount of revenue raised by the government, including funds that were earmarked for health initiatives.

Despite changes like this, the administration knows that most Colombians remain upset. The majority of voters were against the peace deal yet still had a very similar, if re-worked, agreement imposed upon them. And now here comes a tax overhaul that even fewer citizens support — at the end of an economically challenging year beset by heavy inflation and high food prices.

Cardenas believes it was essential, however. He says the government needed to act to set itself up for the long term, swallowing a tough pill now in order to ensure the massive economic growth and security improvements of the past decade are not squandered by the oil-price plunge.

“Raising VAT to 19% is a decision that requires a lot of effort,” Cardenas told BluRadio. “I am the first to recognize that it is a difficult measure that will require a large sacrifice of all Colombians — but it is necessary.”

May said that the United Kingdom was committed to strengthening the trade relationship between the two nations, which was worth 1 billion pounds in 2015 and she believes is set to grow even further due to three major initiatives.

“Today we are supporting those efforts with a new partnership in the oil and gas sector, 1 billion pounds in export finance to encourage investment in rural healthcare and renewable energy projects, and a landmark tax agreement to provide greater certainty for businesses and employees in both countries,” said May.

Photo: Colombian President Juan Manuel Santos made his first official state visit to London this week and was welcomed with economic and diplomat support by U.K. Prime Minister Theresa May. (Photo Credit: Presedencia de la República, Juan Pablo Bello – SIG)

The double tax agreement centers on preventing companies from being burdened by “double taxation” in which their profits are hit by both governments. It also seeks to add clarity to companies and employees operating between the UK and Colombia over which taxes must be paid to which jurisdictions.

The deal also will help the two governments work together to fight tax evasion and avoidance. Santos said that he will continue rooting out corruption, strengthening the rule of law, and improving the business environment in order to attract more investment from U.K. companies. “We have signed this morning an agreement to prevent double taxation, that will benefit thousands of companies and individuals doing business in both countries,” said President Santos. He added that, “joint action against organized crime, including co-operation in cybersecurity and improving the effectiveness of our criminal justice policy, will be a key priority in our common agenda.”

During her comments, May pledged an an investment of up to 25 million pounds in urban development, agriculture, services, and transport, something she says will help more than three million people impacted by Colombia’s half-century conflict and create export opportunities worth upwards of 6 billion pounds for some 2,500 British businesses.

In terms of progress already made, May highlighted the opening of a Lloyd’s of London office in Bogotá this summer, which will add an estimated 130 million pounds of revenue to the insurance industry in the United Kingdom. May, a conservative who took over as prime minister after David Cameron resigned following his party’s Brexit vote loss, noted that the United Kingdom has been the third largest foreign investor in Colombia in the past decade and that the arrival of Lloyd’s is a good example of how England should be fostering even more trade with Colombia.

Juan Manuel Santos speaks in the United Kingdom. (Credit: Juan David Tena – SIG)

“Today, we have agreed that we want to build on this solid base,” said May. “As the U.K. prepares to leave the EU, I am determined that Britain should become the global champion of free trade, and that means boosting trade with fast-growing economies like Colombia.”

For Santos, insurance is but one sector ripe for further development. An ocean has kept the two countries from being larger economic allies in the past, but he thinks this can be overcome in a time when borders and distance matter less. “Quite frankly, the trade figures are very small compared to what they could be, so we see this as a great opportunity to enlarge our trade, and to make even a more ambitious agreement, and to attract more investment both ways,” said President Santos. “We were talking, for example, about the financial sector, the insurance sector: the potential to grow in Colombia is immense.”

May agreed and said that she hopes this investment and business momentum can go both ways. “I want to see even more British companies and investors taking up the opportunities that Colombia offers,” said May. “And I want Colombian businesses to see the UK as a leading hub for finance, innovation, research and development … Colombia is one of Britain’s most important partners in Latin America, and this visit provides an opportunity to strengthen the ties that have existed between our countries for more than 200 years.”

Lastly, the U.K. prime minister announced that her nation will contribute an additional 7.5 million pounds to de-mining efforts and the international monitoring mission in Colombia. The country will also continue to offer advice from its experts who went through their own peace process with Northern Ireland. “We know from our own experiences that peace-building takes time, perseverance and patience.”