Colombia - Economic position and prospects (Vol. 3 of 3) : Colombian tax reform of 1974

Report No. 696-CO Economic Position and Prospects of Colombia (In Three Volumes) Volume Ill: Colombian Tax Reform of 1974 May 20, 1975 Latin America and Caribbean Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It mreay not be published, quoted or cited without Bank Group authorization. The Bank Croup does not accept responsibility for the accuracy or completeness of the report.FI EO P  GURRENCY EQUIVALENTS Currency Unit: Peso Exchange Rate Effective April 17, 1975 Selling Rate - US$1.00 = Col$30.03 Col$1.00= US$O.333 Buying Rate - US$1.00 = Col$30.07 Average Exchange Rate (Selling) 1972 1973 1974 US$1.00 = Col$21.92 Coli23.67 C-ol$26.14 Col$1.00 US$.0456 US$.0h22 Us$.0382  Appendix I - THE COLOMBIAN TAX REFORM OF 1974h2 1/ This appendix is based on a report prepared by two consultants, Malcolm Gillis and Charles E. McLure, Jr., following a ten-day mission to Bogota, Colombia, in mid-February. Preparation of the report was made possible by the cooperation of a number of Colombian Tax, Financial and Planning officials in briefing the authors and otherwise facilitating their work.   TABLE OF CONTENTS I. Introduction I-1 A. Background I-i 1. General Comments I-i 2. Fiscal Debility, 1968-74 I-2 B. The Economic Emergency 1-7 II. Personal Income and Related Taxes II-1 A. Present Law II-1 1. The Present Income Tax II-4 2. The Tax on Irregular Income II-lO 3. Net Wealth Tax II-17 4. Gift and Inheritance Taxes II-19 5. Exempt Income II-24 6. Administrative Aspects II-29 B. Comparison (with Present Law and with Musgrave Commission Proposals) and Evaluation II-33 1. Deductions and Credits II-34 2. Changes in Exempt Income II-44 3. Rate Structure II-49 4. Net Wealth Tax II-54 5. Other Direct Personal Taxes (Capital Gains, Death Taxes, Asset Revaluation) II-57 III. Business Income and Related Taxes III-1 A. Present Law III-1 1. General Comments III-1  - 2 - B. Details for the Present Tax on Business Entities III-4 1. Net Income III-4 2. Total Net Income III-7 3. Taxable Income III-io 4. Tax Liability III-11 C. Special Issues in Business Taxation III-12 1. State Enterprises and Decentralized Agencies III-12 2. Mining III-13 3. Exempt Income and Tax Incentives III-18 4. Anticipatory Taxes III-18 5. Special Regimen for Payments to Foreigners III-18 6. Limitations on Deductibility of Expenses III-19 7. Amnesty III-20 8. Procedural Matters III-21 D. Comparison (with Previous Law and with Musgrave Commission Proposals) and Evaluation III-22 1. Realignment and Unification of Business Income Tax Rates III-22 2. Tax on Presumptive Income III-27 3. Deductions (Depreciation, Depletion, etc.) III-28 4. Tax Credits (Intercorporate Dividends, etc.) III-39 5. Tax Incentives III-45 6. Integration of Company and Personal Taxes III-45 7. Taxation of State Enterprises TII-56 IV. Sales Tax IV-1 A. General Comments: Present Law IV-1 1. Rates and Exemptions IV-1  - 3 - 2. Value Added Technique and Rebate System IV-2 3. Inclusion of Services IV-3 4. Definition and Value of Sales IV-4 5. Revenue-Sharing Features IV-5 6. Sales Tax Amnesty IV-5 B. Details of Present Sales Tax Law IV-7 1. Rate Structure and Exemptions IV-7 2. Collection and Rebate System IV-10 3. Taxation of Services IV-l1 4. Definition of Taxable Activity IV-13 C. Comparison with Previous Law and with Proposals of the Musgrave Commission IV-14 1. Previous Law IV-14 2. Comparison with Proposals of Musgrave Commission IV-20 D. Evaluation IV-23 1. Tax Evasion and Administrative Feasibility IV-24 2. Progressivity IV-26 3. Taxation of Capital Goods IV-28 4. Revenue Implications IV-29 5. Shift of Sales Tax Toward Retail Level IV-31 V. Other Taxes and Subsidies: Foreign Trade and Petroleum Products v-1 Taxes and Subsidies on Foreign Trade V-1 1. Import Surcharges V-1 2. Changes in Import Duty Exemptions for State Enterprises and Decentralized Agencies V-6 3. Export Taxes V8 4. The CAT V-il   THE COLOMBIAN TAX REFORM OF 1974 I. Introduction A. Backzground 1. General Comments The government of Colombia implemented a tax reform of major propor- tions in the last four months of 1974. The first elements of the reform were announced in mid-September, as part of a comprehensive set of sta- bilization measures under economic emergency authority provided in Ar- ticle 122 of the Constitution. Notwithstanding the fact that the first now tax measures were introduced less than two months after the beginning of the new administration in ea.rly August, the reform embraced almost every important component of the tax system and was cohesive in internal structure and innovative in approach. The new tax structure represents a clear and significant improvement over the prior system on nearly all counts. Although the reform did not serve to purge the revenue system completely of all anomalies, inconsistencies, and other shortcomings, neither was it offered and advertised as such. Should the basic features of the new measures remain intact over the coming months, the tax reform will stand as a landmark in the recent history of such undertakings, both among developing and developed nations. Indeed, parallels else- where are difficult to find. The scope of the Colombian measures of 1974 is perhaps comparable to that envisioned by the Carter Commission on Taxation in Canada in the mid-sixties, but the Colombian reforms as im- plemented were far more comprehensive than those proposals of the Carter Commission which ultimately found their way into Canadian tax law. The tax reform enacted by the government in the last four months of 1974 was the outgrowth of careful and intensive planning by a high-  I-2 -evo.l team of Colombian experts appointed in May by the then President- els tro study alternatives for revamping the revenue system. In turn, rnaX.,- >olt by no means all, of the tax measures were based upon oix va..rs o' Rear-continuous discussion, under three administrations, of t -r, ps posals of the 1968 Colombian Commission on Tax Reform, popularly aow 2'a-. Uiho Musgrave Commission. This was an international commission apza