Colombia - The development program (Vol. 2 of 2) : Annexes

R RNbF[U TO1 '- 1 11; t\}COPY RESTRICTED REPORTS DES Annexes II to VII to Report No. WH-119b I WITHINI This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ANNEXES TO AN APPRAISAL OF THE DEVELOPMENT PROGRAM OF COLOMBIA August 3, 1962 Department of Operations Western Hemisphere  TABLE OF CONTENTS AIXNEX I Balance of Payments (attached to main report) Annex Tables (attached to main report) II Domestic Financing of Public Investment III Agricultural Production Targets IV Immediate Agricultural Production Support Measures V Production and Investment Targets in Manufacturing VI Petroleum, Coal, and Other Extractive Industries VII Public Investment, by Sectors: Section A. Public Investment in Transportation " B. Public Investment in Electric Power " C. Public Investment in Telecommunications " D. Public Investment in Land and 1:.Tater Development " E. Public Investment in Agrarian Re,form and Low-Income Problem in Agriculture " F. Public Investment in Education " G. Public Investment in Housing " H. Public Investment in Water and Sewerage  ANNEX II DOMESTIC FINANCINGF OF PUBLIC IWJB7TINThiT Recent Trends 1. Tn the past, financing of nublic inrestment has relied greatly on public savings, i.e. the surplus of current government revenue over current government exDenditures, as indicated in Table 1: Table 1: FINANCING OF IflS3TM1NUT OF PUBLIC SECTOR J (in millions of pesos at current prices) 1950 1955 1957 1958 19$9 Taxes 724 1,605 1,80k 2,268 2,596 Other Current Revenue 1_8 319 4B5 610 649 Total Current Revenue 872 1,924 2,332 2,878 3,245 Current Expenditures 731 13324 1,608 2,069 2,227 Government Savings 141 6oo 724 809 1,018 Investment Expenditures 251 8L5 867 959 1,161 Government Davings as percent of Investment Expenditures 56 71 84 84 88 j The term"oublic sector!used in this table comprises the national government, the departments, the municipalities, the decentralized institutions and public enterprises (e.g. rower and transport enterprises). Source: Development Plan Although comprehensive data are not available for 1961 and 1962, it is clear that government savings have declined and that substantial reliance has been placed on domestic borrowing for financing public investment.  - 2 - ANIEX II DOMESTIC FINANCING CURRENT REVENUE Main Sources of Revenue 2. Structure of Current Revenue. About three-quarters of current revenue is provided by taxes, and the rest by oil royalties, depart- mental monopolies, fees and fines. Of the tax revenue, some 40 percent is attributable to the national income tax. The legislation on income taxcs was substantially changed by enactment of Law 81 of 1960. Under this reform tax rates for taxable incomes of up to 36,000 pesos ($4,500 equivalent) remained unchanged, tax rates on incomes of 36,000-70,000 pesos (C4,500-10,000 equivalent) were lcwered, and rates on income higher than 70,000 pesos were increased. Other changes included a more equitable taxation of the different legal forms of enterprises, tax exemptions for basic industries and tax incentives for private savings. A further 20-25 percent of tax revenue is provided by import duties which also accrue entirely to the national government. Present import duties are based on the Tariff Reform Law of 1959, under which duty rates were increased. The remaining 35-40 percent of tax revenue is provided by taxes on the consumption of liquor, beer, tobacco and gaso- line, by taxes on business establishments, real estate property and automotive vehicles, and by a great number of other minor taxes. The majority of these taxes accrues to the municipalities and the depart- ments. The following paragraphs describe income tax and import duties, the main source of revenue. In summary, Colombia has a relatively advanced tax system in comparison with other Latin American countries. 3. Taxes on Income of Natural Persons. The income tax on natural persons consists of a combination of taxes on income, property and excess profits. There is also a special tax, based on a modified taxable income, for financing steel and electric power development. This tax obligation can be discharged in part by subscribing to shares of the Paz del Rio steel company until the capitalization of the company has been comoleted. Livestock owners nay an additional special tax for financing livestock development. Taxation starts theoretically on income above 2,500 pesos a year ($MOO equivalent), but because of deductions for family members most income below 8,000 pesos ($1,200 equivalent) will not be taxable, This explains why the number of taxpayers in Colombia is relatively small. In 1961 some 47o,ooo persons paid income tax, compared to an economically active population of 2.3 million in urban areas. Nevertheless, rising incomes and better tax enforcement have brought about a rapid increase in the number of taxpayers over the last ten years, as shown in the following table: Number of Taxpayers 1952 106,000 1955 138,000 1958 293,000 1961 h68,000 1962 (estimate) 508,000 Source: Ministry of Finance, Division of National Revenue.  - 3 - ANNEX II DOMESTIC FINUICING 4. Income Groups and Tax Rates. According to 1959 statistics, about 80 percent of all taxpayers have a taxable income of 12,000 pesos or less. If deductions for family members are taken into account, a taxable income of 12,000 pesos would correspond to a gross income of some 20,000 pesos ($3,000 equivalent), This income group comprises industrial workers and the majority of salaried employees. Total taxes on an income of 12,000 pesos (including the special tax for steel and electric power development) are approximately 4.5 percent, provided that there is no substantial property, Tax rates remain fairly modest for the middle- income groups. A higher-salaried employee, having a taxable income of 22,000 pesos (corresponding to a gross income of about 30,000 pesos or $4,500 equivalent) and a property of 100,000 pesos would pay an aggre- gate rate of 9 percent on his income. However, tax rates on higher earnings go up rapidly, particularly by the addition of the excess profits tax on certain forms of income. A person having a taxable income of 100,000 pesos ($15,000 equivalent) and a property of 300,000 pesos ($hS5,000 equivalent) would pay an aggregate rate of 26-43 percent, according to the type of his income (the lower rate would apply if his income were derived exclusively from his salary). A person with a tax- able income of 250,000 pesos ($37,000 eauivalent) and a property of 1 million pesos ($150,000 eciivalent) would be subject to a maximum aggregate rate of 49 percent. In 1959, only 336 persons wiere reported to have taxable incomes of 250,000 pesos or more. As the above examples show, the rates on higher incomes are fairly substantial even if compared to rates in industrialized countries. The result is that most of the income tax burden is carried by persons in the upper-income brackets. In fact, the 21,000 taxpayers who in 1959 earned 22,000 pesos or more provided more than 80 percent of the income tax revenue (see Table 2 below). Table 2: TAXATION OF N.6TURAL PERSONS 1959 Income Group Number of taxpayers Tax payments in Pesos persons in % of total in. 000 Pesos in %.of total up to 12,000 231,000 82 26,300 8 12 - 22,000 26,000 10 24,000 8 22,000 & more 21,000 8 261,900 84 260,000 E/ 100 312,200 100 a/ This total has been adjusted later to 343,000; however, no breakdown into income groups is available for the adjusted total. Source: Ministry of Finance, Division of National Revenue.  - 4 - ANNEX II DflMPSTIC F1JTANTCING 5. Income Tax Enforcement0 The tax on urban incomes is generally well enforced. Every person who wishes to nerform any legal act (e.g., purchase or sale of oroperty) or to deal with govermnent authori- ties (e.g., seeking employ?nent, requesting passports, etc.) whether his income is taxable or not, has to submit a certificate which states that he has complied with the income tax regulations. Enforcement of the tax on rural incomes, however, has been difficult. Special provisions for the valuation of cattle readily permit the establishment of tax losses which can be, and in fact are, offset against income from other activities. There are also provisions under which property which does not produce taxable income can be exempt from the property tax, whith is -- as explained above -- a part of the general income tax. Finally, the valuation of land as such is lagging, and more than half of cadastral land values (except in the Department of Antioquia and in the city of Bogota) are likely to be below actual commercial values. In a great number of recent revaluation cases the new value has been more than double the previous cadastral value. 6. Taxation of Business Profits. Corporations are subject to a graduated corporate tax levied at the rate of 12 percent on the first 100,000 rnesos, 24 percent on the excess of 100,000 pesos up to total profits of 1 million pesos, and 36 percent on larger amounts. They are also subject to special taxes for tlhe development of steel, electric power and housing. Though the graduation of the corporate tax penalizes corporate growth at a certain level, the low initial rate in general does not discourage small business establishments with growth prospects, from availing themselves of the many advantages of tha corporate form. A company with a net worth of 800,000 pesos ($120,000 equivalent) earning 200,000 pesos or 25 percent of its net worth, is subject to an aggregate tax rate of 36 percent. A company with a net worth ten times this amount ($ 1.2 million equivalent) ancl also writh Orofits equivalent to 25 percent of its net worth is subject to an aggregate rate of 47 nercent. Such a rate is fairly high even compared to corporate tax rates in industrialized countries. Nevertheless, the form of share- holding comnany has proved quite attractive, particularly since the tax reform of 1960, which narrowed greatly the difference between the tax treatment of companies with limited liability and that of corporations. In 1961, 137 new corporations were formed, compared to 97 in 1960 and 26 in 1959. Limited liability companies are subject to a graduated tax of 4, 8 and 12 percent according to the size of their earnings. The difference between these rates and the rates applicable to shareholding corporations is in part offset by taxation of the partners; moreover, if a majority of the shares of a limited liability company are owned by a corporation, the company is treated for taxation as a corporation. 7. Tax Exemptions and.. Reductions. Tax exemptions or reductions can be granted to "basic" industries and to industries wfhich are "complementary to the production of iron." Among the former are a-wide number of industries producing chemicals, basic non-ferrous metals,  - 5 - ANNEX II DOMESTIC FINANCING machinery, equipment and tools. Among the latter are industries which use, to the extent of more than 50 percent of their input, products the steel plant Paz del Rio or imported products bartered against Paz del Rio steel. Within this group of industries, tax exemptions can be granted to all enterprises (old or new) which are established until December 31, 1965. The tax holiday extends over the business years 1960-69, i.e., over taxes payable in 1961-70. Shareholders of exempt enterprises are likemise exempt from taxes on dividends and property if the enterprises are "new," i.e., if they have been established since the 1960 tax reform. A special tax exemption has been granted to the automobile assembly industry (Decree 0177 of February 1, 1956). This exemption, which does not apply to shareholders, terminates either at a predetermined date or when total profits reach 150 percent of paid-in capital. Enterprises in other activities can form during 1960-69 a "reserve for economic development" up to 5 percent of their annual profits, provided that the counterpart of this reserve is used for the production of raw materials and other goods substituting for imports (according to a list of goods to be prepared by the Planning Council). Since the provisions on tax exemptions and reductions are fairly new it is not possible yet to assess their effect on present and future tax revenue. Until February 1962, only 15 companies had applied for exemption from income tax on their 1960 profits, and the final decision of the Government upon these was still pending. Judging from the wide possibilities of tax exemptions and reductions offered by the law, the loss in revenue could become substantial. (Additional tax exemptions designed to stimulate exports are summarized in Annex I, p.6.) 8. Import Duties. The Colombian tariff consists of a combination of' specific and ad valorem duties based on the c.i.f. value of the imported product. Up to May 1961, the first ten percentage points of the ad valorem part of the duty were payable in U.S. dollars to be purchased in the free exchange market. As from June 1961, the whole import duty is payable in pesos which has slightly reduced the tariff burden since the U.S. dollars had to be obtained at an agio price. The revenue from import duties in 1960 and 1961 has not increased to the extent which could have been expected from the increase in rates in 1959 and from the increase in imports. The lag in revenue is explained by the growing volume of tariff exemptions afforded to all entities in the public sector and to a great number of private enterprises. Private imports exempt from duties presently comprise taxis; automobile chassis to be used for public transport; machinery and equipment for enter- prises in the fields of petroleum, steel making, metal manufacture, automobile assembly, fertilizer and rubber; and raw materials and semi- finished products used in the assembly of automotive vehicles and rubber tires. The extent of revenue loss is shown in Table 3.  - 6 - A2NaEX II DOMESTIC FINANICING Table 3: IMPORT D1UTIES (in millions of pesos) Calculated Not paid as a re- 3 as % Total Paid sult of exemption of 1 1957 239 184 55 23 1950 279 193 86 31 1959 492 361 131 27 1960 802 568 234 29 1961 (first half) 4h 284 160 36 Appraisal of Plan Targets 9. Overall Targets, The Colombian Planning Office projects an increase in total current revenue from 3 billion pesos in 1959 to about 6 billion pesos in 1965 (in 1961 prices) and to 8.9 billion pesos (in 1961 prices) in 1970. Most of the increase would be provided by the growth in tax revenue based on existing tax legislation. Beginning in 1963, additional revenue is projected from the levy of new taxes but the amounts do not become substantial until 1965 (see Table 4 below). Table 4: PLAN TARGrSTS FOR CURIREIIT GOVMEVNTM REVENUE aJ (in millions of 1961 pesos) b 1959.2I 1961 1962 1963 196)4 1965 1970 Current Revenue Existing Taxes 2,172 3,413 3,778 4,063 4,346 4,534 6,187 New Taxes - - - 103 267 1472 1,306 Other Current Revenue 820 702 732 809 856 958 1,409 Total 2,992 4,115 14,510 14,975 5,469 5,964 8,902 aJ The term "current government revenue" comprises the current revenue of the national government, the departments, the municipalities and the gross income (other than government transfers) of decentralized institutions. J Except data for 1959 which are in 1959 pesos. #/ Source: Budget Office, Presentation of 1962 Budget Proposal..  - 7 - AMNNTY II DOIMSTIC FITAiTING 10. General Observations on Plan Targets. The mission found it extremely difficult to appraise the Plan targets in any detail. The historical series of revenue on which the targets are based do not, in many instances, agree with the series published by the Budget Office. In some cases the differences between Plan figures and Budget Office figures are substantial. The mission has tried -- in cooperation with the CEPAL assistance group -_ to find the causes of the differences, in order to reconcile the data. This attempt has succeeded only to a limited extent, and the mission has doubts about the reliability of the basic data used in the Plan. The main reasons for disagreement appear to lie in differ- ences or inconsistencies in the: a. classification of direct and indirect taxes and of tax and non-tax revenue; b. coverage of decentralized institutions (some were not included in the Plan); c. treatment of income of decentralized institutions; d. coverage of social security contributions (the Plan figures are higher than the Budget figures); e. estimates of municipal revenue (not all municipalities report their revenue to the national government); f. price deflators used in the conversion to 1958 prices of 1959 and 1960 data expressed in current prices. 11. Further difficulties exist in the appraisal of the targets. The grouping of revenue types chosen in the Plan does not permit exact comnarisons with performance (except in the grand total) unless the Budget statistics are revised. The mission has brought the p?roblem to the attention of the Planning Office and has stressed the need for recon- ciliation of Plan targets w.ith Budget data for observing Plan performance. 12. Projection of Income Tax Revenue. Preliminary results for 1961 indicate that, despite a growing number of taxpayers and higher incomes, income tax revenue increased verv little. This development had been partially foreseen in the Plan 1/. The reason for the slow growth lies in tax exemptions, reduced tax rates for middle incomes and other tax relief provisions enacted b-Y -the 1960 tax reform. Hloreover, the changes in the legislation inevitably created uncertainties and delays in filing and nrocessing tax declarations, resulting possibly in some understate- ment of tax liabilities. In the future, income tax revenue can be 1/ In addition to the regular income tax and special taxes on income, the Plan target for income tax includes lottery and absentee taxes. These, however, are minor taxes.  - 8 - ANNEX II DOECSTIC FINANCING expected to resume its growth, particularly after the administrative mechanism has adjusted fully to the new legislation. In fact, a higher than normal increase can be expected for 1962 because of retroactive adjustments. The mission estimates that from 1963 onward income tax revenue will increase by some 10 percent a year on average, while Gross Domestic Product (GDP) grows by 5.6 percent a year. Thus the ratio between growth in GDP and growth in income tax revenue is assumed to be 1:1.8. Such a ratio, though slightly higher than assumed in the Plan (1:1.5), appears justified by the progressive nature of tax rates and the prospects for further rapid growth in the number of taxpayers. The realization of the targets would, however, require that tax exemptions for basic and other important industries be held to a minimum, and that the main possibilities for tax evasion, tax losses on cattle operations and exemption from the wealth tax of land yielding no taxable incomes, are removed by changes in the law. 13. Projection of Import Duty Revenue. Although the volume of impor-ts increasedi in 1961 as anticipated, revenue from import duties fell some 100 million pesos short of the budget estimate, exceeding the 1960 result by only DO million pesos. The main explanation for the shortfall lies in the gEowing extent of exemptions, the effects of which on revenue had obvio-asly not been foreseen. For the same reason the budget estimate for 1962 is probably too high by some 100 million pesos.. No comparable Plan projections exist for later years, The Plan targets for import duties include special consumption taxes and consular fees, the develop- ment of which is difficult to assess without detailed knowledge of their enforcement; the mission was assured, however, that the budget estimates for 1961 and 1962 are consistent with the Plan targets. The mission estimates that without changes in tariff rates, import duty revenue will increase from present levels at about the same rate as imports. 14. Projection of Other National Revenue, The mission has not attempted to appraise individually the great number of other current revenue items. It noted, however, that in 1961 the receipts of the national government from the central bank in connection with the coffee tax (which was payable directly to the central bank) had fallen some 40 million pesos behind estimates. Since the coffee tax was abolished effective January 1, 1962, the central bank has ceased to make payments to the national government, and the budget estimate of 75 million pesos of revenue in 1962 will, therefore, not be realized. The mission has the impression that this effect of the elimination of the coffee tax had not been foreseen by the Budget Office because of the very complex relationship between coffee tax, amortization of commercial debt and government revenue. The mission also noted that 26 million pesos in oil royalties payable in 1961 by the Government-owned petroleum company (Ecopetrol) to the national government had not been paid. The corresponding revenue estimate for 1962 -- also 26 million pesos -- therefore appears questionable. The aggregate total of "other national revenue," which declined in 1960 and 1961 because of lower receipts from the central bank linked to the coffee tax, will thus  - 9 - ANTJFA II DOA,1E3TIG F-C,I11| 4OCINOJ probably decline again in 1962 because of the termination of these payments. The mission estimates that from 1963 onw;ard revenue will grow by some 5 percent a year. The cormparison of Plan projections and rnission estimates is shown in Table 5 below. Table 5: FROJECTI13H1 OF C0JRHIRT RPEflTiUE CF N'LATIONZ,L C-0',T;7 ( in mifliors of pesos) Income Tax Import Duties Others Total Plan BERD Plan ITRD Plan IBRD Plan IBRD 1959 874 361 681 1,916 1960 1,028 568 536 2,132 1961 1,09g 1,053a/ 696V 592/ 704 528