Jaime Vargas, Tax Managing Partner and International Tax Services Leader, EY Colombia: Interview

Interview: Jaime Vargas

How can tax collection become more efficient?

JAIME VARGAS: If we look at Colombia’s competitiveness ranking, fiscal regulations are its second biggest weakness, after the tax burden. While the system is inherently complex, it is unacceptable for it to be made more so by the lack of unification between national and regional policies, such as the one requiring entities to present documents across several taxation authorities.

Indeed, while the administration is seeking to dismantle some procedures, the core of the issue has not been addressed. The taxation process must be made coherent, simple and user-friendly to incentivise natural and legal persons to subscribe to it, much like a private company provides a service to its clients. Moreover, unifying the process of declaring and paying taxes across the country, regardless of location, should already have been implemented and digitalised. Integration of new technologies, both within the functioning of the administration and in its relation to taxpayers, is paramount to make operations more efficient and transparent.

What measures can be taken to address informality?

VARGAS: Informality is extremely detrimental, especially when it trickles down to every aspect of the economy. It increases inefficiency, strains financial sustainability and foments unfair competition in the marketplace. Previous policies regarding formalisation have had limited impact due to poor implementation, as well as a lack of continuity and political will.

Under the recent fiscal reform, affiliation to the most basic taxation scheme, El Simple (the Simple Regime), is voluntary as long as certain requisites are met. However, when natural persons are not registered under the Simple Regime, and do not comply with their fiscal obligations, the authorities may register them under it. Theoretically, those with no affiliation would proactively adhere to the regime to benefit from preferential rates.

The other challenge involves creating a sense of moral duty towards paying taxes. While big tax evaders will continue avoiding their obligations, reducing their numbers is paramount in Colombia, as well as across all Latin American countries.

What opportunities exist to broaden the tax base?

VARGAS: Other than the formalisation of the economy, tax authorities could broaden the tax base through the development of new industries, such as those traditionally marginalised by the formal sector. Creative or cultural sectors, as well as non-traditional agriculture, can be given further incentives to develop with few negative repercussions on tax collection, given their informal nature. The administration has taken a step forward with the implementation of the Orange Economy Law and fiscal reforms, but more can be done.

How can policy incentivise oil and mining growth?

VARGAS: Developing operations in extractive industries in Colombia is not cheap. Under previous reforms, the administration implemented fiscal incentives for offshore operations and the tax reimbursement certificate for exploration. Under the current model, a limited number of companies can access these incentives. In my opinion, the primary challenges stem from issues related to managing communities, environmental permits and legal security. Under the recent reform, benefits from the mega-investment clause offer companies that invest over $200m a preferential income tax rate of 27% for 20 years. However, the hydrocarbons sector is barred from accessing this incentive. Providing means through which the industry can access such benefits could increase interest. Obras por Impuestos, or Works for Taxes, provides an impetus for companies working in remote areas. While this programme does not entail tax benefits, it does allow operators to oversee where their tax dollars are invested. The assurance that their taxes will help improve the conditions of their investment, in community management or infrastructure development, for instance, can also be an incentive.