Legal reforms boost Colombia's standing in global markets

Colombia has a modern institutional framework to foster and maintain economic stability, including separation of government groups and functions. The aims of the government are to keep unemployment and inflation down, modernise the country’s infrastructure, develop its agriculture sector, and further stimulate the tourism and real estate sectors, as well as housing and innovation. Low inflation, the availability of financing and a stable investment-friendly political environment mean that many sectors of the economy remain competitive and attractive to investors.

Reforms

Some important legal reforms introduced in the recent past include those aimed at improving the delivery of effective justice, strengthening respect for intellectual property, promoting international trade and developing the country’s infrastructure.

Colombia has overhauled its civil and administrative procedural codes, with an emphasis on verbal procedures, in order to speed up the administration of justice. It has also enacted cutting-edge legislation in international arbitration that brings the country to the forefront of international trends.

The adoption of the Madrid Protocol includes Colombia among countries that recognise trademark applications to the World Intellectual Property Organisation, as well as the handling of trademark, patent and copyright infringement cases by specialised judges.

Colombia is a founding member of the Pacific Alliance and the Andean Community and has signed free trade agreements with the US, EU, the European Free Trade Association, Canada, Chile, the Caribbean community, the Mercosur bloc and South Korea. The country is in the process of negotiating a number of bilateral investment treaties with nations from all over the world, including Japan and Turkey. Double taxation treaties that follow OECD guidelines are currently in force with Canada, Chile, India, Mexico, South Korea, Spain, Switzerland and the Czech Republic. Colombia has also signed treaties with Portugal, France and the UK that are still undergoing approval procedures, and the country is in the process of negotiating new tax treaties with Belgium, Germany, Israel, Japan, the Netherlands, the UAE and the US.

Infrastructure reforms have been necessary not only to bring the country’s assets up to acceptable standards and boost its competitiveness at a regional level, but also as a countercyclical measure in light of the global downturn in the price of commodities, which has affected Colombia severely. Efforts taken include the adoption of a public-private partnership statute, the enactment of an infrastructure law aimed at eliminating the legal barriers for large projects, and measures aimed at facilitating the financing of these projects. The latter includes changes to the regulations applicable to pension and private equity funds, with the objective of increasing the pool of resources available for local financing of infrastructure projects and reducing the withholding tax rates applicable to foreign financing of infrastructure.

Tax Hindrances

Of course, there are challenges as well. The business environment is currently affected by a very uncompetitive tax regime. In 2016 firms were subject to very high rates of income tax, around 40%, but the country’s tax revenue as a percentage of GDP has been below the regional average.

In 2015 the government committed to submit a tax reform bill aimed at restoring competitiveness without sacrificing revenue by lowering rates and expanding the base so that, as a general rule, a business that properly paid its taxes in 2016 would benefit from a noticeable reduction in its future tax burden from 2017 onwards. For a number of political and macroeconomic reasons, the government was unable to follow through and the recently enacted tax reform law was a bitter disappointment for the business community: the combined effective tax rate for 2017 now sits at 43%. To offset this, Colombia’s recent achievements in increasing competitiveness will have to bear fruit soon.