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Five Colombian tax resolutions for 2018

Five Colombian tax resolutions for 2018

If a presidential hopeful wanted to select its resolutions for the inevitable 2018 tax reform, I submit for consideration the following five, acknowledging that the New Year resolutions are not easy to honor:

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Five Colombian tax resolutions for 2018

By Eric Thompson, Regional Partner KPMG (ericthompson@kpmg.com)

 

If a presidential hopeful wanted to select its resolutions for the inevitable 2018 tax reform, I submit for consideration the following five, acknowledging that the New Year resolutions are not easy to honor:

1.  Refrain to create new taxes, both permanent and supposedly “temporary” taxes that tend to be reborn. The siren calls of a new version of the distortionary wealth tax must be unheard, and the proliferation of selective consumption taxes must be reversed, given that they produce true economic losers and that erode the neutrality and efficiency of a VAT of wide coverage.  

2. Refrain of rising the tax rates.  Particularly, at least the insufficient scheduled reduction of the Corporate Income Tax rate to 33% must be executed, especially considering an international tax scenario of aggressive tax competition, stimulated by the big reduction on the corporate tax rate in USA from 35% to 21%. Regarding the VAT; the wildcard of increasing the rate from 16% to 19% has been already played, with transitional effects of reducing the consumption and increasing the economic incentive of tax evasion.  Any temptation to increase the rate even more has no feasibility at all.

3. To significantly reduce VAT exceptions and exemptions.  Confronting the challenge of a significant widening of the tax base – suggested by the Tax Experts Commission – means taking the bull by its horns of a direct subsidy mechanism targeted to the low income households, based on an efficient and bulletproof system against patronage and corruption.  This system would finance the VAT charge on goods and services that become taxed, and the fact of taxing households with higher purchase power would strengthen the progressivity of VAT. This is the key to immunize the VAT from its traditional political demonization.

4. To strengthen the Tax Administration (“DIAN” in Colombia).  It is not possible to have a sophisticated and robust tax system with an archaic and weak tax administration.  The Presidential Expenditures Commission alerted in its final report that  “the governmental projections included in the Medium Term Fiscal Benchmark of 2017, that show a persistent increase in revenues, critically rely on the revenue arising from the economy formalization and the management efforts of the DIAN”.   Any serious intention to combat the tax evasion and to reduce the informal economy requires a substantial increase in the DIAN budget, accompanied with challenging and strict indicators of performance and productivity. The DIAN must intensify its massive controls with sound human and technological resources, abandoning the comfort zone of focusing the collection and the audit on a few large taxpayers.

5. To reinforce the taxpayers rights.  During this decade the legal arsenal of the DIAN has been reinforced, assuming the false premise that the tax officials will not abuse of their stronger powers.  Exactly as the laws are filled with mechanisms that presume that the taxpayers will breach its obligations, tangible checks and balances must be designed –i.e. independent administrative Tax Court-  that foresee the risks of abuse by the DIAN in order to mitigate them effectively.  The “Fair Play” in the tax field has to be guaranteed for both teams, and not only in favor of one.

I wish that with these resolutions the new President will promote only one tax reform during his four year term, providing the appropriate stability to drive a stronger economic growth…. 

• © 2018 KPMG S.A.S., KPMG Advisory, Tax & Legal S.A.S., sociedades colombianas y firmas miembro de la red de firmas miembro independientes de KPMG afiliadas a KPMG International Cooperative (“KPMG International”), una entidad suiza. Derechos reservados.

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