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Colombia in Latin America

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Colombia Overview

In the last presidential elections of June 2018, Colombians elected Iván Duque for a period of four years. Expectations surround the new government particularly in connection with efforts to achieve higher economic growth (after sustained growth of less than 4% in the last five years, President-elect Duque aims for growth rates above 5%). Some of the biggest challenges that the Duque government will face are related to a new tax reform (as described below), pension reform, implementation of peace agreements with the FARC and the fight against corruption.

The business community has generally welcomed the invitation to Colombia to become a member of the Organization for Economic Co-operation and Development (OECD) received by mid-year 2018. To enter the OECD, Colombia obtained the endorsement of the 23 committees that evaluate the entry of new members. Substantial legislative reforms were required, as steps previous to obtaining membership to the OECD. Some of the main approved reforms introduced changes in compliance regulation, anti-bribery, environmental issues and full application of IFRS (among many others). Now, the country's challenge will be focused on actually implementing best practices (both in public and private sectors) to be aligned with OECD countries' standards. With the membership of the OECD, new business opportunities and the arrival of more foreign investment are expected.

Another alliance reached by the Colombian government this year was the entry into the North Atlantic Treaty Organization (NATO), making it the only Latin American nation in the Alliance. The 29 nation NATO, started with a partnership agreement with Colombia back in 2017, just after the Government signed the peace deal with the FARC. In May of this year, NATO and Colombia agreed on an individual Partnership and Cooperation Programme with a view to strengthening dialogue and cooperation. According to NATO, the objectives of the alliance are to develop common approaches to global security challenges, to support peace and security efforts, and to build the capacities and capabilities of the Colombian armed forces.

In connection with agro-industry and land matters, the new government will be leading the final regulation of the enacted law for Zones of Interest for Economic and Social Development in Rural Areas (ZIDRES), which is expected to, among other things, finally consolidate a mechanism that allows investors to access major portions of land, well in excess of the current land acquisition limits. In fact, SAC (Farmer's Society of Colombia) which is the association that conglomerates the most important enterprises of the agricultural sector, openly supported Mr Duque's campaign. This may indicate that the new government will act towards balancing the equilibrium of agro-industrial projects and extensive land ownership vs. social aspects such as prior consultation with ethnic and local communities for the development of projects.

Although the economic growth rates of Colombia in recent years are not very high, the country responded positively to the shock produced by the drop in oil prices and the fall in exports, which for decades was one of Colombia's largest exports. Notwithstanding the aforementioned, the country has managed to maintain low and controlled inflation rates and the lowest unemployment in history, with which there are appropriate conditions for investment and growth. With new spikes in the price of oil, new business opportunities may also come from the oil industry.

In terms of economic growth expectations, local analysts expect on average a rebound of 2.4% annual GDP per year by 2018, while external analysts expect a performance of around 2.7%. In relation to inflation, the market in general expects prices to close this year at 3.2%, in line with the controlled inflation target of the Banco de la República of 3%. Finally, with regards to the exchange rate, both local and external analysts, the Minister of Finance and the Banco de la República, consider that the USD/COP will remain stable in a range between COP2,800 and COP3,000, after a normalisation and stabilisation at this level, generated due to a flexible exchange rate regime that helped minimise the impact of low commodity prices a couple of years ago and helped preserve the country's financial stability and payment system.

Regulation has tended to create incentives for international trade. In fact, today the country has 10 agreements in force to avoid double taxation (with Canada, Chile, Spain, Mexico, India, the Czech Republic, Portugal, South Korea, Switzerland and the Andean Community of Nations) and agreements of that sort are expected to come into force in the next few months with France, the United Kingdom, the United Arab Emirates, Italy and Japan.

Finally, the president-elect has announced that a tax reform will be submitted to Congress in the first semester of his term (August-December 2018), to enter into force in 2019. This will continue to deepen OECD recommendations, including:

Fight against tax evasion through electronic tax compliance mechanisms (including electronic invoice which is already underway), e-filing, blockchain technology, deepening of anti-abuse mechanisms, protection of the base and attack on transactions with non-cooperating jurisdictions.

Reduction of the nominal rate of the income tax (currently 33% with a 4% rate) to levels below 30% (it should be at the average of 28%). Expansion of the taxable income base, eliminating exonerations to certain sectors and giving benefits to other sectors.

Tax benefits to the agricultural, extractive and renewable energy sectors. The benefits may come in the form of tax exemptions or tax discounts (tax credits). Incentives to the creative economy (the so-called orange economy), through tariffs and preferential bases of the income tax in the initial stages of the business cycle and benefits to incentivise the creation of formal employment.

The Government of Colombia is working to promote the implementation of renewable energies. Recently, new regulations have been drawn up for the development of the sector (the Ministry of Mines and Energy issued Decree 0570 of 2018, which establishes the public policy guidelines to define and implement a mechanism that promotes long-term contracting for renewable energy generation projects), and the end of the armed conflict has increased the attractiveness for investment in the country.

Regarding VAT, the reform may expand the goods and services subject to VAT, in order to lower the 19% rate. Although this rate is in line with the Latin American average, Colombia is still one of the lowest in the region.