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Viewing cable 09BOGOTA2223, LOWER TAX REVENUES PUT GOC IN FISCAL SQUEEZE

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Reference ID Created Released Classification Origin
09BOGOTA2223 2009-07-13 21:27 2011-08-25 00:00 UNCLASSIFIED Embassy Bogota
VZCZCXYZ0005
RR RUEHWEB

DE RUEHBO #2223 1942127
ZNR UUUUU ZZH
R 132127Z JUL 09
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 9740
INFO RUEHPE/AMEMBASSY LIMA 7790
RUEHLP/AMEMBASSY LA PAZ JUL PANAMA 3898
RUEHQT/AMEMBASSY QUITO 8487
RUEHCV/AMEMBASSY CARACAS 2498
UNCLAS BOGOTA 002223 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAID ECIN EFIN CO
SUBJECT: LOWER TAX REVENUES PUT GOC IN FISCAL SQUEEZE 
 
SUMMARY:  The GOC will soon (most likely mid-July) propose 
new tax reforms to address recent and anticipated future 
losses in tax revenue, caused by the financial crisis and the 
2010 termination of specific taxes.  Through these changes 
the GOC plans to raise an additional USD 1 billion in 
revenue, which is much needed to finance investment and 
infrastructure to steer Colombia through the financial 
crisis, as well as to continue to finance the high costs of 
defense and security.  While widening the tax base would be 
the best long-term solution for revenue stability, the GOC is 
settling for a short-term and politically easier fix.  END 
SUMMARY. 
 
Concerns About Continued Decline In Tax Revenue 
--------------------------------------------- -- 
 
2.  The GOC is facing decreasing tax revenue growth, with 
indicators pointing to more serious problems in 2010.  In the 
first half of 2009, Colombia's tax revenue grew 1.5 percent 
compared to the first half of 2008, significantly lower than 
the 11 percent increase from the same time period 2007. 
Colombia's statistics department forecasts that 2009 and 2010 
tax revenue will total USD 34.6 billion and USD 35.1 billion, 
respectively -- reducing tax revenue from 13.6 to 13 percent 
of GDP.  Local experts tell us the reductions in tax revenue 
would normally not generate such concern, but given the GOC's 
central role in Colombia's recovery from the economic crisis 
and the extensive tax breaks instituted to spur investment, 
tax reform to offset these breaks is now necessary.  Former 
Finance Minister Jose Campo told us, "the decrease in tax 
revenues will generate problems for the GOC and what the 
country needs is a structural tax reform and to tackle some 
of the existing tax breaks." 
 
New Tax Reform Planned By GOC 
----------------------------- 
 
3.  To address collection concerns, Minister of Finance Oscar 
Zuluaga announced July 9 that the GOC will soon submit a tax 
reform bill to Congress, most likely in mid-July.  The bill 
targets the wealth tax put in place on a temporary basis to 
help fund the government's battle against narco-terrorism. 
The wealth tax, which is based on net worth and scheduled to 
terminate in 2010, is the third primary source of Colombia's 
tax revenue: income 42 percent, value-added 29 percent, and 
wealth 3 percent. The new bill also calls for adjustments to 
taxation of fixed assets, and gives he government flexibility 
in management of judicial security contracts.  The GOC hopes 
to raise an additional USD 1 billion in revenue through the 
changes. 
 
4.  The bill will extend the wealth tax by four years, 
imposing a tax of 0.4 percent and 0.6 percent for individuals 
with net worth in excess of USD 1 million and USD 1.5 
million, respectively.  (NOTE:  Several local experts said 
they believe the wealth tax should be imposed for individuals 
with net worth of USD 100,000 or more, applying it to the 
middle as well as upper classes, but that would not be 
politically feasible.  END NOTE.)  In an effort to modernize 
Colombia's industrial sector, the reform will also reduce 
income tax exemptions from 40 to 30 percent for companies 
that reinvest their profits through acquisition of fixed 
assets.  Lastly, the GOC is considering altering prospective 
judicial security contracts -- which ensure existing tax laws 
regulating the private sector will remain consistent over a 
set time-frame -- by giving the government the flexibility to 
institute "temporary" additional taxes if necessary. Existing 
judicial security contracts would not be affected. 
 
Comment:  Tax Reform: May Not Like It, But It's Necessary 
--------------------------------------------- ------------ 
 
5.  President Uribe has never backed broad-based tax reform; 
the efforts of former Finance Minister Carrasquilla died on 
the vine in 2006, during boom years, in great part due to the 
lukewarm support of Uribe.  Now, however, the need for 
greater revenue stability has become apparent as the GOC 
struggles to put its fiscal house in order in lean times. 
The myriad exemptions and incentives the GOC has offered to 
spur investment have hamstrung policymakers by limiting 
revenue raising options.  While extensive reforms designed to 
broaden the tax base would be the best long-term solution for 
revenue stability, the GOC is forced to settle for short-term 
(and politically easier) fixes, and hope that a quick return 
to a growth path will resolve the current revenue crunch. 
 
 
Brownfield