COIN COLLECTION

Colombia 2013 | EXECUTIVE GUIDE | INTERVIEW

TBY talks to Luz María Jaramillo, Country Managing Partner & Tax Partner of Ernst & Young Colombia, on taxation in free trade zones, hurdles for foreign companies, and reforms to the tax system.

Luz María Jaramillo
BIOGRAPHY
Luz María was appointed Country Managing Partner of Ernst & Young in Colombia on July 1, 2007. She is the first Ernst & Young female Managing Partner in South America. She is a certified public accountant in Colombia with more than 30 years of experience in international and local matters related to tax issues, particularly in oil and gas, mining, telecommunications, services, retail, sugar mills, and non-profit organizations. She graduated from Universidad Javeriana in Cali and has been a member of the Ernst & Young America’s Inclusiveness Advisory Committee.

What kind of taxes do potential investors need to be aware of?

The Equity Tax is a one time tax liquidated in 2011. It is paid over four years and eight installments, starting in 2011, 2012, 2013, and the final one in 2014. Colombia has the most competitive free trade zones (FTZs) in Latin America with a 15% income tax as well as the possibility to sell to local markets with no customs taxes—VAT or customs duties—on purchases. There is a VAT exemption for raw materials, inputs, and finished goods sold from the national customs territory to industrial FTZ users or Single Enterprise Free Trade Zone (SEFTZ). Investors can take advantage of the benefits provided by the FTZs even by locating outside of a permanent FTZ.

What are the main challenges for foreign companies in Colombia?

The economic challenges include fiscal and current account deficits, the poor state of infrastructure, and corruption. Colombia has a great need for infrastructure development. One of the most critical factors is the lack of adequate infrastructure to become a global market. In regards to the tax structure, investors looking to inject capital in the form of non-US dollar denominated currency face tax uncertainties, as the Colombian tax legislation refers only to the peso/US dollar exchange rate. Foreign mergers or spin-off companies holding Colombian interests are taxed in Colombia when through these mechanisms direct ownership of Colombian companies or assets is transferred, provided the value of the assets exceeds 20% of the total assets of the group to which the participating companies in the merger or spin off belong to. As of 2013, Colombia has active treaties to avoid double taxation with Spain, Switzerland, Chile, and Canada. As of that same date, Colombia has negotiated or signed treaties with South Korea, Mexico, Portugal, India, Belgium, Czech Republic, and France. Double taxation treaties are also being negotiated with the US, Germany, the Netherlands, and Japan. These treaties have been structured following mostly the Organisation for Economic Cooperation and Development (OECD) model, and it is expected to encourage foreign investment, guarantee legal stability, reduce the overall tax burden, and avoid double taxation in both the country of the investor and the country where the investment is made. As of 2013, Colombia has five Double Taxation Agreements (DTAs) in effect and ongoing negotiations or DTAs signed with 11 countries

What sort of reforms to the legal framework would enhance the development of the national economy?

During the last three presidential mandates, Colombia has improved the legal framework by providing advantages to investors in making investments, particularly by offering permanent FTZs. The legal framework developed from early 1991 opened the economy to private investments in all major sectors of the economy and promoted competition and fostered foreign investments in the country. The climate for foreign direct and portfolio investment is very open. If we see the Ernst & Young Globalization Index, where Colombia is fourth place in Latin America and 40th in the world, it is necessary to stimulate the strengthening of the exchange of technology, ideas, cultural integration, and movement of capital and finance for continued growth and as a market that exploits the opportunities of economic news.

What is the potential of Colombian companies for internationalization?

The aspects that influence the decisions of the internationalization of Colombian companies are defensive behavior against competition investments, the risk reduction associated with a presence in one market, and after market research, while decisions on the selection of a foreign market are taken primarily based on the size of the market, the competitiveness of the target market, and tariff barriers. As for the obstacles perceived by local companies when entering foreign markets, the main ones are: political risk, certifications, taxes, and the availability of raw materials. Today, we see that growth needs are given by the necessity to address new markets, expand and diversify sources of income, venture into other businesses, or simply because there is not much room to grow in Colombia. Although Colombian companies are not among the largest in Latin America, they are slowly gaining ground through mergers or acquisitions and also belong to a variety of economic sectors.