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Home » Colombia’s 7 Most Absurd Taxes

Colombia’s 7 Most Absurd Taxes

Daniel Raisbeck by Daniel Raisbeck
January 8, 2016
in Colombia, Columnists, Economics, Featured, Free Markets, Free Trade, Opinion, Politics, South America
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An outrageous hodgepodge of taxes shows the hypertrophied nature of Colombia's fiscal system
An outrageous hodgepodge of taxes shows the hypertrophied nature of Colombia’s fiscal system. (Unipymes)

EspañolRecently, Colombian journalist Antonio Caballero, a caviar-Marxist grandee, wrote that President Juan Manuel Santos’s government “has yielded practically nothing to the FARC guerrillas during the current peace negotiations in Havana, Cuba,” among other things, because “the capitalist and neoliberal economic model” remains intact.

Time and again, Caballero and his ilk insist on calling the country’s economy “neoliberal” and “capitalistic” despite all the evidence to the contrary; nothing close to a free market exists in Colombia, where the government charges companies a 70 percent tax rate on commercial profits, far more than the openly socialist “republics” of China and Venezuela.

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In Caballero’s honor, I’ve drawn up an initial list of the seven most ridiculous taxes imposed upon Colombian citizens, taxes that any self-respecting capitalist country would have axed years ago, or never created in the first place. Admittedly, this is a mere synthesis, and one which was very difficult to draw.

In June, journalist María Isabel Rueda revealed her libertarian sympathies by publishing a list of 62 municipal and national taxes currently charged, an outrageous hodgepodge that shows the oppressive nature of Colombia’s hypertrophied tax system.

Here is my own, limited version, which excludes obvious absurdities such as rising property taxes and VAT, which is set to rise this year from 16 to 19 percent, simply because they also exist needlessly in many other countries.

1. 4 x 1,000

The prototypical “temporary” tax that inevitably becomes permanent, this 0.4 percent fee on all financial transactions — including cash withdrawals at ATM machines before certain exemptions were added — was introduced by former President Andrés Pastrana (1998-2002) in the midst of an economic crisis.

Rather than being transitory, this tax was increased over time; originally, its rate was 0.2 percent. According to a recent tax reform, the 4 x 1,000 tax will be abolished in 2022, but don’t be surprised if it’s replaced with another, similarly senseless tax, elsewhere. That’s the Colombian government’s modus operandi (see #2).

2. Income Tax for Equality (CREE)

This 9 percent tax on income was created in 2013 after the government reduced the traditional income tax rate from 33 percent to 25 percent. This move might have helped the Santos government shiftily move up a few slots in the Doing Business ranking, which only takes regular income tax into account, but legally constituted businesses ended up paying an effective tax rate of 34 percent on profits.

Out of either innocence or malevolence, the tax authority claims that CREE’s purpose is to benefit “workers, social investment, and job creation,” as if the government could create productive jobs by taking money away from entrepreneurs, who are the real job creators.

3. Appreciation Tax (valorización)

If you’re into paying the local government several times for infrastructure projects it can’t even bring itself to complete, then this is the tax for you. According to Colombian law, real-estate owners who benefit from “the execution of local public works” must pay the local government a “contribution” called the “tax on property appreciation.”

This is preposterous in the first place, because owners who sell their property are also subject to a capital-gains tax. This is charged whenever there has been “an increase in the price of real estate as a result of urban planning works that modify their use or increase their (commercial) benefit.” Annual property taxes (impuesto predial) also rise based on the local government’s calculations of real-estate appreciation as a result of public works.

In other words, owners are being charged two or three times for the same infrastructure projects that they already pay with their other taxes. The appreciation tax, however, is arbitrarily charged: how can the government accurately determine exactly which residents in a defined area benefit from an infrastructure project and which don’t? And, in practice, this tax leads to abuses of all sorts.

Last year, for instance, when the costs of a bypass tunnel under construction in northern Bogotá mysteriously increased by 300 percent over the original price, bureaucrats announced that they might charge residents a new appreciation tax, even though they had already paid it once. Colombian taxmen, like Shakespeare’s Goths descending on Rome, “have gathered head, and with a power / Of high-resolved men, bent to the spoil.”

4. Liquor Taxes

If you’re in the business of importing liquor into Colombia, the state forces you to operate as if you were selling your product in 32 different, extremely protectionist countries (Colombia is divided into 32 “departments” or states). This is so because each department charges for a “stamp” that each bottle must bear in order to be sold within its borders.

As  journalist Juan Esteban Lewin explains, each departmental governor holds a virtual monopoly over liquor sales, since, according to the law, the department alone can produce alcoholic beverages and determine the necessary requirements for outside brands — foreign or national — to be sold in said department.

This means, Lewin writes, that a governor can whimsically place “any obstacle or restriction” on the sale of non-local liquor, and governors can handpick approved distributors of the local brand. To top it all off, liquor taxes are designed to protect the department’s monopolies from foreign competition, since alcoholic beverages containing more than 35 percent alcohol are charged more than double the tax than beverages containing less than that amount.

“Most national products,” Lewin explains, “contain less than 35 percent alcohol, whereas most imported alcoholic beverages contain more than 35 percent.”

Although the Santos government, under much pressure from the OECD, tried to reform liquor laws last year in order reduce taxes on foreign brands and to curb the governors’ ability to hinder the sale of non-local alcohol, the measure was defeated in Congress by a 93 to 0 margin. Without a doubt, this was due to the fact that state liquor monopolies are a main source of departmental revenue and of campaign finance for regional politicos. Naturally, they are also a frequent source of corruption.

5. Merchant Registration Tax

Although Colombian Chambers of Commerce are not officially part of the Colombian state, they exact an annual, obligatory registration fee from businesses which is a de facto tax.

The country’s commercial code, in fact, forces all new businesses to sign in with the Chamber’s Mercantile Registry and to renew their license annually. The initial costs of registration has an initial cost depend on the company’s assets, and price of the annual renewal depend on the previous year’s balance.

In practical terms, however, business registration requires a mere online registry, not a Chamber of Commerce with palatial headquarters in several Bogotá locations. This is as if the state forced each citizen to pay a considerable amount in Colombian terms in order to annually renew his or her national identification card (cédula).

Admittedly, the Bogotá Chamber of Commerce does an excellent job in certain fields such as providing legal information and advice to aspiring and actual businessmen. Particularly laudable are its arbitration and conflict resolution services, which provide a truly valuable alternative to Colombia’s inefficient legal system. Also, during the last campaign for Bogotá mayor, the Chamber organized a series of debates on key issues and never failed to invite independent candidates such as yours truly, for which I am very thankful indeed.

Nonetheless, Chamber of Commerce membership should be voluntary and businesses shouldn’t be charged merely for registering with the state. Business registration, moreover, should be required only once so as not to waste entrepreneurs’ time and money.

6. Occasional Gains

This is a 10 percent tax on profits made “on the sale of fixed assets owned during at least two years.” As usual, the government and the commentariat are crowning themselves with laurels because the last tax reform reduced this tax’s rate from a former maximum of 33 percent.

They don’t realize that the tax itself, which also applies to income “proceeding from inheritance, legacies, or donations,” is unnecessary and should be simply scrapped. This, in fact, is what Norway, Sweden, Portugal, and 10 other countries have done with their inheritance and estate taxes since 2000.

As taxfoundation.org reports, “even governments that like high revenues for robust social welfare spending find that estate or inheritance taxes are not an effective source” of revenue. All they do, in fact, is encourage evasion and tax exile.

7. Tax on Consumption

This tax, introduced in 2013, is additional to VAT when it applies to mobile telephone services and the sale of furniture, vehicles, motorcycles, and boats. Consumption, the government feels, is an activity to be punished. Restaurants and bakeries are also subject to this tax at a rate of 8 percent, while being exempt from VAT for their sales.

While the transition from VAT to consumption tax is presented as a charge on “luxury” that benefits certain businesses, real relief would come only if the Colombian government followed Hong Kong‘s good example and eliminated VAT and sales taxes altogether.

Happily for comrade Caballero, he can now throw in the towel in his struggle to build a Colombian socialist republic with no dishonor. With current levels of taxation and the absurdity of individual taxes, socialism has long arrived.

Tags: juan manuel santostaxes
Daniel Raisbeck

Daniel Raisbeck

Daniel Raisbeck is the PanAm Post's Chief Editor. He ran for Mayor of Bogotá in 2015 as an independent candidate. Follow him @DanielRaisbeck.

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