COLOMBIA TAX REFORMS OF LIMITED BENEFIT

UNCLAS BOGOTA 004483 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EFIN ELAB PGOV CO SUBJECT: COLOMBIA TAX REFORMS OF LIMITED BENEFIT (SBU) Summary: With a total public sector revenue reaching 30% GDP, Colombia,s ability is limited to using additional taxes to further reduce its external debt. Nevertheless the GOC is pushing for tax reforms to streamline IMF-mandated tax adjustments enacted in December 2003 and to increase revenue. These are in line with tax reforms proposed in President Uribe,s failed public referendums. Political focus on re-election and reform of Colombia,s pension system and the federal budget will likely delay tax reform proposals. End Summary. ¶2. (SBU) President Uribe called for an across-the board 2 percent increase in Colombia,s Value Added Tax (VAT) on all consumer basket items to increase government revenue. In a presentation to the National Association of Financial Information (ANIF),Minister of Finance Carrasquilla proposed a progressive tax on pensions and a revision of the current tax system to close loopholes and put an end to "distortional8 taxes on financial transactions, inheritance, and certain procedural duties ("timbre") (A previous attempt to increase the value added tax in the 2002 reform was ruled unconstitutional by the Constitutional Court). ¶4. (SBU) Although the GOC passed IMF-mandated tax reforms in December of 2003, Uribe says his proposals represent a clearer, less-distortionary way to generate additional revenue. The reforms passed in December are expected to raise USD 710 million this year, 350 million USD less than the reforms in Uribe,s failed public referendum. It remains unclear whether the GOC will have sufficient political support to propose tax restructuring during 2004. IMF officials have expressed confidence that the GOC will make the necessary near-term expenditure adjustments to make up the shortfall associated with the December 2003 tax package and meet their 2004 deficit target (2.5% of GDP). Moreover, local Fund economists and Fund officials say that pension and federal budget reforms are far more important to Colombia,s long-term fiscal health than Uribe,s tax proposals. ¶5. (SBU) Comment: Colombia,s recent tax reforms are a major step forward toward meeting IMF fixed targets, but fall short of long-term GOC expectations for a streamlined, progressive tax structure. With the GOC focused on pension and budget reform, further changes to the tax system are likely to be postponed. End Comment. WOOD