GOC REPORTS ON WEALTH TAX EXPENDITURES

C O N F I D E N T I A L BOGOTA 004577

SIPDIS

E.O. 12958: DECL: 12/24/2018
TAGS: PGOV PREL PREF PTER MASS MCAP CO
SUBJECT: GOC REPORTS ON WEALTH TAX EXPENDITURES

Classified By: Acting Political Counselor David M. Zimov
Reasons 1.4 (b and d)

SUMMARY
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1. (C) The Colombian Ministry of Defense (MOD) reported in
November 2008 that the four-year "wealth tax" imposed on
Colombia's richest citizens and enterprises to fund the
democratic security policy would total $3.7 billion from
2007-2011. Approximately 80% is directed towards the
internal conflict and will be spent primarily on manpower
increases in the military and police, mobility (helicopters),
and intelligence upgrades. The remaining 20% is directed
towards external threats--primarily Venezuela--and will be
used to upgrade Colombia's aging fleet of jets, frigates and
submarines. The MOD's proposal for an additional wealth tax
to focus on consolidation efforts beyond 2011 has been met by
firm political resistance, especially given the grim economic
outlook for 2009. End Summary.

BACKGROUND
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2. (C) President Uribe instituted the first wealth tax
("impuesto al patrimonio") in 2002, which raised over $800
million to boost military spending. A similar tax imposed
from 2007-2011 ("recursos extraordinarios") and levied on the
country's wealthiest individuals and enterprises is expected
to raise another $3.7 billion. The wealth tax applies to
approximately 50,000 Colombian individuals and corporations,
and levies a 1.2 percent tax on liquid assets valued over
three billion pesos (about $1.35 million). Deductions are
allowed for shares held in government entities and the value
of a personal residence up to about $100,000. The wealth tax
is scheduled to be collected in 10 tranches ("cupos") between
2007 and 2011. Expenditure priorities are proposed by the
MOD and reviewed by an ethics committee composed of 12
members from the private sector.

DEFENSE SPENDING AS % OF GDP
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3. (C) The GOC reported to congress in November 2008 that
Colombia's defense spending as a percentage of GDP increased
in 2008 to an estimated 5.7%, up from 5.3% in 2007. This
percentage has been trending upwards since 1990, when defense
spending accounted for only 2.2% of GDP. Director of
Planning and Budget at the MOD, Yaneth Giha Tovar, cautioned
that these defense figures take into account various
enterprises that the GOC does not consider part of its "core
business" -- including enterprises owned by the MOD,
autonomous bodies such as military schools, and health and
pension funds for security services. When non-core amounts
are subtracted, the percentage of the GDP spent on defense in
2008 was 3.9% in 2008, but still up from 3.3% in 2007.

SPENDING PRIORITIES
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4. (C) According to the GOC report, wealth tax revenues of
7,540,082 million Colombian pesos (roughly $3.4 billion,
under an exchange rate of 2230 Colombian pesos per dollar)
have been allocated as follows:

- Army/Police personnel - 37%
- Mobility - 25%
- External threat - 20%
- Arms/supplies/infrastructure - 7%
- Sustainability (e.g. fuel) - 5%
- Intelligence - 4%
- Accion integral (consolidation) - 2%


5. (C) Of the approximately $1.3 billion in personnel
expenditures, 34% was allocated to the Army, 22% to the Navy,
Marines and Coast Guard, 21% to the Air Force, and 23% to the
Police. With these funds, 14,000 soldiers, 3,000 Marines and
900 Air Force personnel have been added, and an additional
20,000 Police are set to be hired through 2010. Giha
indicated that the "sustainability" category is designed to
cover fuel (consistent with U.S. requests that the GOC absorb
these costs) and other costs necessary to sustain operations
of both equipment and personnel. While intelligence and
consolidation spending appear comparatively low, additional
funds are spent on these items by other government
ministries, and approximately $100 million of wealth tax
funds were transferred from other categories to fund
intelligence, particularly to purchase UAVs with
Intelligence, Surveillance and Reconnaissance (ISR)
capabilities. Giha said that GOC successes against high
value targets (HVTs) had prompted the President and Minister
of Defense to increase spending on these intelligence
platforms.

MANPOWER ADDITIONS
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6. (C) A June 2008 MOD report provides more detail regarding
the specific use of wealth tax funds for intelligence,
mobility and manpower upgrades. The MOD is acquiring
intelligence platforms and equipment for the Army, Navy, Air
Force and Police, and will also create a General Command
intelligence fusion center. In terms of manpower increases,
the Army is adding 3 mobile brigades, 3 infantry battalions,
2 engineering battalions, 2 mobile engineering companies, and
2 anti-explosive companies. The Colombian Navy will add 3
Coast Guard stations, 2 battalions of Marine infantry, 4
riverine combat elements, and 1 Coast Guard ship. The Air
Force will add 1 air group. The National Police will add 3
mobile Carabineros squads and 18 rural police units, and will
construct 60 police stations, complete 48 other police
stations, and upgrade 1 police station.

EQUIPMENT
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7. (C) The June 2008 MOD report provides detail on equipment
purchases with wealth tax funds. The Army will acquire 15
UH-60L helicopters, 5 MI-17 helicopters, armored vehicles,
buses, 5 Grand Caravan airplanes, and Spike Launchers. The
Navy will acquire 1 ocean patroller, 1 coastal patroller, 3
go-fast boats, 13 midnight express boats, 23 riverine support
boats, 4 mobile river stations, and will invest in a San
Andres Coast Guard station and modernization of 8 frigates
and 2 submarines. The Air Force will acquire 12 Huey II
helicopters, 4 C-295 aircraft, 2 King 350 aircraft, 1 B-767
aircraft, 8 Grand Caravan aircraft, 25 training aircraft and
will invest in aerial infrastructure, re-outfitting of 24
Kfir aircraft, conversion of 8 UH-60A helicopters, command
and control systems, UAV and satellite systems, and 2
intelligence platforms. Finally, the Police will acquire
7,000 vehicles and will invest in 200 infrastructure projects
and various communication networks.

INTERNAL VS. EXTERNAL THREATS
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8. (C) Approximately 80% of the wealth tax funding to date
has been targeted against the internal conflict, with the
remaining 20% directed towards external threats--particularly
Venezuela. Giha said that at the time when the wealth tax
was conceived in 2006, Venezuela was not considered a
military threat--but this view and consequently certain
resources "had to be re-calibrated" in light of the March
2008 crisis with Venezuela over the GOC attack against Raul
Reyes' FARC camp in Ecuador. Faced with a fleet of
deteriorating Kfir fighters, frigates, and submarines, the
GOC decided to upgrade/refit the assets rather than "scrap"
them. Giha said some of these assets also served the GOC in
the internal conflict; for example, submarines are used for
anti-narcotics and Kfirs are used to target HVTs.

FOREIGN ARMS PURCHASES
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9. (C) An earlier, December 2007 MOD report detailed wealth
tax expenditures through 2007, and provides the following
breakdown regarding foreign arms purchases:

- Israel: 38% (intelligence materials, optronics, transport
aircraft, combat aircraft, arms and munitions)
- United States: 37% (Forward Area Refueling Equipment, arms,
helicopters, aeronautical equipment and helmets)
- Spain: 19% (military transport aircraft)
- Russia: 6% (helicopters)

Giha noted that the large amount of arms purchases from
Israel was due to the contract to refit the Kfir fighters and
that the percentage would drop in the out years, while U.S.
purchases as a percentage would likely rise. Despite this
prediction, we note that the MOD has recently chosen a German
solution rather than Lockheed Martin for its submarine
renovation project and has sent mixed signals regarding the
selection of a U.S. solution for its major frigate
modernization program.

FUTURE WEALTH TAX UNLIKELY
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10. (C) Giha told us that Defense Minister Juan Manuel Santos
had considered levying an additional wealth tax to fund
security operations beyond 2011, with a focus on
consolidation efforts and external threats. She said the MOD
acknowledged that once the military cleared an area of
illegal armed groups, police and state institutions need to
follow closely behind "to win hearts and minds" and to keep
the territory from backsliding -- and those activities would
need future funding. However, the MOD concluded that
projected slower economic growth in 2009, and consequently
lower fiscal revenues, made plans for an additional
consolidation-focused wealth tax politically difficult.
BROWNFIELD