Strengthening PFM in LAC Project: Colombia

The country's tax effort is 69.2% of tax capacity, while the average of the surveyed LAC countries is 61.1%. However, Colombia's tax capacity, at 28.3% of GDP, is lower than the tax capacity of all other surveyed LAC countries, with an average of 33.5%. Colombia has undergone significant tax policy and fiscal reforms in the past decade to simplify its tax system and improve its tax revenue. The most notable reforms include the tax reform of late 2012, which is expected to have a significant impact on the country's fiscal framework and increase its revenue. The reform introduced a standard VAT rate of 16% and eliminated VAT exemptions, which previously allowed for nearly 10 different rates that undermined the tax base and productivity. The tax reform also introduced a new electronic system to verify taxes owed, which reduced evasion by 25-30% across various tax types. Additionally, the reform introduced a new corporate income tax rate of 25% for Colombian-resident entities, while maintaining the 33% rate for non-Colombian entities. The reform also eliminated the VAT zero-rating on hydrocarbon and mining, and introduced a new Minimum National Tax (IMAN) to curb deductions and loopholes and create a progressive tax rate. Colombia's tax revenue has increased by 2.4% of GDP from 2003 to 2012, with the majority of the increase occurring in the last two years of the period. The revenue gains are primarily from taxes on income and profits (1.9% of GDP in 2012) and other taxes (0.4% of GDP in 2012). The composition of revenue has changed over the past decade, with taxes on income and profits, taxes on goods and services, and other taxes increasing as a percentage of GDP, while taxes on international trade decreased. Colombia's tax effort from personal income tax is 3.8%, which is slightly below the LAC regional average of 4.1% and below the income group and world averages of 4.8% and 5.5% respectively. The revenue effort from corporate income tax is 1.4%, which is well below the corresponding regional, income group, and world averages. The revenue effort from VAT is 5.3%, which is below the regional and income group average of 6.4% and below the world average of 6.1%. The maximum personal income tax rate in Colombia is 33%, which is higher than the income group and world averages. The corporate income tax rate is 25% for Colombian-resident entities, while the rate for non-Colombian entities remains at 33%. The VAT rate is 16%, which is slightly above the regional, income group, and world averages. Colombia's tax system is complex, with a high number of tax rates and exemptions. The tax system is also subject to frequent changes, with the government introducing new tax laws and reforms to simplify the system and improve its revenue. The tax system profile in 2010-11 shows that Colombia's tax revenue effort is below the world average, with a revenue effort of 13.6% compared to the world average of 17.9%. The tax effort from personal income tax is 3.8%, which is slightly below the LAC regional average of 4.1%. The revenue effort from corporate income tax is 1.4%, which is well below the corresponding regional, income group, and world averages.