US embassy cable - 04BOGOTA4483

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