Three of South America’s most dynamic economies – Chile, Colombia and Peru – have announced a new round of tax reforms aimed at improving competition and guaranteeing sustained growth for the coming decade.
Colombia has proposed an ambitious plan that the government is painting as a do-or-die measure. President Juan Manuel Santos has warned that failure by Congress to approve reform could deepen levels of extreme poverty.
Finance Minister Juan Carlos Echeverry has compared the impending fight with the “battle of Stalingrad.” He said Colombia had a “preposterous tax regime, which taxes the poor more than the rich.”
He said he had used dramatic language to show Congress that reform was necessary. “We are emphasizing that this is not about raising taxes,” he said. “Congress has to pass a reform that the favours the poor. We need the reform to guarantee continued growth.”
The measure includes 500 changes to the 1,200-article tax code. He said the code would make the tax code fairer for poor Colombians and more attractive for companies investing in the country.
The national tax haul is currently 14% of GDP and Echeverry estimated the reform will increase that to 15% next year, which is still low but will increase as the economy grows and becomes more competitive.
Neighbouring Peru, which has had one of the fastest growing economies in the region and will expand this year by at least 5.5%, is working on a new tax package to be submitted to Congress in the second quarter of this year.
Finance Minister Luis Miguel Castilla said the plan’s “ambitious goal” was to increase the tax haul to 18% of GDP by 2016.
The first piece of the effort, strengthening the tax authority, SUNAT, has already been implemented. It provided the agency with greater independence to manage its own resources, allowing it to invest in technology and pay better wages to personnel.
The reform is aimed improving collection, reducing evasion and closing loopholes. It will also increase tax audits, which will increase this year 60% compared to 2011.
“We are also planning to rationalize tax breaks and exemptions that have been granted over the past few years,” said Castilla.
It will not be easy. The congressional Housing and Construction Committee recently passed legislation that would exempt 33 water/sanitation companies from paying income tax. Castilla’s office has said the bill would be vetoed if the full Congress passes it.
Chilean President Sebastian Pinera may announce on March 11 that his administration will put forward tax reform to approval by Congress. The plan will be unveiled in April.
The primary thrust of the plan is keeping corporate income tax at 20%. The rate had been 18%, but was raised by two points in 2010 after the devastating earthquake in the center of the country. The plan would make it permanent.
“There will be an increase on corporate taxes and reduction in taxes paid by individuals and small companies,” Pinera announced.
As with Colombia and Peru, the Chilean plan would aim at fighting evasion and streamlining the tax code to improve competition, according to Pinera. Chile’s tax haul, including mining taxes and social security, is 31% of GDP.