Published: January 01, 2000
What is going on in Colombia? Is the country finally emerging from the dark days of narco traffic and FARC (Revolutionary Armed Forces of Colombia) terrorism ... it’s not really clear. What is certain is that anyone returning to Colombia after a few years would definitely notice some changes. The country’s economic indicators are turning green, rating agencies are on the upgrade and political stability is making progress. At the same time the country continues to benefit from the friendly umbrella of its closest ally, the USA, and has been on a clear rebound since the beginning of 2010. It grew at a rate of 4.5% in 2Q 2010. Political stability and improved democratic practices are part of this overall positive trend, including the recent election of Juan Manuel Santos replacing Alvaro Uribe, who is now recognised by the international community as the president who initiated a turnaround of the country.
More recently, with the elimination of one of the last FARC leaders in September 2010 and the reconciliation of trade disputes with its agitated neighbour Venezuela, Colombia seems to be on a better track towards growth and stability. Inflation should remain below 4% in 2010 with a still relatively over-valued peso gaining close to 12% over the US$ since the beginning of the year. Colombia is surfing the wave of higher commodity prices, remaining a key exporter of oil, coffee, nickel, coal and copper. The consensus is that growth should be north of 5% for the year 2010. At the same time the new president still has a number of challenges including poverty reduction in a country where 64% of the population is still below the poverty line, not to speak of the narcotics trade which is far from having been eradicated.
On the financial aspects and more specifically as regards to corporate treasury, financing and foreign exchange regulations, Colombia remains in the leading pack of Latin America’s most difficult countries. It is still heavily regulated with foreign exchange controls and a set of specific rules on transactions and borrowings. The tax system is also relatively penalising. As an example it is one of only a few remaining countries in the region such as Brazil, Argentina and Peru, to retain a tax on financial transactions (4/000 on all bank debit transactions). Also, like other countries in the region, the administrative burden including central bank reporting is heavy.
Regulation of bank accounts remains stringent. Residents and non residents are only allowed to have accounts in pesos (COP). There are no pesos offshore accounts. USD accounts are not authorised either for residents nor non residents, although there are some exceptions (in the energy sector for example). There are some COP savings accounts. It is possible to have a USD account offshore (NY DDA account for example) but that account has to be registered and will be controlled by the central bank. You can make and receive payments on that account net of financial transaction tax. [[[PAGE]]]
The clearing system is relatively well organised and efficient. There are two clearing systems for payments in Colombia. For high value payments there is either ACH – Cenit which is managed by Banco de la Republica (average daily volume of $400m in 2009) or ACH-Colombia which is managed by a group of private banks (average daily volumes of $1.27bn in 2009). For low volume payments there is CEDEC (managed by Banco de la Republica) and for cheques, a separate clearing house called CCC (Cámara de Compensación de Cheques). In total, low value payments represented an average daily volume of $1.6bn in 2009. Bank cut-off time for fund transfers is generally 5pm.
The cheque is still an important instrument of payment but this is tending to diminish over the years to the advantage of transfers. Numbers of cheques compensated continued to decrease between 2008 and 2009, from 197 million to 167 million, while transfers for both Cenit and ACH Colombia are up from 26.5 to 27.9 million and 292 to 297 million respectively.
There are also two bank switches (Redeban and Credibanco) and three major ATM networks. There is a restriction on deposits, as you can only make deposits in a bank where you have a bank account. There is also a specific certification programme that has been put in place for internet payments called Certicamara, which actually certifies signatures. Taxes can be paid electronically. Various banks provide direct tax payments via their internet platforms.
Colombia does not provide lockbox systems. Collections are done through remittances at bank branches across the country. Collections can be made directly by the bank or by collection agents providing this service to banks. It is necessary to have a local bank with a good branch network when one needs to collect country-wide. Banks offer collection products to accelerate the collection process.
The cheque is still an important instrument of payment but this is tending to diminish over the years to the advantage of transfers.
Colombia allows zero balancing between companies of the same group. End of day balances can be placed but there is no overnight market. As in most other Latin American countries, cross-border pooling is not available. The market provides for interest bearing or corporate savings accounts. There are also some short-term placement instruments such as CDT which are bank commercial papers in LCY. There are also time deposits where excess funds can be deposited for periods from one day to 12 months for a minimum of $100m (depending on banks). Interest rates on COP have fallen in the last year and the central bank benchmark interest rate was 3% in Sept 2010. [[[PAGE]]]
Colombia is certainly not a top destination in terms of tax in the region: it is comparable to many other Latin American countries but also has its specificities. Basic tax items include a corporate tax of 33% which can be reduced to 15% if your company is registered in a free trade zone (FTZ law). Capital gains are subject to 33% taxation as well as dividends also at 33%, but only on corporate income that is not subject to the 33% corporate tax. No WHT (no intercompany loan possible) on interest on foreign bank loans which are also fully deductible.
Royalties are taxed at 33% with a reduction to 26.4% for software imports. There are some double taxation treaties, notably with Spain and Chile. Some others are in the pipeline (including Canada, Switzerland and Germany). Colombia also has a tax on assets/equity of 1.2% for equity exceeding US$1.6m (some deductions are possible when acquiring certain assets, so a tax review is necessary for that specific item). VAT is 16%.
A tax on financial transaction (IDB) is also payable on all bank debits at a rate of 4/000 as mentioned above. IDB is payable on all bank debit transactions with a few exceptions including (a) any transfer of money made from one account to another belonging to the same holder (b) for debits from savings accounts up to the equivalent of US$3,500.
There has been no stamp duty tax as of 2010. Colombia has a transfer pricing regulation which follows the OECD arm’s-length rules. Losses may be carried forward without limitation. No carry-back is allowed.
This remains one of the particularities of Colombia. Subsidiaries have no choice but to borrow from banks for their needs. Generally foreign loans obtained by local companies that are developing activities considered beneficial to the social and economic development of the country (according to a broad definition) are deemed as being held abroad and as such any interest paid is not considered to be domestic source income and is not subject to withholding taxes. Otherwise, interests would be subject to a 33% withholding tax. Note that due to exchange control regulations local companies can only enter into foreign loans with foreign financial institutions. Another thing that it is important to be aware of is that there are no thin capitalisation rules in Colombia to date.
There are 18 banks in Colombia with a total of more than 5,000 branches. All the international banks active in the region are in Colombia but their presence and domestic reach vary. The most important foreign banks are Santander (74 branches), BBVA (68) Citi (34) and HSBC (10) and the latest arrival is ScotiaBank which bought the small RBS franchise in 2010.
There is still a huge market opportunity for banks as only 40% of the population is bancarised today.
Otherwise the three largest local banks are Bancolombia, Banco de Bogota, Banco Davivienda (with assets of US$20bn,15bn and 12bn respectively). There is still a huge market opportunity for banks as only 40% of the population is bancarised today.
Unfortunately there have been no recent positive measures in the regulatory environment or foreign exchange regulations. In December 2009 the central bank reconfirmed existing rules applicable to offshore loans. During the same period, however, some decisions were taken as regards transparency on foreign exchange and derivative transactions. More recently in March 2010 a measure was taken to facilitate foreign exchange registration process for amounts exceeding USD250,000. There is still a need for improvement in the financial regulatory environment, which should hopefully form part of the measures of the newly-elected president and his team. However so far there have been no tangible signs of this happening soon.
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