Colombia’s top tax authority has defended the roll-out of a recent payroll tax, claiming that two million Colombian laborers have been included in the formal employment sector because of the reforms.
Director Juan Ricardo Ortega of Colombia’s National Tax and Customs Directorate (DIAN) told Caracol Radio on Wednesday that, contrary to the criticisms many sectors of the business community had expressed regarding the tax (or CREE as it is known), it was indeed encouraging the generation of formal employment in Colombia.
“If we compare January 2012 [before the tax reform], when we had 5.8 million contributors to [worker’s benefits scheme] PILA, with the 7.8 million this January, then I do believe that what was proposed was always responsible, serious and transparent,” said Ortega.
At the time of the tax’s announcement, President Juan Manuel Santos also received backlash from various political factions, who claim it was a ruse to raise income taxes for employees while providing employers with a tax break.
Changing payroll tax to grow the formal economy
In 2008, 74.2 % of all Colombian labor force was considered informal, that is, not regulated or taxed by government. This left many without health or employment benefits. By 2011 Colombia still had one of the highest unemployment rates in Latin America, according to an international labor report.
Ostensibly with this in mind, the tax reforms formulated in 2012 and introduced in January 2013 reduced the tax paid by companies for each employee and replaced it with a tax on the profits they earn by making use of that labor.
While unemployment and the informal economy are still large, the structural reforms appear to have grown the formal economy.
Driver of economic growth
The International Monetary Fund sees the reforms as a key driver of Colombia’s recent economic growth.
National tax reforms were one of the key factors driving economic growth in Colombia, along with anti-inflation measures, a flexible exchange rate, effective financial sector control, and a prudent fiscal policy, International Monetary Fund Mission Chief for Colombia, Valerie Cerra, told Colombia Reports last year.
“Colombia is advancing on structural reforms, as demonstrated by the tax reform approved at the end of 2012. It should help reduce non-wage labor costs, promote job creation in the formal sector and reduce inequality,” said Cerra, who represents the global body which aims to stabilize the international monetary system.