Business Environment of Colombia Research Paper

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Colombia

Once a no-go zone, Colombia has enjoyed something of a resurgence. This paper will examine the business environment in Colombia, highlighting the different issues that matter to businesses. Colombia has recently become the fastest-growing economy in Latin America (The Economist, 2014), which is testament to some key policy changes that have spurred renewed investment. It started with a major security push to stabilize the country and has now left Colombia enjoying a fairly attractive investment environment. This report will outline the country's economic and legal conditions, to provide the relevant background information for anyone considering doing business in Colombia.

Economic Conditions

Colombia is experiencing strong growth at present, something that can be attributed both to improved security and to a shift in economic policies. With 46 million people and a relatively slow growth rate, Colombia is the 30th-largest country in the world. Its economy ranks 32nd, with $642.7 billion (CIA World Factbook, 2015). Major exports are petroleum, coal, emeralds, coffee, nickel, flowers and bananas, and the U.S. is the largest trading partner by far for Colombia. However, it also sells around the world, to China, India and Spain, as well as to Panama. Major import partners are the U.S., China, Mexico and Brazil. The instability had a negative impact on Colombia's manufacturing base, so many industrial goods and transportation equipment and consumer goods must be imported (CIA World Factbook, 2015). There is potential growth in developing those sectors domestically. Despite being an energy exporter, Colombia does not have a massive supply of fossil fuel, sitting at just 35th in the world for proved reserves as crude oil and 47th for natural gas (CIA World Factbook, 2015).

Trade Framework

Colombia has been aggressive in recent years with respect to modernizing its economy. Juan Manuel Santos, as President of the country, has been to open the market. South America in particular enjoyed a decade-long commodity boom, but when that ended it hurt other South American economies. Colombia has weathered the storm better than some of the other countries mainly because its main exports are fossil fuels. That the country has these is good for Colombia, but does not necessarily mean much for the future given low levels of reserves. This is why Colombia has opened up its economy.

The World Trade Organization last reviewed Colombia's performance in 2012. It noted increasing openness in trade since the prior review in 2006. Colombia has "participated in various negotiations to consolidate existing bilateral and regional agreements" (WTO, 2012). The WTO declared the company's trade regime "substantially open," and the average tariff declined during the review period. The country has also sought to have balanced economic policy, using some stimulus during the recession but also relying on monetary policy to prop up the economy. With several free trade agreements and a commitment to free trade that has been implemented over the course of several years, Colombia has begun to position its economy as favorable in the Western Hemisphere.

Laws and Regulations

The legal system in Colombia is based on civil law, largely influenced by the Spanish and French civil codes (CIA World Factbook, 2015). Colombia's legal system is generally considered to be transparent and functional. That said, Colombia does have a fairly poor score in the Corruption Perceptions Index (Transparency.org, 2014). The country also scores poorly on the press freedom index. Journalists are under constant threat from the government and there is little respect for freedom of information. So, while there does appear to be a functioning judiciary, Colombia also has major issues with corruption and a lack of freedom (RSF, 2015).

For businesses, the overall business environment has been ranked #45 out of 185 economies, which is a respectable score, by the World Bank (2013). The biggest obstacles to operating a business include access to finance, "practices of the informal sector" and tax rates. The middle refers to the fact that there is significant competition from entrepreneurs and some businesses apparently feel that they should have government protection from competition. Access to capital and tax rates are much more legitimate complaints. Thus, the regulatory environment is moderate favorable, but for the corruption, and Colombia scores better than most countries in Latin America in this regard.

Ownership Requirements

Some countries use ownership requirements as a means of protecting their economies. Ownership requirements demand that some percentage of ownership for major firms should be domestic in nature. In a bid to attract more foreign direct investment, Colombia has liberalized its ownership regulations in recent years.

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Foreigners have the same ownership rights on property as Colombian citizens do. Foreigners can also return their income to their own country, should they find that Colombian taxes are too high. Thus, the rules have made it much easier in recent years for foreigners to invest in Colombia real estate (Miller, 2011). Foreign investors do need to have a local representative by law, and will probably benefit from one anyway in terms of navigating the Colombian legal system.

Corporations are registered at the civic level, and there are a few different corporate structures available in Colombia. Some, like the LLC, would be familiar to Americans, while others such as simple stock corporations, are a little more unusual. It is worth noting that foreign subsidiaries are legal, but that they must report their finances according to Colombian GAAP, in Colombian pesos, and in Spanish, for the benefit of the local regulators (Deloitte, 2014).

Setting up Banking

Knowing that access to financing is one of the biggest impediments to doing business is Colombia is disconcerting for foreign investors. Foreign exchange flows freely, and the peso is on a free float, and this convertibility is a beneficial feature for the Colombian economy. However, because trade in goods and services needs to flow through the exchange market, there is a need for local Colombian banking partners to do business in the country. There are a range of commercial banks in Colombia that can perform these services, and a foreign subsidiary may not have as much difficult securing local financing as the smaller local companies that find this to be an impediment. Many major banks are present in the Colombian market, including from Brazil, Spain and the U.S., so there are options within the banking system should an international bank be desired.

Labor Rules and Regulations

Foreign workers in Colombia are bound by Colombian laws, but are generally able to enter and leave freely where there is agreement and visa in place. The work week in Colombia is 48 hours and 8 hours per day. Thus, there is a mandatory rest day on which an employee cannot work, but the employer and employee can agree as to which day is the rest day. After that point there is overtime due to the employee, and the percentages and specifications are all codified. Employees are entitled to 15 days of vacation time per year. Fourteen is the minimum age for employment, and children under 15 are limited in the number of hours that they can work. The government exerts some control over layoffs -- mass termination of labor agreements must receive the approval of the Ministry of Labor. There are many other specific, codified, provisions within Colombian labor law (Deloitte, 2014).

Colombia has a national social security system, and employers are obligated to pay into this, and there is a national pension scheme as well. Employers also make monthly contributions to the healthcare plan for the employees. In general, the Colombian system of labor laws is similar to that in the U.S., and is robust in the legal sense. The specifics of each labor law are codified, and a local HR lawyer can help the company to understand each of the laws and how they can be implemented.

Taxes

Colombia's business taxes were cited as one of the major structural impediments to business in the country. A Colombian company is subject to taxes on all of its income worldwide. This creates disincentive for local companies to pursue international expansion. Foreign subsidiaries, however, are only taxed on their Colombian-sourced income. Business visitors without a physical branch in the country are not expected to file a tax return. The tax rate is 25%. Dividends are not taxed when they are paid out of a company's after-tax profits. (Deloitte, 2014). The country also has a strict transfer pricing regime in order to minimize the risk of tax fraud.

One unique feature of the Colombian tax regime is the CREE, or Income Tax for Equality. This tax regime is the contribution that companies make to benefit workers, employment generation and social investment. This was enacted in 2012, and while it seems as though it would have a dampening effect on foreign direct investment that has not been the case. Colombia has some free trade zones that can be used to reduce the overall tax burden of a foreign company operating in Colombia (Deloitte, 2014).

There is a capital gains tax in.....

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