Comparison between colombian and Latin-American Free Trade Zones

Comparison between colombian and Latin-American Free Trade Zones

 

Colombia is the first country with more Free Trade Zones (FTZ) in South America. This industry is established in 60 municipalities, a total of 19 departments throughout the country, generating more than 40,000 direct jobs and close to 90,000 indirect ones.

This business model has shown great efficiency in the country, growing from 10 free zones in 2001 to 101 in 2013, generating sales for more than USD $ 24,000 million compared to $ 3.7 billion a decade ago.

While in 2005 Colombia only exported USD $ 506 million from the free trade zone, in 2013 this figure reached USD $ 3.43 billion, representing 14% of the total Colombian exports. In other words, Colombia’s exports from Free Trade Zones have grown at an average annual rate of 27% in the last 9 years.

According to the National Administrative Department of Statistics (DANE), exports from Free Trade Zones in the first two months of 2017 have increased 68.4% compared to the same period of the previous year; in addition, FTZ have achieved a positive exchange rate, even though 75% of operations are destined to the National Customs Territory.

The flexibility in customs policy has contributed to the increase in foreign trade. Therefore, merchandise, either manufactured in the country or arriving from abroad, directed to a free zone is entitled to preferential treatment such as:

  • Income Tax Rate of 15% for all free trade zones located in the country.
  • Investors have the possibility of performing partial processing outside the Free Zone for up to six months.
  • A possibility of selling services or goods in the national territory without quotas or restrictions, after the nationalization of the merchandise and payment of the corresponding customs taxes.
  • Companies have an indefinite term of storage of goods that are in Free Trade Zone without the payment of taxes.
  • Investors have benefits on exports of goods to destinations where trade agreements exist between Colombia and other countries.
  • Companies have the possibility of reducing time in procedures and customs processes.
  • Customs duties such as VAT and tariff are not caused or paid for goods coming from abroad.
  • Exemption from taxes on imports of equipment, tools and materials exclusively used to build infrastructures, buildings and facilities for export processing zones by management organizations and users.
  • Non-payment of VAT for raw materials, inputs and goods subject to sale from the National Customs Territory to industrial users of the Free Trade Zone.
  • The ability for companies to complete customs transit procedures.
  • Elimination of customs procedures, meaning that entry and issue of goods is simpler and more agile, without declarations of imports or exports.
  • Companies in free trade zones do not require a percentage of nationalization of goods produced, or a percentage of local purchases.

Unlike other countries in the region, Colombia has a model named special permanent free zones, commonly known as business units, where a legal person or a single company is granted the status of Free Trade Zone in any part of the country, so they can perform industrial activities of services in a certain area if the investment generates a high social and economic impact. This impact is measured by the amount of investment and jobs created.

From 2005 to 2014, 96 special permanent free zones have been created, specifically in production of technology, plastics or beverages. Historically, this is one of the greatest advantages Colombian free trade zones has over the rest of south American FTZ.

This type of specific free trade zones allows the foreign investor to locate in a place where its production is competitive according to factors like workforce, distributors, access to the market and logistics.

Although other countries in South America have implemented special permanent free zones in their legislation, Colombia outstands for the elaboration on its laws in this matter and the trajectory the country has on incorporating important multinational companies in these specific trade zones.

It is very important to mention that Colombia is located in a very privileged geographic position with 2900 km of coastline, of both the Caribbean Sea and the Pacific Ocean, having easy access to maritime transport and direct channels with the manufactured country to the free trade zone, no matter the country of origin.

According, to the AZFA (Association of Free Zones of the Americas), the VAT of Colombia is of 19%, not the highest percent in south America which is Argentina but neither the lowest which is Panama. So far, Colombian statistics have demonstrated that it is in a middle rate in comparison with other South American countries, making it very profitable for investors when combining the other benefits.

Free Trade Zones have been an instrument to boost the development of Colombian economy. However, an AZF investigation and comparison with other countries has demonstrated that Colombia needs to reduce its income tax. Another thing to improve would be the time for the approval process of Free Zones construction. There is also a need for an active incorporation of small and medium-sized businesses into the FTZ regime to generate greater production links, support human capital, and strengthening and facilitating migration processes for foreign investors.

Free trade zone projects or the decision of a company to establish itself within them is based on a process that considers the geographic advantages, the cost of utilities and the suitability of local labor, generating more efficient productivity mechanisms and better costs than the local market in each country.

Regardless of the different models and incentives, the Free Zones have demonstrated significant results, recognizing them as an efficient tool for job creation, investment attraction, commercial exchange and technology transfer.

For more information on Free trade zones in Colombia, contact us.

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