Comparison between colombian and latinamerican free trade zones

Comparison between colombian and latinamerican free trade zones

Colombia is the first country in South America with the most free trade zones. 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, with a development of 10 free zones in 2001 to 101 in 2013, generating sales for more than US $ 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 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 DANE, exports from Free Trade Zones in the first two months of the year have increased 68.4% compared to the same period of the previous year; in addition, Free Zones have achieved a positive exchange rate, even though 75% of operations are destined to the National Customs Territory. The data presented above demonstrates that Colombian financial results in free zones encourage foreign trade.

 

Colombia’s economical increase in foreign trade is due to its flexibility in customs policy. Therefore, merchandise manufactured in the country and arriving from abroad in the direction of a free zone is entitled to preferential treatment such as:

 

First, Income Tax Rate of 15% for all free trade zones located in the country. Second, Investors have the possibility of performing partial processing outside the Free Zone for up to six months. Third, 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. Fourth, companies have an indefinite term of storage of goods that are in Free Trade Zone without the payment of taxes. Fifth, investors have benefits on exports of goods to destinations where trade agreements exist between Colombia and other countries. Sixth, Companies have the possibility of reducing time in procedures and customs processes. Seventh, Customs duties such as VAT and tariff are not caused or paid for goods coming from abroad. Eighth, 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. Ninth, 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. Lastly, the ability for companies to complete customs transit procedures.

 

Unlike other countries in the region, Colombia has the economical advantage of 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, 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 legal system has over the rest of south America 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 national and international logistics. Nevertheless, other countries in South America have implemented the ability to create special permanent free zones in their legislation, Colombian legal system outstands for the meticulousness of its laws in this matter and the trajectory the country has on locating important multinational companies in this specific trade zone.

 

Other benefits are the elimination of the customs procedures, meaning that the income and output of goods process are made very simple and agile, that is without declarations of imports or exports. Companies in free trade zones do not require a percentage of nationalization of goods produced, and also they do not require a percentage of local purchases.

 

It is very important for investors to understand that Colombia has a very privileged geographic position with 2900 km of coastline, of which 1600 km are in the Caribbean Sea and the remaining 1300 km in the Pacific Ocean, with the possibility of an easy access of maritime transport and direct channels of transportation from the manufactured country to the free trade zone for distribution, no matter country of origins of the good because Colombia has access to two oceans.

 

According, to the AZFA (Association of Free Zones of the Americas), the VAT of Colombia is of 20%, 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 the establishment of medium and high investors in its free trade zones.

 

Furthermore, Free Zones have been an instrument to boost the development of Colombian economy; there are still flaws in the system. For this purpose, it would be advisable to speed up the time for the approval process of construction of Free Zones or the inner expansion of these. Also, statistics from the AZFA have demonstrated that Colombia has one of the highest income taxes, with a 34% versus the lowest that are Paraguay and Brazil. Either way, the AZF investigation and comparison with other countries have demonstrated that Colombia needs reducing its tax income.  In addition, there is a need for an active incorporation of small and medium-sized enterprises into the free trade zone regime to generate greater production links, support human capital strengthening and facilitate 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 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, undoubtedly recognizing them as an efficient tool for job creation, investment attraction, commercial exchange and technology transfer.

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