The possible end of the Free Trade Zones in Colombia

In Colombia, Free Trade Zones are those geographical areas of the national territory where industrial activities of goods or services or commercial activities are developed under special tax, customs, and foreign trade regulations. In relation to tax benefits, legal entities qualified as Free Zone users have a special income tax rate of 20% (the general rate for legal entities is currently 35%). On the other hand, in customs terms, it is important to highlight that these zones are located outside the National Customs Territory ("TAN" in Spanish), which means that the introduction and/or exit of goods between these types of zones are not considered imports or exports, respectively.

Among their main purposes are to serve as an instrument for the creation of jobs and the attraction of new capital investments. Also, this special regime allows these zones to consolidate as a development pole that promotes competitiveness in the regions where they are established.

These areas have generated around 147,000 jobs in the 22 departments where they are established. They have also reported investments of around COP$44 billion of which 13% represent direct foreign investment and generate 114.603 direct and indirect jobs in the country, thus generating growth in different sectors of industry such as heath, energy, paper and agro-industrial. In spite, this panorama is about to change if the project of the Tax Reform presented by the current Government gets approved.

However, this scenario is about to change with the approbation of the Tax Reform presented by the current Government. With this reform project, there could be a modification in the article 240-1 of the Tax Statute, which pretends to establish a ceiling of maximum sales to the national customs territory to continue with the special tax rate mentioned. In this context the project states that they 20% rate will only be maintained if the Free Trade Zone users achieve a threshold of operations in the national customs territory that must not be higher than 40% for the taxable year 2024, 30% for year 2025 and 20% for year 2026. Additionally, they propose that those users who fail to comply with this requirement for three consecutive yeas may lose they qualification, authorization, or recognition for the development of activities in these zones. Consequently, they will lose their benefits, even though they could still operate in these areas.

With this new scenario, some concerns arise considering that these modifications go against the purposes and objectives of the Free Trade Zones, including Colombia’s commitments with the World Trade Organization, by requiring users to export 80% of their total sales. It should be noted that these zones are tools for the instrumentalization and internalization of the Colombian economy, in that way, if this project is implemented, it would generate a threat and disincentive to the arrival of investments in the country, which also would negatively impact the creation of employment on which million of families depend.

Another concern expressed by the unions refers to the fact that most of the companies located in the Free Trade Zones are micro, small, and medium-sized companies. With this in mind, to achieve the objectives mentioned above, it is required that these companies build a gradual internationalization plans and processes that may last several years, and that are far from the business reality of the country. Consequently, the stability and the continuity of there companies are being threatened. Finally, it has been pointed out that there isn’t a law -in any country- that obligates a company to export their products or services, these, considering that exporting is a process that requires commercial dynamics to conquer markets that are very competitive.

All things considered; it is expected that the Government will reconsider this project since the new conditions required will risk the existence of around 1.009 companies operating in the 122 Free Trade Zones existing today in the 22 departments of the country. It would also drive away foreign investments and consequently, many jobs of people and their families would be lost. All these concerns are in detriment of the country’s economy growth.