July 14 2000 Emergency Tax Could Become Permanent Holguín Neira Pombo Abogados | Banking & Financial Services - Colombia Banking & Financial Services Since enactment in December 1998, the '2x1000' tax on financial transactions has been a source of controversy between the national government, the financial sector, economic analysts, businessmen and general users of the financial system. Although it was originally announced as a temporary measure, the government has proposed legislation that would make it permanent. The 2x1000 tax was originally introduced by emergency decree, as a source of revenue to be used by the government to rescue failing financial institutions. It was intended to expire at the end of 1999. However, it was extended until December 2000 with the National Development Plan, to provide the government the funds needed to support the reconstruction of one of the main coffee-growing regions in the country (the Quindio and Risaralda areas), devastated by an earthquake in January 1999. Pursuant to the current version of the tax, all transactions that involve (i) the disposition of funds deposited into cheque or savings accounts (eg, drawing of cheques, cash withdrawals and wire transfers) or (ii) the issuance of cashier's cheques by financial institutions, must pay a 0.2% tax on the face value of the transaction. The amount to be paid by the customer is directly debited from his or her account every time a transaction subject to the tax is effected. Financial institutions have indicated that the tax: limits the development of new financial services; reduces the volume of payments conducted through the financial system (customers are resorting to cash transactions and the endorsement of cheques in favour of third parties); and may induce an increase in interest rates, which would hamper ongoing economic recovery. The increased use of cash has lead analysts to surmise that Colombia may follow the trail of Peru, where a similar tax has induced a preference for cash (a preference that is one of the highest in the world). As the legislation expires in December 2000, the government has approximately six months to get Congress approval for the proposal, so that there is no interruption in the application of the tax. The proposal has already been approved by a House of Representatives committee, but in all likelihood the debate will continue in the subsequent stages of the legislative process. For further information on this topic please contact Juan Carlos Duran at Holguin Neira y Pombo Abogados by telephone (+57 1 312 2473) or by fax (+57 1 312 2513) or by e-mail ([email protected]). The materials contained on this web site are for general information purposes only and are subject to the disclaimer.