Memorandum of Conversation, by Mr. Albert H. Gerberich of the Division of North and West Coast Affairs
|Participants:||Mr. Brown, ITP|
|Mr. Mills, NWC|
|Mr. Gerberich, NWC|
|Mr. Palmer, FN|
|Mr. Gray, CP 1|
|Mr. Araujo and Mr. Gutierrez Gomez, Colombian Economic Mission|
Mr. Brown began by saying that we have received a message from Ambassador Beaulac indicating that the Colombian Government prefers to pursue here talks regarding the proposed taxes to increase Colombian revenue, and asked the Colombian Ambassador if he had heard anything along that line. The Ambassador replied that he had also received word from his Government to continue the discussions in Washington.
Mr. Brown then said that we have thoroughly gone over the suggestion made Monday2 that the stamp tax be increased from 4% to 12% as a substitute for the exchange taxes, and we still think it would be better for the Colombians to impose quantitative restrictions along lines not conflicting with GATT and ITO and raise revenue by internal taxation. He said that we are unhappy about the imposition of [Page 457] different exchange taxes for different kinds of products, and consider this an undesirable instrument to use. If we would agree to it, the 1936 Trade Agreement would have no significance.
Mr. Araujo replied by saying that he and Mr. Gutierrez are on a different mission here, but they know the background of the problem and realized at the start that difficulties would be encountered. Going into the history of the present measures, he said that the Trade Agreement was negotiated on the basis of the Colombian Tariff of 1930, when the peso and dollar were equivalent in value. All tariff duties were specific, not ad valorem.
Since 1936 Colombian revenue needs have grown with the country and all taxes have had to be increased. In 1936 customs duties amounted to between 35 and 40 million pesos, or about 60% of the budget, while income capital and excess profits taxes amounted to only 14 million. The latter now represent 110 million, while in the same period customs duties have proportionately decreased. Last year only 55 million pesos were collected from customs duties while 130 millions were collected in direct taxes. Income taxes have been increased two or three times, the most recent income tax having been decreed last June. The consumption taxes on items like beer, tobacco, matches, stamped paper, etc., have all been increased.
It is hard to establish a sales tax in Colombia. 80% of the people can’t be taxed because of under-consumption. The Department of Boyacá, for example, which has a million inhabitants, imports practically nothing; all articles of consumption are locally produced largely by home industry. Last year more than a million children could not go to school in Colombia because there was no money for teachers or buildings.
The problem is a tremendous one. The Government is trying to cut down the average deficit of 40 to 50 million pesos every year for the last several years by means of new taxes, but it is almost impossible to overcome in this way. The Colombians feel that they have almost reached the limit that they can go in this direction, and an increase in customs duties seems to be the only solution.
The second part of the problem is the tremendous deficit in balance of trade, coupled with increasing depreciation of the currency from year to year. The Colombians have tried to bring down their annual expenses below 350 million dollars, and have been unable to do so. The roads can hardly be maintained under the present budget. Salaries and living expenses are all going up. One could live better on a salary of 600 pesos eight years ago than on 1500 today. Since 1936 in many necessary items the cost has gone up 500%.
When the Colombian Fiscal Committee considered a possible sales tax it found that except for cement, textiles, sugar and one or two others, all Colombian industries are so small that additional taxes [Page 458] would kill the local enterprises. A 10% sales tax would automatically and instantly wipe out pottery, leather, and other small industries. This sort of tax is therefore no solution to the problem. 90% of the people of Colombia have never worn shoes. Only 20% of the people use imported goods. In some departments (he mentioned Boyacá, Narino, Huila and Tolima) the tax wouldn’t raise enough money to pay the cost of collection.
Mr. Mills asked if he considered the income tax collection system efficient, saying that he recalled that a merchant in India keeps three sets of books; one for himself, one for his partner, and one for the tax collector. The Ambassador said that he admitted the Colombians haven’t a perfect organization for collecting taxes, and have only fines—no jail sentences—for tax evasion. However, the system is much improved, and is pretty good, for Colombia. He said they caught a lot of tax dodgers last year by exempting them from the penalties of a false return for past evasions if they pay up on current income, and their methods of obtaining the rightful amount of revenue are getting better.
Continuing, Mr. Araujo said there are 35,000 payers of income tax in Colombia, and no more. All the others can’t pay. This is a good reason why they prefer not to assess such taxes above the ones now in force. They have also tried to depreciate the currency, but this would give no relief and would increase inflation.
Mr. Mills said that one thing that worried him is the 7% or 10% bonus that is being turned over to the coffee growers from the exchange taxes. He wanted to know if that was necessary.
Mr. Araujo replied that the Government had established, with the consent of IMF, a system of exchange certificates giving preferential treatment to exporters of new articles of commerce. At once the coffee growers protested, saying it was unfair. The Government is now trying to attack the problem from another angle, and will abandon the so-called bonus.
The Committee also considered a general tax of 15% on imports. This was thought unwise, as it would assess drugs and medicines, for example, equally with jewelry and other luxury items. Mr. Brown inquired if it is not true that the Colombian tariff has higher rates on luxuries than on essentials; Mr. Araujo said this is true, but each luxury item is covered by a separate measure. Mr. Mills remarked that the Colombians are therefore following the policy—except for essentials—of charging what the traffic will bear. Mr. Araujo said that this was correct.
Summing up, Mr. Araujo said that Colombia has immense social problems, as he hoped he had demonstrated, and the only source of additional revenue that seemed logical was an increase in the customs duties, as they alone haven’t changed in the last 18 years.[Page 459]
Mr. Brown thanked Mr. Araujo for his able exposition, in excellent English, of the difficult situation, and said that the specific nature of his discussion was extremely helpful to us. He added that we want to see that Colombia’s needs and our needs are both met to the fullest extent possible, and that it is for that reason that we go to them with our questions. He said that he understood that Colombia is considering a revision of its import tariff, and wondered if they considered revising it on an ad valorem basis.
Mr. Araujo said that would be extremely difficult, and cited the common falsification of invoice values as a major deterrent factor. He said that there was no plan to change all specific duties to ad valorem.
Mr. Gutierrez then said he wanted to say some things and ask some questions, but he preferred to express himself in Spanish. He said that he felt that the exchange taxes were the logical solution, as they will remove the pressure on the balance of payments, whereas quotas would not. He did not believe that they violate the Trade Agreement. He asked whether the disapproval would have been equally severe if Colombia had decided instead to devaluate the peso. Mr. Brown replied that devaluation should be resorted to only in a very serious situation. Mr. Gutierrez remarked: “Exactly—and this is a serious situation.” Mr. Brown said that probably we would not object to devaluation if it was approved by the IMF.
Ambassador Restrepo then said he would attempt to put the whole problem on a practical basis. He said it was impractical for us to discuss whether the exchange taxes are a violation of the Trade Agreement or not; the Colombian Government holds they are not, and the United States Government holds they are. He did not wish to become involved in a discussion of this difference in point of view. He wanted to point out, however, that the tax was already in existence at the time of the Trade Agreement; and the Colombian Government increased this old tax. The Ambassador said he could understand that there were important principles and commercial considerations involved, and both sides want to reach a satisfactory solution. He had proposed at our last meeting a 12% stamp tax, which does not seem to be viewed more favorably than the exchange taxes. However, he felt sure that a compromise, a new “deal”, could be reached without abandoning any principles. He again mentioned the ad valorem problem, saying that Colombia is not yet ready to put its tariff on that basis, and cited the evasion of exchange regulations this year in the case of parcel post packages. He suggested that we do not discuss the juridical aspect of the problem, but try to come to an agreement in the old “good neighbor” spirit.
Mr. Brown said that he was in agreement with the Ambassador on a number of points: 1) We desire a speedy solution to the problem; 2) A discussion of whether or not there has been a violation of the Trade [Page 460] Agreement will not aid in reaching a solution; 3) We are anxious for selfish and unselfish reasons to have our neighbors in economic health and prosperity, and want to help Colombia in particular to come to that condition. But we want to be sure Colombia is helping herself. He had already mentioned in a former meeting the unsatisfactory conditions under which foreign oil companies operate, and which adversely affect Colombia’s foreign exchange position. And then there are points of principle, of trade policy, at stake, as the Ambassador had pointed out. He impressed on the Ambassador that he was obliged to be frank and rather searching in his questions because he can anticipate what sort of questions will be asked when the matter goes before our Congressional Committees.
The Ambassador said he had been a Representative and Senator himself, and could understand Mr. Brown on that point. About the oil situation, he said he had sent his Government an urgent message, giving his recommendations, after the discussions he had with us on the former occasion.
It was agreed that another meeting would be held on Monday or Tuesday of next week, depending on whether or not Mr. Willoughby is free to meet with us.