(Yicai) Nov. 9 -- Some Chinese companies are exploring building factories in Colombia amid the new government's move to cut corporate income tax and plans to offer preferential rates to qualifying large investment projects. However, they need to ensure tax compliance in advance to seize local opportunities, according to Carlos Miguel Chaparro Plazas, Tax Partner and Chinese desk leader at PwC Colombia.

In an interview with Yicai at the ninth China International Import Expo, Carlos, who is attending the event for the first time, said most Chinese companies he works with distribute products in Colombia. However, he has been talking to two firms that want to understand what it takes to set up a plant there, about labor costs, taxes, etc.

"If you go to Colombia, you will see consumer business, Chinese brands, cars everywhere," he said. "We have natural resources. We have a growing middle class. We have spending capacity.

"If you think about Colombia and Latin America, set up production there, you can use it as a production hub for the entire region, and that would be very beneficial for Colombia, for the Chinese company, for anybody," Carlos noted. “It's beginning to happen.”

In a survey by PwC China conducted last year, 47 of 48 Chinese companies with business in Latin America said they were operating or expanding in Colombia, with 22 firms having their regional headquarters there. In addition, China accounted for 28 percent of Colombia's imports last year, making it the country’s largest import source, according to preliminary data from the National Administrative Department of Statistics.

"The new government is incentivizing investment and Colombia is a trustworthy country," Carlos stressed.

Tax Cuts, Investment Incentives

Colombian President Abelardo de la Espriella, who took office in August, is pushing a tax reform, with the government submitting the Economic Rescue Law bill on Oct. 29, which would cut the corporate tax rate from 35 percent to 33 percent next year and 31 percent in 2028 and onwards.

In addition, the bill would also create a Regime for Generating Business Stability for large new investment projects, where projects starting in 2027 or 2028 would enjoy a 20 percent corporate tax rate, while those starting from 2029 would enjoy a 26 percent rate, with 16 years of  tax stability. The final tax rate on dividends paid to non-resident shareholders would fall to 8 percent from 20 percent. 

The regime is meant for "new investment, not necessarily a new company," though projects must be carried out through a newly created legal vehicle, said José Manuel Restrepo, vice president of Colombia, noting that the bill still needs congressional approval.

"I believe this government will make its promise true, will create the environment to bring more investment," according to Carlos. “Changes are coming, and we expect those changes to be for the better. We're hopeful that Colombia will create enough interest to bring Chinese companies to produce.”

Putting Compliance First

"There is more and more cooperation between local tax administrations and tax administrations in Europe, in the US," Carlos said. “Colombia's tax administration is using that knowledge to do execute quality audits and demand some adjustments, and this is why audits are coming not only for the Chinese companies, for many others.”

In the PwC China survey, 70 percent of companies said they had faced tax audits or disputes in Latin America, with 38 percent citing cross-border transfer pricing. When a firm shifts from importing and selling to local production, its intra-group transactions and profit allocation change, so it needs to adjust its transfer pricing arrangements accordingly.

"There's a lot of tax compliance, and then I think that's something that in the beginning they (Chinese companies) don't understand very well," Carlos noted, suggesting that firms need to find reliable advisers from the start rather than "hire the tax guy in the corner and just dedicate very little resources" to their tax function.

"You have to have your house in order so you can work on your business," he stressed. Things change quickly in Latin America, so "my advice to my clients in the Chinese corporate space is to be prepared and adapt to change so you can continue to do business," he added.

Chinese companies in Colombia should also develop local talent, he pointed out. “I feel like a Chinese company in Colombia really needs to have Colombian senior people in certain positions. Cultural exchange should be deepened.”

Chinese companies should bring Colombian employees to China "for some time, one, two, three years, over and over, and then send them back, so that would mean a lot in terms of established operation with a common mentality," Carlos said.

Editor: Martin Kadiev