Colombia ranked last in the International Tax Competitiveness Index

A well-designed tax system is one that is easy for taxpayers to manage and can stimulate economic growth and provide sufficient revenue for government operations.

Now, poorly structured tax systems are expensive as they distort economic decision-making and negatively affect national economies.

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Well, the OECD’s International Tax Competitiveness Index, which serves as a tool to assess competitiveness, neutrality and the degree to which tax systems promote economic growth and fiscal stability, placed Colombia in last place.

This means that Colombia has the least competitive tax system among OECD countries. According to the Tax Foundation Index, this is due to the fact that Colombia has the highest corporate tax rate among these countries, at 35%, as well as the existence of a wealth tax and a tax on financial transactions.

Top-ranked countries in the International Tax Competitiveness Index (ITCI)

Estonia stands out in the International Tax Competitiveness Index for having the most competitive tax system in the OECD.

This result is due, according to the report, to its favorable tax structure: a 20% corporate income tax only on distributed profits, a flat 20% individual income tax that excludes personal dividends, a simplified property tax based on land value, and a territorial tax system that exempts foreign profits.

In second place is Latvia, thanks to its recent adoption of the same model as Estonia, which stimulates entrepreneurship and promotes investment, according to the report.

New Zealand ranks third, due to its relatively flat, low-rate personal income tax, which also largely excludes capital gains (resulting in a combined top rate of 39%).

In addition, the International Tax Competitiveness Index welcomes that New Zealand applies a broad value-added tax (VAT) and does not tax inheritances, property transfers, assets or financial transactions.

In fourth place is Switzerland. According to the Index, this country offers a competitive tax environment due to its relatively low corporate tax rate (19.7%), a low and large consumption tax, and a personal income tax that partially exempts capital gains.

The Czech Republic closes the Top 5 of the Index, as its policies do not tax long-term capital gains.

The lowest-ranked countries on the International Tax Competitiveness Index (ITCI)

Following Colombia, which as mentioned occupies the last place in the ranking, are Italy, France, Chile and Portugal.

Italy ranks 37th, that is, in the penultimate place in the OECD’s International Tax Competitiveness Index. Its tax system is characterized by multiple property taxes, with differentiated levies on real estate transfers, inheritance and financial transactions.

In addition, this Mediterranean country imposes a wealth tax on certain assets. Another reason why the index ranked Italy second to last is that its relatively high VAT rate of 22% is applied to one of the lowest consumption tax bases in the OECD countries.

France, Chile and Portugal round out the five lowest-ranked countries in the International Tax Competitiveness Index, ranking 36th, 35th and 34th, respectively.

France imposes various taxes on property, including those on inheritances, bank assets, financial transactions and a tax on real estate wealth, which placed it in one of the worst positions.

Meanwhile, Chile has an uncompetitive cross-border taxation system, “with a global tax system” and a small number of tax treaties, resulting in high withholding tax rates of 35% on dividends and interest.

Finally, Portugal has a high top personal income tax rate of 53%, including additional taxes.

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According to the publication, these nations, including Colombia and Italy, tend to impose relatively high marginal tax rates on corporate income or have complex tax rules with multiple tiers.

The bottom five countries in the International Tax Competitiveness Index rankings have above-average combined corporate tax rates.

Moreover, as established by the International Tax Competitiveness Index, these countries have unusually high corporate tax rates, ranging from 25.82% to 35%.

In fact, four of these five countries maintain top income tax thresholds that the Index considers disproportionately high, ranging from 13 to 21 times average income.

Global tax trends

In recent decades, all countries belonging to the Organisation for Economic Co-operation and Development (OECD) have experienced a substantial reduction in marginal tax rates on both corporate and personal income.

However, greater tax competitiveness does not necessarily imply higher levels of development or greater investment capacity, as there are other factors that influence economic performance. Some of them are the export capacity with added value, the weight of the industry in the economy, the country cost and the size of the market, among others.

Competitiveness and neutrality assessment

The International Tax Competitiveness Index is a tool designed to measure the extent to which a country’s tax system complies with two fundamental aspects of tax policy: competitiveness and neutrality. For more information on the subject, you can click here.

To determine whether a country’s tax system is competitive and neutral, the International Tax Competitiveness Index evaluates more than 40 tax policy variables, covering not only tax rates, but also structural aspects of taxation.

The Index examines corporate taxes, personal income taxes, consumption taxes, property taxes and the treatment of profits earned abroad. This analysis provides insights into the effectiveness of tax policies in OECD countries.

Competitive tax system

A competitive tax system refers to cases where low marginal tax rates are maintained.

According to the Tax Foundation, in today’s globalized world, capital is mobile and companies seek countries with lower tax rates to maximize the return on their investments.

High tax rates can divert investment elsewhere, reducing economic growth. In particular, corporate taxes are identified as the most detrimental to economic growth, according to the OECD.

Neutral tax system

According to the Tax Foundation, a neutral tax system aims to generate maximum revenue with minimum economic distortions. Thus, it avoids favoring consumption over savings, minimizes selective tax exemptions and ensures that tax laws are applied consistently to all companies and individuals.

Advantages of a competitive and neutral tax system

A tax system that effectively combines competitiveness and neutrality serves to promote sustainable economic growth and investment while generating sufficient revenue to fund government priorities.

Taxes play a significant role in shaping a nation’s economy. Together with other factors, they influence the economic performance of a country and its businesses.

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