The illustrations on the following pages visualize how the interaction of VAT exclusions and the FTZ exemption give raise to VAT revenue forgone in scenarios 3 and 4. Arrows represent financial flows. For simplicity, the illustrations only focus on FTZ users purchasing inputs from the national territory but the same reasoning holds for inputs purchased from outside Colombia.
OECD Tax Policy Reviews: Colombia 2022
OECD Tax Policy Reviews
Annex B. VAT revenue forgone linked to the Free Trade Zone exemption
Scenario 1
Infographic A B.1. Domestic consumption of non-excluded goods produced in Free Trade Zones
Source: OECD.
Result: As revenue forgone is a static concept that does not take into account behavioural responses such as price changes or the relocation of businesses, revenue forgone from FTZs is zero in the absence of VAT exclusions. Businesses can recover the input VAT paid in the absence of FTZs. The same applies to output goods taxed at reduced or zero rates. The FTZ does not increase the revenue forgone caused by these provisions.
Scenario 2
Infographic A B.2. Export of goods produced in Free Trade Zones
Source: OECD.
Result: Revenue forgone from FTZs is zero in the case of goods produced for export purposes as the VAT exemption on exports is part of the benchmark. Businesses can recover the input VAT paid in the absence of FTZs.
Scenario 3
Infographic A B.3. Sale of excluded goods from domestic to Free Trade Zone businesses
Source: OECD
Result: Revenue forgone increases if FTZ businesses purchase excluded goods from domestic businesses. Domestic businesses are allowed to reclaim input VAT if excluded goods are sold to FTZs (the exclusion turns into an exemption). Without the FTZ, input VAT paid on the production of excluded goods cannot be recovered. The fact that the non-recoverability of input VAT might lead to higher pre-tax price when the good is sold to the final consumer (and VAT is levied again on the transaction) is disregarded by the static concept of revenue forgone.
Scenario 4
Infographic A B.4. Domestic consumption of excluded goods produced in Free Trade Zones
Source: OECD.
Result: Revenue forgone increases if FTZ businesses produce excluded goods, which are then sold to the domestic market. This is because the input VAT paid on the production of an excluded good would not have been recoverable by a domestic business. FTZ businesses, on the other hand, do not pay input VAT) in the first place. We show the scenario in which FTZs purchase inputs from domestic businesses but the same logic would apply if these inputs were imports from abroad.