09 de August 2018
The Challenges that the US tax reform pose for the attraction of foreign investment
The recent tax reform by the US government has intensified competition for the attraction of foreign investment worldwide. Invest in Bogota, in association with the company Araújo Ibarra, carried out an analysis of the effects of these decisions on the economies of Latin America, as well as of the opportunities for foreign businesses installed in Bogota.
The tax reform approved by the US government at the end of 2017 is having profound effects on the international markets of goods and services, at the same time as it agitates competition for the attraction of foreign investment worldwide.
In addition to various “modifications to incentivize the repatriation of capital to the US territory, the reform reduced corporate tax from 35% to 21%. At first sight, this is an incentive enough to motivate North American corporations to maintain or repatriate their investments”, highlights a recent analysis conducted by Invest in Bogota and Araújo Ibarra, the consultancy firm in international business.
The document, in addition to explaining the main changes that the US tax reform brought for American companies located abroad, analyzes the potential impact of the arrival of direct foreign investment flows from the world to the United States. This is in addition to the effects on foreign investment located in Latin America. Likewise, it delivers a series of recommendations on what the country should do to strengthen its position as a strategic country for direct foreign investment and external commerce in the Latin American region.
Effects on Latin America
On the account of various changes to incentivize the return of capital to the United States, it is expected that North American corporations will be tempted to maintain or repatriate their investments. According to the document, this type of measures will obligate “the Latin American region to revise its tax competitiveness. Such a radical reduction of taxes requires decisive actions that will allow the region to continue being attractive, not only due to lower workforce costs.”
For Martín Gustavo Ibarra, CEO of Araújo Ibarra Associates, the US tax reform constitutes “a great challenge for Latin American countries, which will need to analyze how they can complement North American tax proposal with the incentives offered by each duty-free zone and special economic zone. The former, to generate regional and hemispherical value chains, especially using the free trade agreements that the US has today with 11 Latin American countries.”
The document concludes that it is necessary to generate a public-private dialogue to evaluate strategies to improve the country’s competitiveness, not just from a tax standpoint, but also with the intervention of other variables that affect competitiveness at a regional level. The commercial and cultural integration of the Pacific Alliance also acquires relevance to the extent it will allow the region to get closer to new markets, especially to Asia.
“With the new national government coming in, we need to revise and analyze the tools Colombia has to keep being a competitive country in the attraction of direct quality foreign investment,” added the Executive Director of Invest in Bogota, Juan Gabriel Pérez.
The recommendations proposed by the document include the modernization of instruments for the attraction of direct foreign investment and the promotion of exports looking towards the transformation of production factors in the 21st century. This is in addition to the promotion of the use of duty-free zones as the only valid instrument that allows businesses in Colombia to compete directly with countries with 21% tax rates. Moreover, the document suggests the generation of strategies to attract high value-added investment projects with a strong research component; development and innovation; and the promotion of co regional productive development strategies.
To read the document, The Effects of the US Tax Reform on Direct Foreign Investment in Bogota, click here.