What new initiatives is Ernst & Young (E&Y) involved in here in Latin America?
JARAMILLO: E&Y Latin America is currently concentrated in diversifying its product portfolio. Our aim is to match our local services with the portfolio offered by the company on a global scale. For example, we are improving our services in Mergers & Acquisitions by assisting on capital market transactions. Given the position of Colombia and Brazil in the global market, E&Y is putting additional effort into facilitating foreign investors with in-depth valuation analysis and capital transformation strategies. Moreover, it is very important for our local needs to establish world standards in assurance and regulatory reporting services, such as financial statement audit, IFRS reporting, financial accounting, and internal audit. In general, I have to say that E&Y Colombia is working very hard to offer world-class services in advisory, assurance, taxation and corporate finances.
What is your business mix at present? How do you anticipate this will evolve?
JARAMILLO: E&Y has experienced amazing growth since the year 2000. We started with 90 people, spread in assurance and administration. Currently, we have 900 specialists working on assurance, audit, advisory, and tax. Assurance practices take close to 45% of our operations and the rest of the 55% is spread between the advisory and tax services. An interesting fact is that the market for capital market transactions takes only 10% of our product portfolio. However, I can assure you that this one is the fastest growing market for us due to the increase in foreign investments.
Colombia ranks very highly on the World Bank’s Ease of Doing Business Report, at number 42 overall. However, it ranks very low in several categories, including getting electricity and enforcing contracts. What needs to be done to improve these areas specifically?
JARAMILLO: The energy sector is very important for the country’s integration into the global economy. Oil and gas has experienced exponential growth in the past years. With our local value proposition, in terms of low barriers to enter the market and up-to-date technology to process heavy crude oil, we have been able to exploit new fields of this market. With the new opportunities in mining, I have to say that Colombia will continue to improve in this area.
What kinds of taxes do potential investors need to be aware of?
JARAMILLO: In terms of taxes, the government is currently adjusting the tax system to promote banking services among locals and to ultimately improve the economy. I strongly believe that this reform will tackle most of the problems of the current tax system. For example, a reduction in our income tax rate will take place along with adjustments in tax binding between corporations and share holders. Currently, we are working at an income tax rate of 33%, a VAT of 16%, and circa 1% of municipality tax, which varies by region. The tax reform will further promote financial institutions among locals by reducing or demolishing the tax on financial transactions, which is 0.4% at the moment. This is not good for the economy because it incentivizes people to walk around with cash instead of using the banking system and that’s not good for the country.
What are the greatest challenges for foreign companies in Colombia today?
JARAMILLO: The greatest challenge that foreign companies are facing in Colombia is the country’s poor infrastructure. Since the urban areas are spread across the country and the roads have not been improved, there are difficulties in logistics. Furthermore, there are limitations in air and sea travel. However, the current government has been working very hard to improve the general infrastructure of the country. I do believe that this challenge presents a huge investment opportunity for foreign companies. Colombia really needs foreign capital to build a solid infrastructure. Another challenge that the government is struggling to overcome is bureaucracy. The system is very rigid and needs to be simplified to further facilitate foreign companies. Unfortunately, last year’s weather conditions were very influential on foreign investments. So, I have to add climate to the list of challenges for foreign companies as well.
In terms of taxes, the government is currently adjusting the tax system to promote banking services among locals and to ultimately improve the economy. I strongly believe that this reform will tackle most of the problems of the current tax system.
What is your general economic outlook for Colombia? Which indicators are showing the most positive trends and which are showing the most negative?
JARAMILLO: I am very positive about the economic outlook for Colombia. Indicators such as growth and controlled inflation are proof that the economy is stabilizing. Despite the fact that the government has to emphasize even further on reducing the unemployment rate, the country is definitely moving forward in terms of new employment opportunities. Due to the increased foreign interest in our country, we have a low interest rate and a low exchange rate. On one hand, this is a benefit for foreign companies. On the other it has a negative influence on our exports. This can be attributed to the global economic crisis as well. Another positive indicator is the generation of new labor opportunities, especially for young people and women over the age of 40. The government is promoting this generation of labor by deducting taxes from companies who create additional work placements. In a global perspective, economies are reducing costs by reducing human capital, which I find to have a rather negative outlook on the economy. By having this reduction in taxation, the government has brought a further incentive to employ minorities and create a diverse human capital.
Which sectors currently provide the best investment opportunities?
JARAMILLO: Actually, oil and gas continue to be the most attractive areas for investment. Colombia will be further developing the energy sector with new projects in mining. However, the government is working to preserve the environment and structure mining in a way that it is not going to be destructive to our beautiful country. Therefore, this sector is experiencing slower growth. I do believe that this is an excellent opportunity for foreign investors to bring their know-how and develop a solid infrastructure without harming the environment. Agriculture is the other sector that offers various investment opportunities. For example, the east part of Colombia is already establishing itself as an agricultural centre, with foreign investors in corn and sugar cane processing. My personal opinion is that we have to take advantage of our natural resources and position ourselves as major food producers.