Colombia - Works for Taxes

Colombia - Works for Taxes

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Yale School of Management
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When the FARC-EP (Fuerzas Armadas Revolucionarias de Colombia – Revolutionary Armed Forces of Colombia) officially disarmed in June of 2017, a long and bloody 50-year struggle ended. The conflict had touched all areas of Colombia, but the FARC’s control had been concentrated in rural regions, where the group controlled wide swaths of territory. With the end of the conflict, the federal government faced the question of how to rebuild these rural areas, labeled the Zones Most Affected by the Armed Conflict (ZOMACs).

In an effort to jumpstart development, the government initiated a Works for Taxes program. Starting in 2017, corporations whose businesses were located in the ZOMACs could undertake infrastructure projects for a reduction in their tax liabilities. Many corporations had long-standing operations in the ZOMACs, having worked out accommodations with the FARC during the conflict. In 2017, the government turned to these companies to improve rural areas and reintegrate them into the national economy.

In order to receive tax rebate, a company had to qualify (only large companies were considered) and propose an undertaking that would improve local conditions in the regions under consideration. Federal and local officials approved those projects that they believed fulfilled regional priorities. Once a project was approved, the company would take responsibility for implementation (contracting or utilizing its own resources). When the government certified that the company had finished the work, the company could deduct the agreed-upon cost of the project from its tax bill, up to 50% of its total tax liabilities.

The program presented a classic principal-agent situation. The government, as principal, was contracting with businesses (the agent) to accomplish important state priorities. But could the incentives for the two sides be aligned to ensure that both the principal and agent benefitted from the arrangement? Should the government increase the scale of the program or implement additional rebate programs (for example, “Works for Royalties”)? Alternatively, should the program be limited and seen as a stopgap measure to deal with the immediate time after the end of the conflict?

By 2019, there were some initial undertakings to evaluate. Large companies such as Parex, Corona, and Mineros had been awarded and completed projects. The results of these first rounds were mixed. What were the commonalities among the successes and the failures?

Publication Date:  2020-03-22

Suggested Citation: Nicolás Jiménez, Jaan Elias, Greg MacDonald, and Ian Shapiro, "Columbia - Work for Taxes: Post-Conflict Development of Rural Zones" Yale SOM Case 20-026, March 22, 2020.

Keywords: development, principal-agent, oversight, FARC

Teaching Note: No