THINKING

Analysis of Decree 2147 of 2016: Is the National Government’s bet on investment and competition the right move?

Last December, the Ministry of Commerce, Industry and Tourism issued Decree 2147, which includes all the regulations related to the regime of free trade zones in Colombia, thus integrating all the applicable provisions and modifying many facets relevant to different industries in the country.

The aforesaid Decree was issued to generate investment in the country from different economic sectors, speed up procedures related to applications for free trade zones, promote competition and generate employment.

SECTORS AND INDUSTRIES THAT BENEFIT

The regulation includes the establishment of the following free trade zones: zones for the creation of technology parks, zones for goods, zones for services, zones for agribusiness, zones for the production of milk products, zones for healthcare services, zones for the exploration for and production of hydrocarbons and zones for off-coast operations. Users of free trade zones include operators, goods and services industries, commerce, administrators and exhibitors (depending on the type of free trade zone requested).

Anyone seeking to request the establishment of a free trade zone must meet a series of requirements set out by the Ministry of Commerce, Industry and Tourism and present technical, legal, economic, financial and market feasibility studies. These requirements will be evaluated by an Inter-Sector Committee created for that purpose made up of: the Ministry of Commerce, Industry and Tourism, which will preside over it, the Ministry of the Treasury and Public Credit, the Director of the National Planning Department, the Director General of the Special Administrative Unit, the Ministry of National Taxes and Customs and a delegate from the Presidency of the Republic. Following the approval and affirmation of viability from said committee, the existence of a free trade zone shall be declared by an Administrative Act issued by the Ministry of Commerce, Industry and Tourism.

The requirements include that the area be continuous and greater than twenty hectares, and also be suitable for the infrastructure of the industrial, commercial and/or service activities to be carried out.

It is important to note that three different kinds of zone are planned, and each has specific requirements:

Permanent free trade zones. An area on national territory in which multiple industrial and commercial users are located and enjoy special tax, customs and trade benefits, which shall vary depending on the case in question. The term during which these zones are effective is a maximum of 30 years, which can be extended by 30 more years, regardless of the initial term.

Special permanent free trade zone.  An area on national territory where only one industrial user is located that will enjoy special tax, customs and trade benefits. The term during which these zones are effective shall not exceed thirty (30) years although if the initial declared period is shorter, the full thirty years may be requested as an extension. Once the initial 30 year period is completed, no extension is possible.

Temporary free trade zone: An area on national territory where national and international fairs, exhibitions, congresses and seminars of importance to the economy and/or international trade are held, which shall enjoy special tax, customs and trade benefits. These free trade zones may be granted for the temporary period during which the event in question will be held. The main characteristic is that it shall require a minimum area of 30 square metres for the offices of the monitoring entities.

Special requirements are necessary for the establishment of each free trade zone: however, the new decree states that investments and employment may begin following the presentation of the application for the establishment of a free trade zone meaning that while the applicant waits for an answer they can develop the initial infrastructure stages of the project while enjoying the benefits being applied for.

Before the presentation of an application for the declaration of a free trade zone, the investor must meet with the Technical Secretary of Free Trade Zones in order to carry out an inspection of the documentation required for the application, although this will not involve a detailed analysis of the content of the documents and their appendices. Once the Technical Secretary has carried out the verification of the documents, the interested party shall be able to present the project to the Ministry of Commerce, Industry and Tourism and start to carry out investment and generate employment.

However, this is no guarantee that the declaration of the free trade zone will be approved so the risk is assumed by each investor in question.

This should be taken into account not only when considering investment in infrastructure, there is also the question of what will happen to the new jobs that are generated in anticipation of the creation of a free trade zone if the application does not come to fruition. The legal uncertainty created by these provisions is a questionable aspect of the scheme.

The regulations also state that during a 3 year period following the declaration of a free trade zone, each applicant must meet certain requirements that, if not met, would result in the designation being withdrawn, meaning that investors should take special care. For example, for the free trade zone for healthcare services, a subsequent investment of specific sums set out in article 33, and the generation of new jobs, are required.

SPECIFIC FACTORS FOR KEY SECTORS

  • In the permanent special free trade zones for tourism services, the sale of retail merchandise shall be allowed for industrial services and commercial users.
  • In special permanent free trade zones for healthcare services, within the defined area the retail sale of goods connected to the provision of healthcare services for companies shall be allowed. The merchandise purchased there shall be subject to applicable legislation in the rest of the territory and shall not enjoy the benefits of the free trade zone.
  • The exit of supplies, medications and devices imported from overseas supplied to patients that are directly related to treatment carried out within the free trade zone for healthcare services shall require monitoring and authorization via the form for the movement of merchandise, which shall replace a customs declaration.
  • In the hydrocarbon sector, for a free trade zone to be declared, a contract signed with an operator from the National Agency of Hydrocarbons is required. This contract will determine the term during which the zone exists. When the declaration of the zone applies to several different contracts with the National Agency of Hydrocarbons, the term of the free trade zone will be for the longest contract.

The National Government’s plan is to convert the main cities of the country into platforms for exports, increasing the production of goods and services, skilled labour and foreign investment by attracting different companies to create synergies between the different sectors involved.

Scrutinizing the new regulations, the sector that sounds most promising for the development of this initiative is Hydrocarbons, which already has two pre-approved off-shore free trade zones:  Anadarko and Repsol Exploración Colombia. Ecopetrol has also applied for the declaration of a free trade zone which is expected to cover 998.092 hectares for exploration and production activities.

Currently there are 109 declared free trade zones in Colombia distributed as follows: Bolívar (17), Cundinamarca (16), Antioquia (11), Valle del Cauca (10), Atlántico (8), Magdalena (7), Cauca (6), Norte de Santander (6), Bogotá (4), Santander (5), Huila (2), Caldas (2), Meta (2), Risaralda (2), Nariño (2), La Guajira (2), Córdoba (2), Costa Afuera Caribe (2), Cesar (1), Tolima (1) and Quindío (1).

It is expected that the new regulations will increase this number, but it will depend on the interests of the industries who are considering this option as a means of expanding their investments.