Colombia’s Tax Reforms: An Overview and Forecast

Colombia’s Tax Reforms: An Overview and Forecast

On 15th April, Colombia’s government presented its latest proposal for fiscal reforms to Congress, the so-called Sustainable Solidarity Bill (Proyecto de ley Solidaridad Sostenible). If made law, the bill will have wide ranging effects on taxation and social spending in Colombia. The bill has proved controversial, prompting criticism from parties on both the political left and right in the context of upcoming elections in 2022.

The Bill’s Background

An important cause of the introduction of the Sustainable Solidarity Bill is the Colombian government’s aim to reduce its debt and limit the growth of the country’s fiscal deficit. Due to the effects of the COVID-19 pandemic both domestically and internationally, Colombia saw its debt as a proportion of nominal GDP rise from approximately 52% in 2019 to around 65% by the middle of 2020

In addition, as a result of pandemic-related increased spending and reduced government revenues, Colombia’s Finance Ministry expects the country’s fiscal deficit to rise to 8.6% of GDP by the end of 2021, an increase on last year’s figure of 7.8%. As 2020’s economic shocks saw Colombia fall into its first recession since 1999, major credit rating agencies including Fitch Ratings and Moody’s revised Colombia’s rating downwards; in Fitch’s case, Colombia went from ‘BBB’ to ‘BBB-‘. Consequently, the Sustainable Solidarity Bill is also an important part of government efforts to assuage the concerns of international investors and financial bodies.

Dissenting Voices

The bill has received criticism from figures within President Iván Duque’s own party, Democratic Centre (Centro Democrático). Most significantly, Duque’s decision to present the bill in its current form was critiqued by party leader and former President Álvaro Uribe out of concern that it would harm the party; Uribe also expressed his opposition to the bill’s elimination of stimuli for Colombia’s creative and cultural industries.

Moreover, many of Colombia’s largest political parties including the Colombian Liberal Party, Radical Change and the Social Party of National Unity, which together take up 44 of the Colombian senate’s 108 seats, have signalled their objection to the bill, citing factors such as the detrimental financial effect it could have on already pandemic-stricken Colombians and a pressing need to address tax evasion and avoidance to justify their opposition. In one of the clearest indications of political and public defiance towards the bill, a commission led by unions including the Central Union of Workers (Central Unitaria de Trabajadores) called for a national strike on 28th April, leading to demonstrations across the country against the bill, as well as other public grievances.

It is quite likely that the context of upcoming presidential elections in 2022 is playing a role in parties’ opposition to the bill. As being seen to support raising taxes is likely to lose parties votes, it stands to reason that political resistance to the bill has been strong. Precisely because of the negative reaction to the bill, it is highly likely that it will not pass through Congress without significant alterations.

Forecast

Much of the controversy surrounding the proposed reforms relates to a 19% tax on utilities like gas, electricity and public services for those in Colombia’s stratum 4 and above (defined by housing, with 4 ostensibly middle class). Funeral services will also be taxed, a decision which has prompted criticism given over 72,000 total COVID-19 deaths in Colombia. The bill is also set to lower income tax thresholds after 2022 and, importantly for a country with a large informal economy, will also reduce the threshold at which individuals will be obligated to declare their income. 

Concerning notable changes aimed at corporations and other legal persons, the bill aims to abolish or adjust various tax benefits from 2023. For example, a number of tax discounts and exemptions concerning donations to creative and environmental causes are to be abolished, as well as discounts regarding the employment of older Colombians without pensions, among other groups. Taking this fact together with the aforementioned tax increases, it is quite likely that the proposed reforms could have a dampening effect on Colombia’s economic recovery from the pandemic over the short to medium term. This is because the tax increases may subdue demand, particularly if firms’ higher tax burdens are passed on to consumers.

Bearing in mind the proposed tax increases and the abolition of tax benefits on creative industries such as filmmaking, it is highly likely that consumer discretionary sectors including entertainment, hospitality and retail will be among the most heavily affected by the reforms. Nevertheless, in the long term the Sustainable Solidarity Bill has the potential to, as its name suggests, have a positive effect on Colombia’s socioeconomic stability. This is due to the bill’s establishment of a more progressive corporate income tax system and commitments towards increased social spending. In particular, tax revenues are to be used to expand the recently established Ingreso Solidario income support scheme, meant to assist Colombia’s most economically vulnerable households.

Of course, this is assuming that the bill is introduced in its current form and the government is able to generate the revenue it is hoping to by passing the bill. In reality, the large role played by income tax changes in the proposed reforms is liable to pose a challenge in the face of 2019 statistics which indicate a tax evasion rate equivalent to 30% of tax revenues per year. As a result, the potential for the reforms to help service Colombia’s debt and fund social schemes is likely to be diminished. Furthermore, the political opposition to the bill makes it likely that, if reforms are introduced at all, they will be significantly watered down and thus less likely to have a positive impact on social spending, improving Colombia’s deficit or assuaging international investors and credit rating agencies.

Categories: Latin America, Politics

About Author

Samuel Arnold-Parra

Samuel graduated from LSE in 2020 with a degree in International Relations and History. Since graduating, he has been building up experience in research and analysis. Currently, he is conducting voluntary research on Japanese national and sub-national responses to COVID-19. He is eager to use his skills in Spanish and Japanese to contribute valuable insights focusing on Japan and Latin America.