Columbia is trying to keep the turmoil covered with a milder fiscal reform plan

Three months after the Colombian government provoked protests with a tax reform that was considered unfair to the poor and middle classes, the finance minister pushed for a more modest plan that puts more weight on companies.

The proposed review aims to raise $ 4 billion – about two-thirds of the initial package. While the first plan included an increase in value added tax (VAT) on certain items and an expansion of the tax base that would have meant more people paying income tax, the new version puts the burden on the private sector: its main pillar is an increase in the corporate tax rate from 31 to 35 percent next year.

“It doesn’t touch VAT, it doesn’t touch taxes on pensions and it doesn’t raise taxes on income,” Finance Minister José Manuel Restrepo told the Financial Times. “Why not? Because we’re still in a pandemic and we have to be empathetic with what people are going through at the moment.”

The government presented the first plan in April, but the reaction against it was so fierce that President Iván Duque had withdraw it in a few days. The Minister of Finance who drafted it, Alberto Carrasquilla, renounced.

The protests turned to me weeks of widespread anti-government demonstrations on a number of issues. While most were peaceful, there were brutal clashes between some protesters and police where at least 24 people were killed. Local non-governmental organizations say the figure is twice as high.

Restrepo was brought in to write the revised plan, which he will put into congress on Tuesday, when another major anti-government protest is planned. The initial response from political parties has been largely positive, suggesting that it should be approved without too many changes. The minister said he expected it to be over by the end of August.

He said the increase in the corporate tax rate would be around $ 1.8 billion for a Treasury that has been heavily extended by spending to alleviate the impact of the coronavirus pandemic. The government hopes to raise another $ 1 billion from the changes to the rules on the payment of Industry and Commerce Tax (ICA), which is being raised locally. So far, companies have been able to deduct 100 percent of their ICA payments from their income tax bill but by next year they will be able to deduct only 50 percent.

In what will be good news for bondholders, the revised plan will abolish a tax deduction for foreign fixed-income investors that until now was at 5 percent.

“The idea is to attract investment,” Restrepo said. “This change puts us on par with other countries in the region such as Peru, Panama and Uruguay.”

In all, the government hopes to collect 69 percent of the total $ 4 billion from changes to the tax regime and the remaining 31 percent from efficiency savings and a crackdown on tax evasion.

Like other Latin American countries, Colombia has been hit hard by the pandemic. After expanding to 3.3 percent in 2019 – the highest growth rate of any major economy in the region – the Colombian economy contracted by 6.8 percent last year, its biggest decline record. It was about average for the region: the Brazilian economy did better while the Mexican, Argentine and Peruvian economies suffered.

This year, the Colombian economy is projected to rebound by about 6-8 percent, reaching pre-Covid levels by the end of the year.

Restrepo said the government expects the fiscal deficit to touch 8.6 per cent this year before falling to 7 per cent next year and 4.7 per cent in 2023.

The reform plan includes changes to Columbia’s fiscal rule, which was introduced in 2011 and sets limits for exceeding the government’s budget. From now on, the rule will include a “debt anchor” designed to ensure that national debt remains below 55 percent of gross domestic product. It jumped from the pandemic to more than 65 percent. The plan is expected to drop 10 percentage points over the next decade.

As a result of the turmoil on the original plan and the poor finances of the country, Columbia lost its precious, ten-year investment status this month, when Fitch followed in the footsteps of Standard & Poor’s and plunged Colombia into debt for the issuance of long-term sovereign debt.

Restrepo acknowledged that it would take Columbia perhaps several years to regain the investment grade but said that, independently, “Colombia is and will remain a fiscally responsible country with or without investment grade status.”

Across the region, countries are struggling with debt and broader fiscal deficits due to the pandemic, and many are likely to try to pass their tax reform packages in the coming months.

“Columbia will be something of a reference for the rest of the region,” he said.

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