Tax reform package key to trade and investment in Colombia's economy

Colombia began 2019 with a raft of tax and fiscal reforms designed to stimulate local and foreign investment, though there are concerns that some of the measures may hinder growth in the short to medium term. Headlining the changes in the Financing Law, which came into effect on January 1, 2019, is the progressive reduction of corporate income tax from 33% in 2019 to 30% in 2022, along with the repeal of a 4% surcharge on corporate earnings. It also provided for the repeal of the presumptive income tax, an alternative tax based on a percentage of net equity from 2018, which will fall from a rate of 3.5% in 2019 to zero by 2021.

Speaking after the bill’s ratification in mid-December 2018, President Iván Duque said the law would encourage entrepreneurship and investment by reducing tax commitments for businesses of all sizes. “Removing the burden from those who generate employment, motivating investment and taking resources to the countryside is what we will do with this law,” he said.

Sector Targets

In addition to broader tax reform, the law features a series of incentives designed to boost growth in targeted sectors. For example, in an effort to incentivise development in the tourism industry, the corporate income tax assessed on new and refurbished hotels, new theme park projects, ecotourism parks and agro-tourism developments has been adjusted to 9% for a period of 10-20 years, depending on the activity.

Meanwhile, entrepreneurial activities in agricultural, technological and creative industries will be eligible for a tax exemption on earnings below 80,000 tax units, equivalent to around $850,000. The exemption period is seven years for tech and creative industries, and 10 years for those involved in agriculture. These measures tie into efforts to develop the so-called Orange Economy – made up activities in the arts, publishing, technology and the like – which the government has identified as a key potential source of revenue.

Furthermore, projects that employ more than 250 people and invest more than 30m tax units ($320m) for a period of at least five years will qualify for benefits over the course of 20 years. These include a reduced income tax rate of 27%; eligibility to depreciate assets over a two-year period; and exemptions to presumptive income, equity and dividend taxes. A handful of activities will not be eligible for those benefits, including the exploration of non-renewable resources, infrastructure projects and the development of free trade zones.

Financial Levy

The package also imposed a temporary surcharge on bank earnings. Institutions with taxable income greater than 120,000 tax units ($1.3m) will pay an additional 4% tax in 2019, before the rate declines to 3% in 2020 and is phased out by 2022. That surcharge has sparked criticism from parts of the financial sector. Pablo Trujillo, chairperson of Bogotá-based financial firm Accion Fiduciaria, told OBG, “The new tariffs on dividends and higher earnings effectively roll back any perceived benefits brought on by the reduction of the corporate income tax.”

Fiscal Challenge

Several of the President Duque’s proposals to reduce the fiscal deficit were not included in the bill passed by Congress, including new taxes on basic foodstuffs and a reduction of the value-added tax from 19% to 17%. As a result, revenue projections for 2019 were scaled back from COP14trn ($4.4bn) to COP7.1trn ($2.2bn), prompting Alberto Carrasquilla, the minister of finance, to state that the government would look to freeze COP6.5trn ($2.1bn) in spending.

While the reforms should catalyse new investment, credit ratings agency Fitch warned that the tax cuts were likely to be detrimental to the public balance sheet, especially if offsetting factors like oil prices prove less favourable than projected.

“The net impact of the various tax measures will be close to zero in 2020 as the impact of corporate tax cuts is felt,” the agency stated in December. Fitch also warned that without increasing oil and tax revenues, the state could struggle to meet its deficit targets of 2.4% and 2.2% of GDP in 2019 and 2020, respectively.