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Colombia prepares to raise taxes

2021-04-07T23:22:30.693Z

The country seeks to cover the fiscal gap left by spending derived from the pandemic with which it is heading to be the first post-pandemic tax reform in Latin America



Food deliverymen during a protest in Bogotá, Colombia, on October 8.Luisa González / Reuters

Sugar, salt, chocolate and coffee have been the topic of conversation in Colombia these days due to fears that a tax reform promoted by President Iván Duque will make these and other goods more expensive.

The proposal has yet to be presented or sent to Congress, but recommendations made by a commission of experts have been on the authorities' desk since last month and Colombians are already speculating about how the new legislation will affect their pockets.

Colombia, the fourth largest economy in Latin America, suffered a 6.8% drop in 2020 - the deepest since it has been recorded, according to data from the National Administrative Department of Statistics (Dane).

The Government made a decision, at the beginning of the pandemic, to order strict confinements and make direct economic transfers to needy families, spending the equivalent of 5.7% of their gross domestic product (GDP) on support, loans and guarantees, according to a report released by the International Monetary Fund this week.

This increased their debt.

In 2021, the Government estimates that the debt as a proportion of GDP will reach 64.8% and, even with a tax reform that allows the Government to collect more revenue, the level of debt will not drop significantly until 2031. The Government is expected to send to Congress its proposal in the next few days.

If the reform passes, Colombia would become the first country in Latin America to raise taxes to cover the fiscal gap left by the covid-19 pandemic.

Mexico may be next.

The Government wants to increase tax collection by 15 trillion pesos, about 1.5% of GDP.

To achieve this, a committee of experts proposed 12 specific measures, including expanding the taxpayer base, since almost half of the economy is informal, pursuing tax evasion, eliminating some benefits that add up to almost 17 trillion pesos in taxes. and simplify the tax system so that it is easier to pay taxes and it costs the State less to manage resources.

Experts have also proposed eliminating some exceptions to the value added tax (VAT), which has many Colombians concerned about which commodities will go up in price.

The controversy surrounding the price of sugar, salt, chocolate and coffee has been such that President Duque addressed the issue on Wednesday in a morning television program and assured that the prices of these goods will not rise.

"I am going to say it in a very clear way: those four products are going to be kept as they are today," said the president.

“That is the instruction that I have given to the Ministry of Finance.

As they are today: those who have, of those four, those who have zero VAT, will remain at zero VAT;

and those that have VAT five, will remain in VAT five, as they are.

In other words, they will not suffer any increase ”.

The Duque Administration refers to the reform as the Sustainable Social Transformation Agenda and has assured that it will not come into force in 2022 and will be felt In the interview on Wednesday, Duque argued that it is necessary to raise taxes to protect the most vulnerable populations and the most affected by the pandemic.

"Many people say that this is not the time to carry out a tax reform," said Duque, "I think we have to be clear: it is not a concept only of a fiscal nature, here what we are looking for is to maintain the social programs that are they need to protect the most vulnerable in the midst of the pandemic and stabilize public finances ”.

“When do you feel the big effect in terms of collection?

In 2023, when I am no longer president of the republic and I say it because this is not a reform for me, it is a reform so that the country has that protection of the most vulnerable and stabilizes its public finances in a structural way, "he added .

The expanded social programs created during the pandemic will continue this year, added the president, at the same time that the government must freeze, for at least between five and ten years, the hiring of payroll and the acquisition of goods and services, which would save about 1% of GDP.

In an interview with EL PAÍS, the general manager of the Bank of the Republic of Colombia, Leonardo Villar, defended that "the approval of this package of fiscal reforms will be very important to maintain the trust that has traditionally existed in the Colombian economy."

Colombia's sovereign debt suffered a deterioration in its rating in April of last year, when the prices of oil exported by the country fell in international markets and as a result of the increase in government spending due to the pandemic.

Today it retains the coveted investment grade, which keeps financing costs relatively low, but if a reform that increases collection is not passed, the rating is at stake.

"It will be necessary to return to the fiscal rule that was suspended for 2020-2021 due to the severity of the economic contraction to stabilize and begin to reduce the debt burden and increase the credibility of the fiscal rule framework," said rating agency Fitch Ratings in your most recent report.

“However, a credible fiscal consolidation process is not the only key factor that would help stabilize the rating.

A return to sustained economic growth above 3% will also be key ”.

Colombia has a history of approving tax reforms after an

economic

shock

, as well as a long history of prudent and consistent macroeconomic policies, Fitch said.

“A greater popularity of President Iván Duque through the coronavirus crisis could help the Government pass difficult reforms in Congress until mid-2021. However, an electoral cycle in 2022, which includes Congressional elections and a presidential primary in March and May 2022, respectively, could limit the time to pass major reforms before the campaign begins in earnest in the last three months of 2021 ″.

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Source: elparis

All business articles on 2021-04-07

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