The tax increases come as Colombia’s economy slows substantially amid high inflation and rising price sensitivity, hindering firms’ ability to pass the costs to customers through price increases
In November, the Colombian government approved a new tax reform that raises tax burdens primarily on firms and high-income individuals. B2B clients should expect rising tax burdens to further dampen demand in 2023, compounding challenges from inflation and slowing economic growth. The reform’s impact on B2C demand will be relatively limited given that tax increases will hit the more-resilient high-income consumer segment. Clients should closely review the tax reform’s measures to identify exposure to its impacts on local operations and customers. When considering price increases in order to offset higher tax burdens, clients should be mindful of increased price sensitivity among B2B and B2C customers in 2023 as inflation remains high and growth slows.
The measures included in Colombia’s 2022 tax reform generally center around the removal or adjustment of a series of tax exemptions and benefits, including those dealing with new investments and free trade zones. Additionally, the reform includes some new taxes on sugary beverages and processed foods. The extractive industries, particularly oil and mining, are the hardest hit by this reform and are the single largest category as far as projected new tax revenue. The new measures impacting these firms include the elimination of their ability to deduct royalties from taxes. The tax reform is projected to bring in new revenue of approximately COP 20 trillion, shy of the COP 25 trillion sought in the government’s original proposal.
Colombia is the only major market in Latin America to have implemented a tax reform since the outbreak of the COVID-19 pandemic, and now it has adopted a second one, making it a major outlier in the region on this front. Both the 2021 and 2022 reforms substantially increase tax burdens on businesses, with the 2021 reform raising the nominal corporate income tax rate from 30% to 35%.
These new tax increases will take effect as the Colombian economy slows substantially amid high inflation and rising price sensitivity. As such, firms will face substantial challenges shouldering these higher tax burdens and face difficulty passing them to customers through price increases. At the same time, the increased revenue will support the Gustavo Petro administration’s expansionary spending plans, including bolstering of cash transfers to households. The tax reform marks the first major policy initiative of the Petro administration and sets the tone for the direction of his administration. The partial moderation of the government’s original proposal by Congress during the legislative process aligns with our expectations going forward for Petro’s reform agenda.
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