Even though a less ambitious reform is likely to be approved, it will still create a complex operating environment in 2023
Gustavo Petro was inaugurated as president of Colombia on Sunday, making him the first leftist populist to lead the country and marking a substantial shift in public policy priorities. The next day, Petro’s finance minister immediately unveiled a new tax reform proposal, marking the new administration’s first major policy initiative, which will set the basis for Petro’s planned expansion to public spending. The reform stands to create a more complicated tax code in Colombia, raising burdens primarily, though not exclusively, for businesses and high-income individuals. While some adjustments are likely to be made through Congress, clients should expect the reform and most of its measures to be approved and implemented. B2B clients should prepare for increased price sensitivity from firms most impacted by tax increases, including those in the extractive and financial services industries, as well as those depending on free trade zone benefits. B2C firms should expect increased input price pressures, particularly for imported products, and some limited dampening of demand from higher-income consumers.
The Petro administration’s tax reform proposal is less ambitious in its revenue goals, aiming to bring in COP 25.9 trillion in new revenue, compared to the COP 75 trillion Petro called for during the campaign. However, it is extensive in terms of the breadth and complexity of its proposed changes to the current tax system.
The tax reform includes proposed measures that primarily impact high-income individuals making over COP 10 million, such as a permanent wealth tax and reduced tax deductions. Other measures would have broader impacts across consumer segments, including middle- and low-income individuals. These include the elimination of VAT-free days, a tax on sugary beverages and ultra-processed foods, and the application of the VAT tax to imported goods.
While the reform does not increase the nominal corporate income tax rate, a series of other changes would raise tax burdens on businesses, including reductions to tax incentives and deductions. At the industry level, targeted measures in the tax reform would have the greatest impact on burdens for financial services, oil and mining, and sellers of sugary beverages and ultra-processed foods. Firms operating in free trade zones also stand to be negatively impacted by changes in benefits and requirements.
The tax reform proposal is the first major test of both the Petro government and his complex congressional coalition. While we expect this less ambitious reform to be approved, it is likely that Congress will moderate some of its provisions. Even with some further moderations, the increased tax burdens for firms and consumers stand to dampen growth and private investment levels. This will create a complex operating environment in 2023, as other factors, such as still-high inflation and a US recession, weigh more heavily on growth in Colombia.
The tax proposal lowers Petro’s previous revenue goals, in part because the government expects high oil prices to further bolster revenue levels. However, even with this factor, Petro’s expansive public spending program will have to be curtailed to face the realities of lower fiscal revenue expectations. However, an expansion in public spending would still somewhat bolster growth and support lower-income consumer spending demand.
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