Opinion: On Colombia’s Tax Reform, The Experts Have Spoken

Ahead of the expected presentation of the tax reform to Congress next week, the ‘commission of experts’ have spoken with their views as to what needs to happen.

In summary there are over 50 recommendations however are a few that jump out to both myself and the local press. Some are very much general whilst others are in more detail.

• That the reform should be ‘fundamental’ as opposed to making adjustments in every facet of the tax code – traditionally Governments have gone for micro solutions.
• Widen the tax base for individuals, including taxing pension contributions etc – it sounds so obvious to tax more people at source but it is a subject that has been proposed, danced around and eventually thrown out. There is a reluctance to be the administration that makes this move.
• Eliminate some of the corporate exemptions and also the municipal ICA tax – the ICA tax always confuses and is simply another layer to understand, simplification has to be a key.
• Make VAT a global tax on all but a few products – this would surely have to be balanced by more VAT compensation payments to the most needy.
• Increase the tax on goods that are harmful to health – this has worked well on reducing cigarette smoking, one area of tough debate last time around in Congress was sugary drinks, it was proposed and defeated due to local interests.
• Removal of the 4/1000 financial transactions tax – this has been proposed before as removal or reduction but never happened. This tax was implemented on a temporary basis back in 1998 – it comes complete with the local saying “Nothing is more permanent than a temporary tax”.
• The Tax Free Zones need to be moved to a normal VAT regime – created to encourage international trade they are now open to local businesses which wasn’t the initial aim.

There are many more proposals but the overall theme is a more just system, more people contributing, more transparency and less loopholes. The Technical Secretary of the OECD, Bert Brys, put it in simple terms :

“Colombia’s tax system is not aligned with international best practices. The country suffers from a large fiscal deficit and this will have to be adjusted in a balanced way”.

Finance Colombia is pleased to offer a new opinion column by Rupert Stebbings. All opinions are those of the contributor.

In comparison with the OECD Colombia’s tax collection is low – at 19.3% of GDP it falls below Latam (23%) and well below the OECD average of 33.8%. Another issue is the high proportion (54%) of the tax collection which comes from the corporate sector.

FinMin Carrasquilla stated that he is looking forward to a debate in Congress next week – looking at the fuller list of proposals and given the politicians historical track record of watering down any reform, it may be a good watch.

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This will not be the only bill delivered to Congress. After a lengthy delay, caused in large part by the pandemic the Capital Markets Bill is also up for discussion.

The element of this that has captured the headlines is the expansion of competition when it comes to Pensions. Firstly, it appears that more financial institutions, such as brokers, will be able to offer pension funds – Colombia until a few years ago had 6 pension funds but that has fallen to four and this would help with the current concentration. Secondly the bill aims to change the fee structure into two elements. A fixed fee and then a variable fee based on performance – again this would be welcomed by consumers.

Another key aim, it appears, is to encourage fund managers to take more risk in order to increase returns for investors – the Capital Markets Commission in 2019 mentioned on several occasions that Colombia was a risk adverse environment.

There are many aspects to this bill which will need a lot of analysis by the market – however the fact that the experts have realized that change is necessary is a step in the right direction.

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Of course the tax reform is not the only challenge that Colombia faces economically – it is key for the Ratings Agencies however there are choppy waters ahead in many aspects.

New Central Bank Director Bibiana Taboada speaking ahead of her first meeting later this month discussed the complicated situation when it comes to rates. Inflation is well under control in Colombia – expectations are rising as per many countries as the pandemic slowly passes – but versus historic levels it remains very low. That would theoretically leave space for a further cut to overnight rates from the current 1.75% – however Taboada fears that could impact overseas investment into the market.

There has historically been a healthy carry-trade into Colombia and once again there is a healthy spread. However, with the US 10 Year expected to move above 2% in the medium term and TES benchmark rates already low – there is a fear that a further compression of the spread versus overseas rates could lead to a repatriation of bond funds.

Currently the demand for Colombian bonds seems to be in a healthy state given the swap carried out earlier this week. The Government swapped US$1.2bn of 2022 TES bonds for index linked bonds dated between 2029 and 2037.

The other question is whether moving rates from 1.75%-1.50% would make a difference in a market that has been enjoying record low rates for over a year, are there still parts of the economy who haven’t already jumped in ? The next CenBank meeting is on March 26 – at the last gathering the vote was 5-2, let’s see if there are further moves towards a dovish stance.

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Finally for this week – at the beginning of this week I talked about the fears of another Covid lock-down if there is over-confidence, as per Christmas, during the Easter holidays. Last weekend we got ourselves below 100 with the hope of staying there. This week the Government announced the country had now put 1 million vaccines into arms – slow but sure if we are generous – however whilst that is a low number, it is leading to a sense of complacency, here is another set of numbers :

85-92-96-97-100-125-130-138

Those are the Covid death numbers over the past 8 days – hopefully only a blip.

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