The bill’s passage is uncertain, particularly with the 2026 presidential elections approaching. However, the breadth of the proposed changes warrants close attention. A summary of the key provisions, based on a document from PwC, is outlined below.

Value Added Tax (VAT)

The proposed reform includes several significant changes to the Value Added Tax (VAT) system:

• Online Gambling: Online gambling would be permanently subject to VAT, a measure that is currently in place temporarily until the end of 2025. This would also require non-resident operators to register for, collect, and file VAT where applicable.
• Filing Frequency: The VAT filing frequency would be standardized to every two months for all registered suppliers, a change from the current system, where some businesses file four times a year.
• Input VAT Creditability: The window for claiming input VAT credits would be reduced from eight to six months.
• Self-Charging VAT: Large taxpayers would be required to self-charge VAT on taxable services imported into Colombia.
• Fuel Oils: Taxation on fuel oils would be increased through adjustments to the taxable base and higher rates.
• Cultural and Sporting Events: Recreational, cultural, and music festivals, as well as sporting events, would be subject to a 19% VAT.
• Low-Value Shipments: The “de minimis” exemption for low-value shipments would be eliminated.
• Digital Services: The VAT exemption for cloud computing, hosting, and software licenses for digital content would be removed. This change is likely to impact non-resident providers selling services to VAT-unregistered customers in Colombia.

Energy Sector

The energy sector would also see significant changes:

• Extraction Tax: A 1% tax would be imposed on the extraction of coal and oil for domestic sale or export. This would apply to taxpayers with a taxable income of $585,000 USD or more in the previous year.
• Coal Producers: The income tax brackets for coal producers would be tightened, aligning them with those for oil producers.
• Renewable Energy: The 50% “super deduction” for qualified renewable energy projects would be replaced with bonds redeemable over 15 years. Supplies for these projects would become zero-rated.

Corporate and Capital Gains Tax

Several changes are proposed for corporate income and capital gains taxes:

• Financial Industry Surcharge: The surcharge for the financial industry would increase from 5% to 15%, in addition to the 35% headline corporate tax rate.
• Deductibility of Expenses: Withholding tax would become a prerequisite for the deductibility of costs and expenses.
• Amortization: Tax amortization of fixed-term assets and shares would be permitted.
• Capital Gains Tax: The capital gains tax for lotteries, raffles, and gambling would increase from 20% to 30%. The 15% rate for the sale of fixed assets would remain, but the required ownership period would increase from two to four years.
• Non-Resident Dividend Tax: The tax on dividends paid to non-residents would increase from 20% to 30%.

Personal Income Tax

The proposed reform would also impact personal income tax:

• Withholding Tax: The current withholding tax system, based on a 12-month average, would be replaced by a system based on monthly income tax brackets. The top marginal rate would increase from 39% to 41%.
• Dividend Tax Credit: The dividend tax credit for individuals would be eliminated.

International Taxation

The bill includes several provisions related to international taxation:

• Sale of Shares: For direct sales of shares, non-resident sellers would be required to provide proof of filing and tax payment to the local recipient’s agent. Both the agent and representative would be jointly liable for any outstanding taxes.
• Indirect Sales: Joint liability would be introduced for any unfiled income tax returns from the seller in indirect sales.
• Corporate Restructuring: Corporate restructurings using “effective place of management” rules would need to be reported to the tax office and in financial statements.
• Information Exchange: Failure to provide data for automatic exchange of information could result in the closure of bank accounts.
• Permanent Establishments: Taxation for permanent establishments would be aligned with the rules for tax residents.
• Related Parties: Limitations on costs and deductions for related parties would continue to be lifted if they are arm’s length compliant, but withholding tax would still be due where applicable.

Digital Taxation

The proposed reform also addresses digital taxation:

• Significant Economic Presence: The tax rate for taxpayers with a “significant economic presence” who elect to file annual income tax returns would increase from 3% to 5%.
• Digital Assets: Digital assets would be outside the scope of income tax, except where they represent underlying assets. They could also be eligible for tax amortization.
• Indirect Disposal of Assets: The indirect disposal of assets in Colombia through the international transfer of digital assets would become subject to income tax.

Tax Amnesty

The bill includes provisions for a tax amnesty program:

• Penalties and Interest: Penalties and interest could be reduced under certain circumstances for unfiled returns, unpaid taxes, or ongoing tax disputes, provided the underlying tax is fully paid.
• Undeclared Assets: Underreported assets or over-reported liabilities as of January 1, 2026, would be subject to a 15% complementary tax rate, without triggering penalties or interest.

Miscellaneous Provisions

Other notable provisions include:

• Excise Tax: Excise tax rates for beers and liquors would be leveled to 30%, with a broadened taxable base based on liquor content.
• Amended Returns: The window to file amended returns to pay more tax or increase a tax receivable would be tied to the statute of limitations (3 or 5 years).

The proposed tax reform is extensive and could have a significant impact on businesses and individuals in Colombia. As the bill makes its way through Congress, taxpayers must stay informed of any developments.

Finance Colombia will continue to monitor the progress of this legislation. Readers are encouraged to follow financecolombia.com for the latest updates.

Gustavo Petro at his 2025 Labor Day rally. Photo credit: Presidencia de la República de Colombia.

I am a professional photographer and use Japanese cameras and lenses. Colombia does not make any such equipment, and sellers and resellers here have outrageous prices. I therefore have no other option but to import my camera gear. 

My Experience: A $500 USD Lens Becomes a $750 USD Purchase 

Last month, I bought a camera lens online for $500 USD and paid $53 USD for DHL shipping. Colombia’s law clearly states that any item worth less than $200 USD is exempt from customs duties. This makes sense – it helps small importers and regular people who buy personal items online for their personal use. 

But here’s where the system becomes unfair. Instead of applying duties only to the amount above $200 USD, DIAN charges customs fees on the full $553 CIF value (item plus shipping costs). This is how my customs fees were calculated: 

• Gravamen Arancelario: 10% on $553 USD = $219.000 COP

• IVA (VAT): 19% = $457.000 COP

• Manejo de Envío: $123.359 COP

• IVA Sobre Manejo + Cargo: 19% on $123.359 COP = $23.438 COP

Additional fees and calculations bring the total to exactly what I paid. Total customs charges: $822.797 COP (about $200 USD)

This means I paid an additional 40% of the item’s value in Colombian customs charges and taxes, turning my $500 USD lens into a $750+ USD purchase when you include shipping and customs fees. 

Questions in my mind 

• Should there be an IVA levied on the basic duty? Note: I am not buying my lens from Colombian Customs. 

• What is the handling fee for? Is that not covered in the basic customs charges? 

• Is the DIAN system a penalty for importers? That does not make sense: Colombia does not make the item, and it has to be imported. 

The Core Problem: Ignoring the $200 USD Exemption 

The law says items under $200 USD are exempt from duties. Logic tells us that for items over $200 USD, only the excess amount should be taxed. If someone imports a $199 USD item, they pay zero duties. But if I import a $201 USD item, I suddenly owe duties on the full $201 USD, not just the $1 USD over the limit. 

This creates a massive jump in costs for items just over the threshold. It’s like having an income tax system where earning $1 USD more pushes you into a bracket that taxes your entire income at a higher rate, not just the excess. 

How Other Countries Handle This Fairly 

Most countries with de minimis thresholds apply them correctly. In the United States, items are exempt from duties up to $800 USD, and duties apply only to amounts above that threshold.  

For example, using my case, if someone imported a $553 USD item to a country with a $200 exemption (like ours should work), they would calculate duties on $353 USD, not the full $553 USD. This makes the exemption meaningful and creates fair treatment across different purchase values. 

The Impact on Colombian Consumers 

This current system hurts regular Colombians in several ways: 

• Economic burden: People buying essential items like medical equipment, educational materials, or work tools (including IT equipment which are not made in Colombia), face unexpected costs that can double their purchase prices. 
• Unfair treatment: The current system means the $200 USD exemption is essentially worthless for most imports, as courier shipping typically costs $30-60 USD, pushing most items over the threshold. 

Photographic equipment that cannot be repaired in Colombia, and has to be sent to the USA for repair. The cost of parts, service, and courier will push the total cost above $200 USD. 

Reduced competitiveness: Local businesses that need to import supplies or equipment face higher costs, making them less competitive compared to companies in countries with fairer customs systems. 

Discourages small business: Entrepreneurs who want to import small quantities of products for resale face prohibitive customs costs that make their business models unworkable. 

A Simple Solution 

DIAN should change its calculation method to apply customs duties only to the amount above $200 USD. Using my example again: 

• Item value: $500 USD

• Shipping: $53 USD

• Total CIF: $553 USD

• Taxable amount: $553 USD – $200 USD = $353 USD

• Customs duties would then apply only to the $353 USD

This would reduce my customs fees from $200 USD to about $110 USD, making the exemption meaningful and fair.

Time for Reform 

If the shipments are equal to or less than $200 USD, they are exempt from customs duties – this is what the law says. But DIAN’s interpretation makes this exemption almost meaningless for most imports. 

Other countries manage to implement fair de minimis systems without losing significant revenue. Colombia can do the same. The current system doesn’t just hurt individual consumers – it reduces our economic competitiveness and discourages the kind of small-scale importing that helps diversify our economy. 

I call on DIAN to review their calculation methods and implement a fair system that honors the spirit of the $200 USD exemption. Colombian consumers deserve customs policies that support economic activity, not systems that create artificial barriers to fair trade. 

The law already exists. We just need DIAN to apply it fairly. 

Photo credit: Mano Chandra Dhas.

It is important to always ask for an electronic invoice, as cash register or handwritten receipts are non-reimbursable.

Foreign tourists may request the refund of sales tax – VAT for the purchase of taxed movable property as long as the value of each sales invoice is equal to or greater than three (3) units of tax value – UVT (equivalent to $38,004 pesos in 2022 and $42,412 in 2023. The maximum refund is 200 tax value units, so in 2023 that would be $8,482,400, or over $1,700 USD as of publication.

Colombian residents are not eligible for VAT refunds. The goods purchased must be leaving the country with the foreign visitor, and the purchase must be supported by electronically traceable invoices. In other words, the retailer would have submitted the purchase to the DIAN electronically. Most major Colombian retailers do this automatically, as they are required to by law, for all retail transactions. Eligible invoices and receipts will have a CUFE code that starts with CUFE: Followed by a long string of letters and numbers. It is important to always ask for an electronic invoice, as cash register or handwritten receipts are non-reimbursable.

There are traveler service points for processing refunds located at major airports, seaports and land border crossings. Look for either DIAN offices, or self-service kiosks before security checkpoints that will be staffed by either DIAN officials, or Global Blue, their outsourcing contractor.

Based in Medellín, Humberto Rodriguez is bilingual, and accredited in Colombia as both a lawyer and accountant.

Allow yourself extra time when traveling to complete the refund application procedure at the airport or border crossing. You will need:

• The refund request form, available on-site
• Passport and/or other appropriate identification
• The actual products that you purchased and are taking with you out of Colombia
• The physical or emailed electronic invoices

The DIAN may take up to one month to process refunds, which in most cases will be returned via the credit card the traveler used to make the purchase. VAT refunds only apply to merchandise, not services.

For questions about VAT refunds, please do not contact Finance Colombia! Instead, contact Rodriguez & Asoc. Bilingual tax specialists in Colombia at info@rodriguezasociados.co or click on the banner below.

This guest article is published as a courtesy to readers. Finance Colombia is a news publication and does not provide financial, legal, or tax advice. This information is provided as general news and the reader must consult is or her own counsel in order to make qualified, informed decisions. Information, rules, procedures, and laws may (and almost certainly will) change, and Finance Colombia assumes no responsibility for accuracy or timeliness of information.

Headline image by Tracia from Pixabay

The new tax bill places export duties on coal by up to 10% and petroleum by up to 15% depending on commodity prices and raise taxes on Colombians earning more than $2,000 per month (10 million pesos, precisely). The law also removes the tax deductibility of petroleum royalties paid to the government by both coal miners and petroleum producers.

With petroleum and coal being Colombia’s most economically important exports, the shock drove the peso, already down 25% the past year, to a historically low $5,070 COP to the USD. Finance Minister José Ocampo complained that the markets were “overreacting,” while defending the package saying: “This is the most progressive reform in history! There are obviously some sectors which will pay more taxes, but all have high earnings.”

Dividends will be taxed at 15% and the wealth tax will be 0.5% on assets exceeding 3 billion pesos, 1% on assets over 5 billion pesos, and 1.5% on assets over 10 billion pesos.

A new 5% tax is imposed on digital streaming services such as Netflix and HBO Max with at least 300,000 subscribers in Colombia. This is not restricted to video, but also applies to audio streaming and web portals.

The Senate bill must go through a reconciliation process with the house bill before the president signs the final version.

The Petro administration sought to impose a 20% tax on churches, but that measure did not pass congress in the heavily Catholic country. Colombia already has a Value Added Tax (VAT, or IVA in Spanish) Taxes were also rejected on bread, sandwiches, crackers, honey, milk and yogurt, but will be placed on the following foods:

• Other dairy products besides milk and yogurt
• Sausages, meat, offal, insect-based food (ants are a famous snack with some Colombians)
• Prepared or preserved meats
• Confectionery items
• Chocolate, basic and prepared
• Baking and pastry mixes
• Cereal
• Pastries and bakery products
• Jams, marmalades, and jellies
• Ice cream

Above photo: Colombia’s taxation chief Luís Carlos Reyes (left) & Finance Minister José Ocampo in congressional chambers (photo: Twitter account of President Gustavo Petro)

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. 

——————————————————————————————————-

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.

————————————————————————————————————–

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.

————————————————————————————————————–

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.

With the next tax holidays scheduled for July 3 and 19, the government, stung by criticism is moderating its tactics significantly. While it has not canceled the tax holidays, Duque’s government has prohibited retail in-person sale of household appliances, computer equipment and televisions in large retail stores to avoid crowds of shoppers.

“It is necessary that the local authorities adopt extraordinary, strict and urgent measures complementary to those dictated in relation to the containment of the virus and advance in the recommendation of processes, procedures and guidelines to be followed by citizens, in order to guarantee that people who converge in commercial establishments, considered to be large stores, avoid crowds and spread the coronavirus,” said a joint circular issued by the Ministry of Commerce Industry & Tourism along with the Ministry of the Interior.

Appliances and electronics could still be purchased according to the government, but via e-commerce online for delivery or for consumer in-store pickup during the two weeks following the tax holiday.

Mayors and local health authorities were further empowered to impose additional restrictions and safety measures, and the government also encouraged local officials to consider establishing crowd-limiting restrictions such as access schedules based on cédula (identity card) numbers and genders.

“We could see that in some parts of the territory there were crowds and disorder also occurred, and, of course, we all regret that situation.” —President Ivan Duque

Colombian news media spent the week beforehand hyping up the day, and the government suspended the curfew measures that had up until then kept Colombian deaths from the COVID-2 Novel Coronavirus under 2,000. When the day arrived, last Friday, all hell broke loose. Even though many of Colombia’s principal retail chains like Falabella and HomeCenter were under investigation for unethical pricing practices, raising their prices to erase the savings that Colombians would otherwise realize by escaping the normal 19% VAT, mass-market consumers flocked to stores creating a “black-Friday” environment.

Twitter Meme: How to make a casket with the box from your new television!

PARA LOS QUE SALIERON EL DIA SIN IVA pic.twitter.com/40D0NX22Oc

— WILSON CASTAÑO (@WilsonC37686776) June 20, 2020

Several large retail stores had to be shut down because they became so crowded, they violated occupancy rules. Giant lines formed outside of many retail establishments, not to check out, but waiting to even enter the store. Retail outlets throughout the country had to shut down because they simply became full beyond capacity. The secretary of health in Cali, Colombia’s third largest city called for stores to be shut down because of crowding.  On Caracol television, epidemiologist Dr. Jaime Ordóñez Molina called Friday a “mistake that should not be repeated.”

The governor of Meta department, Juan Guillermo Zuluaga said “A discount is good for nothing on purchases in the day without VAT if we leave infected with Coronavirus!! Luis Ernesto Gómez in Bogotá confirmed that the discount store Alkosto had to be closed because crowds were out of control in the face of health measures.

The New York Times published an article that started: “Hundreds of thousands of Colombians braved lengthy lines on Friday to take advantage of a one-day lifting of sales tax, even amid a coronavirus quarantine and nearly 10,000 new confirmed infections in just five days…”

COVID Friday

Friday, Bogotá’s Mayor Claudia Lopez took to Twitter to ask the National Government “with the utmost respect to reconsider making another COVID Friday.”

Equivocarse es de humanos, aceptar y corregir es de sabios.

Le ruego al gobierno nacional no provocar otro viernes de Covid que malogre el cuidado.

Basta con determinar que el próximo #DiaSinIVA sea exclusivamente para compras por internet.

Primero la vida que la plata ?? pic.twitter.com/N2NomIVw4V

— Claudia López ? (@ClaudiaLopez) June 20, 2020

Colombia has yet to know what the public health consequences will be from this experiment in going from a strict public health curfew to a retail jamboree. While there are many calls from Colombia’s business sector, members of the informal economy that barely eke out a living, and micro-entrepreneurs in the tourism and entertainment sectors to reopen the economy, doing so in a reckless way unjustified by science not only puts lives at risk, but it jeopardizes the progress and recovery that Colombia dearly needs and the progress relative to other countries that has been made.

“Dia Sin Orden” (Day Without Order)

Many Finance Colombia readers can make valid arguments for reopening the economy, and that’s fine. Do so if the experts say it is prudent, but that could have been done without this “Dia Sin Orden.” Is Colombia’s VAT too high? Yes, Finance Colombia’s editorial position is that it is a brake on growth, however that is a separate issue. Lower the VAT in a fiscally prudent way, reopen stores in an epidemiologically rational way, but this past Friday was a dangerous fiasco that should not be repeated.

The president correctly indicated that “this pandemic and this virus will be present for a much longer period,” and attempting to put a positive spin on the day’s events Friday evening added that ““the truth is that we must learn from the lessons that today leaves us with: the positive ones, which are many, and also learn from those spaces where citizen behavior was not adequate, so that it is not repeated.”

Yes, true. Citizen behavior in some cases left room to grow, but it was Duque’s decision to hold this, the first of 3-total planned “Dias Sin IVA” lifting curfews specifically to fill the stores with shoppers and empty them of merchandise. He got what he wanted, what else could he expect? With many retail outlets having to close due to public health orders, not even they realized the full benefit of the VAT tax exemptions.

Let’s hope the human cost doesn’t far exceed the 19% savings on a brand new big screen TV.

Do you agree or disagree? Comment below.

Front page “Dia Sin IVA” photo used as example and courtesy of Mikel Agirregabiria from Twitter and of a “Dia Sin IVA” in San Vicente de Baracaldo Spain in 2014 from Flicker.

According to the most recent ACP economic report “Double covid-19 crisis and price war industry: impact for Colombia and the hydrocarbon sector,” with the current crisis it will be necessary to severely curtail investments and production of oil budgeted for 2020, and the group projects a daily drop of 35,000 barrels, which could reach 100,000 if the Brent reference crude price remains below $25 USD a barrel the rest of the year. This situation, added to the already high costs of operating in Colombia, means that the revenues per barrel fail to cover the average costs to produce oil in the country.

The ACP report, prepared based on information provided by the managers of a representative group of the private production companies, indicates that the national average of operating costs is between $20 – $25 dollars per barrel. For its part, the “break-even” or balance point to cover costs of production in Colombia is located between $40 and $45 dollars a barrel, that is, below this range, companies earn revenue that barely covers their current cost of production.

“The price crisis and high uncertainty have led companies to reduce investments, closing wells and fields, with a serious impact on employment, the contracting of goods and services and in the economic dynamics of the producing regions; this without counting the effect on the collection of royalties, taxes and contractual economic rights, and their impact on the finances of the nation,” said Francisco José Lloreda Mera, president of the ACP on a morning conference call with reporters today.

• A daily drop of around 35,000 barrels of oil is expected, which could reach 100,000 if Brent remains below $25 a barrel the rest of the year.
• ACP says that regulated oil transportation rates for pipelines represent around 45% of the total cost of operation.
• Tax revenues of the central government and the regions could fall more than 75% due to the petroleum crisis.

“The national government is aware of this, important measures have been taken, but an urgent intervention in pipeline transportation rates, as they are excessively high compared to the cost of production, are not internationally competitive, and are the main obstacle to companies in this difficult situation,” said Lloreda.

The industry leader further explained that “pipeline transportation is the only link in the chain of the sector whose cost in recent years has remained practically the same, representing around half of production costs, is not manageable by E&P companies because it is regulated by the Ministry of Energy, and various studies show that it is excessive; so it is essential that the tariffs are reviewed not only for the moment of price crisis and for the sustainability of the industry in the short term, but the current methodology should be structurally reformulated towards the future,” added Lloreda.

Measures taken to date

In order to mitigate the double crisis caused by Covid-19 and the fall in international prices, the Colombian government has advanced in actions for E&P (Exploration & Production) contracts with the National Hydrocarbons Agency (ANH) related to extension of terms and reduction of bank guarantees. Likewise, for all taxpayers, progress was made in the refund of VAT balances and flexibility in the tax schedule. Finally, additional measures were announced to defer payment of economic rights.

According to ACP, these decisions are extremely important to the industry and are expected to help preserve E&P contracts, future investment and to partially alleviate the burden on companies to support their sustainability during the crisis.

“The reduction of contributions of this sector to the national economy, which is projected at more than 75% compared to 2019, is critical at this time when more income is required to help the population more vulnerable to the economic and social emergency caused by Covid-19. We hope to continue advancing in the search for effective measures with the government that allows us to continue operating and mitigate the crisis in the sector, while preventing a devastating effect on employment and the regional & national economy,” emphasized Lloreda.

Photos courtesy ACP

The Ivan Duque Administration’s recently released 2020 Financing Plan targets a central government deficit of 2.2% of GDP, down from 2.5% last year. However, Fitch believes this is based on optimistic assumptions for GDP growth (3.7%, versus Fitch’s 3.3% forecast) and tax revenues, which the plan sees remaining stable at 14.3% of GDP.

The Economic Growth Act  approved by Colombia’s congress late last year contained a number of tax measures. Some, such as corporate tax rate cuts and tax credits for VAT on capital imports, were retained from the 2018 Financing Law that the Constitutional Court had declared unconstitutional on procedural grounds. Others, including VAT tax holidays on three days of the year and VAT rebates for the poorest 20% of the population, were late additions to the act and will further undermine fiscal performance.

“Frequent revisions to fiscal targets and reliance on one-off extraordinary measures have reduced policy credibility.”

Even without these additions, the tax credits would have made meeting the 2020 deficit target difficult. Fitch estimates that the act could result in lost revenue worth as much as 1% of GDP with the additional measures. Efforts to improve tax administration could mitigate, but will not fully offset, these losses. Revenues from divestments and higher dividends from Ecopetrol and the Central Bank will likely help contain fiscal underperformance again this year. However, the gains would not be permanent, and the revenue impact of further corporate tax cuts will be felt from 2021 and 2022.

Last year’s central government revised deficit target of 2.7% of GDP was met, and the deficit still narrowed from 3.1% in 2018. Tax revenues rose 9.8% to yield an additional 0.4% of GDP, where we had expected 0.6%, but the government boosted revenues with one-off measures, using “excess reserves” at state-owned Ecopetrol for an additional dividend worth 0.3% of GDP.

The Colombian authorities’ record of prudent and consistent macroeconomic policies has underpinned macroeconomic and financial stability. However, frequent revisions to fiscal targets and reliance on one-off extraordinary measures have reduced policy credibility and contributed to Fitch’s revision of the Rating Outlook on the country’s ‘BBB’ sovereign rating to Negative in May 2019.

General government debt/GDP has steadily risen over the past six years to an estimated 44.7% in 2019 (versus the ‘BBB’ median of 41.1%) from 29.9% in 2013, although this has partly been driven by the recognition of contingent liabilities as well as the weaker peso. Debt to GDP is expected to rise modestly again in 2020, due in part to a weaker peso.

Structural improvements in public finances, for example through measures that permanently increase revenues, could face political and popular opposition. The additional VAT holidays and rebates were added to the act after large protests in November and December against rumored pension cuts, inequality and the slow implementation of policies agreed in the 2016 peace deal that ended the FARC insurgency.

An uptick in cyclical economic growth has supported revenues. Fitch estimates that real GDP growth accelerated to 3.2% in 2019 from 2.6% the previous year, and domestic demand will keep growth broadly stable this year. The VAT rebates will support consumption, while VAT credits and lower corporate taxes should boost private investment. Strong consumption has contributed to a widening current account. This has been largely financed by robust FDI, but a sustained rise in external debt could put additional pressure on the sovereign rating.

After years of elevated results, inflation fell within that range at the beginning of 2018 and remained at or below 3.2% for a six-month stretch throughout the middle of 2018. The year-over-year rate has begun to creep back up, however, reaching 3.33% in October, the highest figure since January.

As inflation began to fall back closer to 3% in the first half of the year, the Bogotá-based Banco de la República seemingly ended an interest rate-cutting cycle that took the nation’s key interest rate down from a high of 7.75% in November 2016 to its current 4.25%.

The most recent cut, of 25 basis points, came in May and the central bank committee members have not made any intervention in subsequent meetings over the past six months.

“Monetary policy actions taken so far are compatible with the process of convergence of inflation to its 3.0% target, and aim at achieving this target in coordination with the general economic policy,” said Banco de la República in a statement this week.

It added that the “board will continue to carefully monitor the behavior of inflation and the forecasts for inflation and economic activity in the country, as well as the international context.”

In mid-November, the Banco de la República forecasted inflation to end 2018 at 3.3%. It also expects 3.3% inflation for 2019, while noting global economic risks and exchange-rate factors that could alter that prediction.

Another economic factor that could alter the trajectory of inflation is the proposed tax cuts by Colombian President Iván Duque. While the has altered its proposal, which is ultimately up to Congress to finalize, early versions of his plan to raise more revenue for the government included value-added tax increases and other provisions that some analysts said could lead to large jumps in inflation.