Itaú BBA - COLOMBIA – Tax reform re-approved

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COLOMBIA – Tax reform re-approved

Dezembro 20, 2019

Despite tax reform approval, we note that Colombia's fiscal accounts remain fragile going forward.

The updated version of the 2018 financing law was approved in time to partly finance approved spending for next year. Following the Constitutional Court’s decision that the 2018 financing law did not meet the required procedural steps, invalidating the entire proposal, Congress approved a new version that will come into effect in January). The approval of the bill is favorable for investment confidence (the withholding tax cut was reaffirmed at 5% for foreign investment in fixed income market) and signals Duque retains some support in Congress. Nevertheless, we note that the Government's revenue estimations look optimistic and Colombia's fiscal accounts remain fragile going forward.  

The core of the expected revenue comes from tax collection optimization. The bill reaffirmed a personal income tax increase, establishing an additional marginal income tax rate of 39% (up from the current 36%). Additionally, it includes a surcharge on profits from the financial sector, and higher taxes on beer and carbonated soft drinks. Together all these measures are expected to raise around COP 5.3 trillion (0.5% of GDP). Meanwhile, the electronic billing implementation (COP 5.0 trillion; 0.5% of GDP) and the second-round effect from lower corporate taxes is expected by the government to trigger higher tax collection, estimated around COP 3.2 trillion (0.3% of GDP).

Recent social unrest has led to the inclusion of some proposals that will pressure fiscal accounts. The measures include a VAT rebate for the poorest 20% of Colombians, three VAT-free days per year, reduced healthcare contributions for some pensioners (gradual reduction from 12% to 4% in 2021) and fiscal incentives for youth employment creation. Together, all the measures have an estimated fiscal cost of around 0.2% of GDP (COP 2.0 trillion). Additionally, the bill approved by Congress reaffirmed the VAT discount for capital goods imports, a measure that will cost COP 6 trillion (0.6% of GDP). 

In all, fiscal consolidation in years ahead will be challenging and will increase the government’s dependence on one-off revenue sources. The government is targeting a budget deficit of 2.2% of GDP for next year from 2.4% of GDP expected for this year. Colombia’s public finances will benefit next year from higher central bank dividends and lower public sector pension commitments. However, public debt levels remain elevated, a development that credit agencies continues to highlight. We note Moody’s long-term foreign debt rating is Baa2 (stable outlook), while S&P’s rating is one notch below (BBB-) with a stable outlook. Recently Fitch reaffirmed Colombia credit rating at BBB- with negative outlook.

Miguel Ricaurte Carolina Monzón

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