Colombia tax reform: A taxing problem

By Oli Pritchard April 22, 2021

Colombia’s byzantine taxation system needs desperate reform, but the public don’t think Carrasquilla has the answers.

Colombia tax reform: Finance minister couldn't reproduce standard price of eggs. Photo by Erol Ahmed on Unsplash
Colombia tax reform: Finance minister couldn’t reproduce standard price of eggs. Photo by Erol Ahmed on Unsplash

Colombian finance minister Alberto Carrasquilla has announced radical new tax reform – possibly the most ambitious ever attempted in Colombia. It’s attracted heavy criticism already, not helped by the hapless treasurer fluffing his lines when asked the price of eggs. What is it, why are people up in arms and what will happen next? Our handy FAQ should help you out.

Colombians are suffering badly through lockdowns, so why does the government want us to pay more tax?

It’s all about the budget deficit. Colombia currently spends more than it makes, and that gap is increasing. Obviously this can’t carry on forever, so more money has to start coming in at some point. That’s why Carrasquilla wants to expand the tax base. In the short term, it would protect Colombia’s prized investment grade credit rating and in the long term, it sets the country on the path to a sustainable revenue system like other OECD countries.

A credit rating what?

Credit ratings are a badge of honour for countries. At BBB-, Colombia is comparable to some European countries. That makes it an attractive destination for companies moving into the market, but even more importantly makes it easier to borrow money for situations like Covid. Without investment grade status, Colombia will have to offer higher interest rates to raise financing to cover the fiscal deficit. On top of that, foreign companies may well be less likely to invest in Colombia. Put simply, there will be less trust in Colombia’s ability to pay back its debts. 

Read all coverage about the coronavirus in Colombia

So what is the government proposing?

A key part of the scheme is to expand the number of people fully under the tax scheme. With this in mind, the declaración de renta will now cover more people. On top of that, a lot of tax exemptions are being scrapped – notably IVA (sales tax) will apply to more products. There’s a one-off wealth tax for those earning COP$10 million monthly or holding COP$5,000,000,000 in assets, and IVA will be levied on utility bills at estrato 4 and above. There are green taxes that penalise vehicles and single-use plastics and the possibility of intra-city toll booths. It’s a fiscal empanada stuffed to bursting point.

But why pay taxes when Colombia’s so corrupt…

Well, that’s one issue, and not to be ignored. There’s widespread mistrust that the money will get to the right places. Still, 60% of owt is more than 100% of nowt. Also overall, many Colombians don’t pay the tax they are supposed to — income tax evasion is at a whopping 31.6% according to the Colombian tax collectors DIAN. On top of this, the government wants to finance social spending…

Social spending? But all I see on social media are memes joking about eggs and decrying the end of the middle classes

Yes, while some of the money being raised by taxes is to stop the debt ratio increasing, a large part is for social spending and VAT rebates for the poor. The largest part of this is the continuation and expansion of the Ingreso Solidario program to reach roughly 4.7 million households. This hands out money to people in lower estratos (following the SISBEN criteria). It’s not perfect, but has won acclaim. Added to this are schemes to encourage companies to hire workers under 28, support for poorer students to attend university and support for small and medium-sized companies (PYME).

This actually sounds quite progressive…

Well, yes. Much of the proposal is akin to what you might expect from a fashionable centre left social democrat party in Europe. It’s certainly not what the neoliberal Centro Democrático are normally into. It’s no surprise that the Centro Democrático rank and file are unhappy, but criticism has come from all sides, including leftists such as Polo and the Alianza Verde.

So why’s it so unpopular?

Well, even the comfortably off might be feeling the pinch. Relatively high earners often feel that they’re average earners and can have extensive debt or commitments. As we said before, people rarely have much faith that their taxes are well spent. It’s also not perfect – there are exceptions, notably for the army and privileged officials in the civil service and public unis.  More importantly, there’s an election next year. Tax hikes are easy pickings for opposition politicians and no one wants to be seen to support tax increases. Finally, it’s so big that there are multiple positives and negatives for almost anyone. No one seems to be looking at their positives.

What have these politicians said?

A Caracol poll on Tuesday found that 84% of voters wouldn’t vote for a candidate who backed the reform as it stands, confirming its toxicity. With that in mind, people are queuing up to distance themselves. The Senate’s second biggest party, the ironically named Cambio Radical, are against it, along with their ally Cesar Gaviria who appears to speak for the Liberals. Juan Manuel Santos’ Partido de la U have decided to vote against it and it seems unpopular within the Centro Democrático, with even Uribe stepping in to complain. The leftist criticisms will come more strongly in next week’s national strike. Wilmer Leal of the greens is asking for more tax on the rich.

Hmmm, so is this going to happen at all?

The tax reform in Colombia will probably pass the Senate in some form. The government will pull out all the stops. There will be lots of shady deals in small rooms in the next few weeks. But this is the 15th tax reform in Colombia since 1995, and they’ve all been significantly watered down, so it might not end up bringing in as much money as the government would like. The question is whether it will be enough for investors to keep faith in the economy. What is almost certain is that whoever is in charge next year will have to have another go at getting people to pay more taxes, so expect to hear more soon.