Tax reform in Colombia to cover spending associated with combatting the coronavirus pandemic and restore government revenues, which were affected by slower economic activity and lower tax collections, could have a negative effect on corporate credit, says Fitch Ratings.
The potential removal or postponement of tax benefits passed into law in late 2018 presents downside risk to Fitch’s forecasts for issuer operating income and cash flow.
Financial implications are not expected to be large enough to trigger downgrades, but an assessment of the impact on individual companies will be made upon finalization and implementation of any tax reform, and will be considered alongside other factors including economic conditions and ongoing pandemic risk.
The tax reform bill expected to be sent to the Colombian Congress this week aims to raise 1.5% of GDP or about COP15 trillion. Measures could include delaying or eliminating previously planned income tax rate reductions or value-added tax (VAT) exemptions and other tax benefits.
Weakness in Colombia’s fiscal metrics after the sharp decline in oil prices and efforts to combat the pandemic increase the likelihood of passage before Congress enters recess on June 20. Fitch downgraded Colombia’s rating to ‘BBB–’ from ‘BBB’ in April 2020 and the Rating Outlook is Negative.
Fitch currently expects Colombian corporate cash flow to reach 85% of pre-pandemic levels in 2021 and fully recover in 2022. However, the recovery in cash flow for some sectors could be negatively affected by tax reform, particularly if higher input costs or tax burdens are passed to consumers and dampens demand.
Expanded VAT on goods could also pressure demand in the restaurant, retail and other consumer discretionary sectors. Fitch forecasts 4.9% real GDP growth in 2021, driven in part by monetary policy and pent-up consumer demand, following the sharp economic contraction of 6.9% in 2020.
The government received a report from the tax experts commission earlier this month noting the structural deficiencies of Colombia’s tax system and recommending fundamental reform to raise revenues in the short term and to move toward a more simple, efficient and equitable scheme.
Colombia has a long track record of passing and implementing piecemeal tax reforms but its system remains more burdensome for business than other Latin American countries.
Colombia’s corporate tax rate was the second highest, behind France, among Organization for Economic Co-operation and Development (OECD) countries at 33% in 2019. Corporate income taxes represented 26% of the country’s tax mix in 2018 compared to 16% for regional peers according to the report which cited data from the OECD.
Tax code changes approved by Congress in 2018 reduced the tax burden for businesses by gradually lowering the corporate income tax rate annually by 1% from 33% in 2018 beginning in 2020.
Other reform measures included income tax deductions for the local business turnover tax (Impuesto de Industria y Comercio) of 50% then increasing to 100% in 2022, deductions of VAT paid on fixed-asset investments and VAT exemptions on raw materials and supplies used for some products, and tax breaks to promote investment in fixed assets and job creation.
Special tax regimes were also granted to hotels, theme park projects, ecotourism parks, agro-tourism and nautical docks, and other institutions.
