Colombian companies face rising taxes as government oil revenue drops

Colombia economy
Colombia economy | shutterstock

Colombian companies face a challenging scenario as the country´s government, hit by declining oil-related revenue, is increasing taxes to try to offset lost income.

Oil related revenues account for a large percentage of government income, so the decline in international oil prices “left an important hole” in 2015 and 2016, which the government needs to cover, Natalia O'Byrne, director of Fitch Ratings Colombia, told Latin Business Daily by telephone from Bogota. 

In December, the government already added additional pressures, she said. The effective rate of taxes on corporations is approximately 65 percent to 70 percent. Colombians face not just additional taxes but also a “temporary tax on equity,” O´Byrne said.

The government has already announced another tax reform aimed at expanding the tax base, now at 14 percent, she said.

However, “the tax base is low because of evasion and informality,” which is bigger in some industries like commerce and retail. Corporations may already be overtaxed.

Projected growth of the Colombian economy has already been lowered to 3 percent this year and 3.5 percent in 2016, which further complicates the situation.

In addition, “there are many (tax) exceptions that benefit some and not others,” O´Byrne added. In part because of this, there are ongoing plans by the government “to create a more balanced tax system.”

There is a panel of experts working on tax change suggestions, and the panel will provide recommendations later this year, she said.

However, on average, “every 18 months there is a tax reform and that causes a large wear,” she said.

The government, however, is also working to reduce its own spending as well as make public investment cuts, she added. 

A depreciation of the peso against the U.S. dollar is expected to help exporters but that aid may not be enough, she added.

Consumers' disposable income has been hit by higher personal income tax rates and by inflation pressure caused by the sharp currency depreciation, Fitch added in a report.

“Corporates will need time to rebuild export channels following the sharp appreciation of the U.S. dollar against the Colombian peso during 2015,” the report said.

The Rating Outlook for Colombian corporates is “stable,” despite challenging economic conditions, Fitch said in a recent report.

“Most corporates continue to maintain conservative credit profiles despite increasing leverage trends. Refinancing risk remains manageable due to robust liquidity position and access to diverse funding sources,” Fitch added.

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Fitch Ratings Colombia

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