Colombian government to present tax reform to Congress

Colombian Treasury Minister Alberto Carrasquilla will present the government’s tax reform proposal to Congress today. Attempts at reform in 2020 were suspended due to COVID-19.

Colombia’s economy has contracted severely since the onset of the pandemic and the current fiscal deficit is around 9%. The government hopes to raise revenue through tax reform, including by removing certain value-added tax (VAT) exemptions. If the government fails to pass meaningful reform, Colombia’s sovereign credit rating risks a severe drop. This could trigger a capital flight, further hampering economic recovery.

Carrasquilla’s governing Democratic Center party holds fewer than 20% of congressional seats and needs other parties’ support to pass the reform. Severely watering down the legislation to appease them risks effectively nullifying the reforms, leaving the possibility for a credit downgrade. In 2018, efforts to remove exemptions on foodstuffs caused an uproar and the measures were softened by legislators, highlighting the divisive nature of VAT exemption reform. Should the Democratic Center leave VAT exemptions in place for foodstuffs, basic goods and health care, the party could gather enough votes. If it fails, Colombia’s credit rating will likely fall, imperiling the Democratic Center’s chances of retaining the presidency in the upcoming 2022 elections.