News Details

Colombian Tax Proposal Targets Energy, Mining, Food Companies

Colombia

Electrical Machinery & Apparatus

19-08-2022

Colombian Finance Minister Jose Antonio Ocampo detailed new tax reform proposals on Aug. 8 that would present financial challenges to corporates, particularly in the energy, commodities, and food and beverage sectors, if passed, Fitch Ratings says. Passage of the proposals are unlikely to have an immediate ratings effect. Environmental and public health related levies could pressure cash flows and affect dividend policies and capex plans across targeted sectors. This, in turn, could weaken credit profiles over the long term. As proposed, the reform will result in COP25 trillion of additional tax revenue, or 1.72% of GDP, in 2023. The additional revenue will be derived from tax changes for individuals (32%), taxes on commodities exports (27%), corporate taxes (23%), environmental and public health charges (10%), and the remaining (9%) from other charges. The additional taxes on individuals, which stem from changes to the tax code, such as an independent tax deduction by income type, a reduction in tax exempt brackets and the creation of a permanent wealth tax, will potentially reduce total household consumption in the short term. According to government projections, consumption will decline 0.38pp in the first year, principally due to lower disposable income for wealthy households. In the last four years, household consumption represented 71% of GDP. Oil and mining issuers would be affected by the elimination of tax benefits, such as royalty deductibility, and a new, procyclical, 10% price tax on exports of crude oil, coal and gold. When international prices are above a certain threshold, the export taxes will affect margins, cash flow generation and, in turn, discourage large long-term investments in these sectors, intensifying their downward trend in foreign direct investments.
 

 

Colombian thermal power generation companies’ costs will rise in the medium term, as coal taxes are gradually implemented. Single-asset or less diversified and efficient generators may be forced to shut down due to diminished economic viability in the context of a transition toward renewable energy generation alternatives. As for public health levies, a sugary drink tax, along with a 10% tax on ultra-processed foods, and taxes on single-use plastics could have a negative to neutral effect on the food and beverage sector, depending on the degree to which cost savings measures can offset competition from untaxed goods/alternatives and margin deterioration. Anticipating some of these measures, the sector has begun proactively transitioning toward environmentally-friendly packaging, reformulating products to minimize sugar content and developing healthier products to adjust to market trends. The proposed tax reforms must pass four regulatory debates in congress before being sanctioned into law, making it unlikely that the reform is approved as presented. We expect some of the effects to corporate sectors will be moderated to pass the near-evenly divided congress. The tax proposal generally aligns with policy goals, which include raising new tax revenues to fund social spending and fiscal consolidation, articulated by Colombia’s new government under President Gustavo Petro, which campaigned for greater state intervention in economic and market activities. Specifically, the proposed reforms lower Colombia’s reliance on the oil and mining industries in favor of more environmentally and socially beneficial alternatives.