February 1, 2023

What is the Petro tax reform in Colombia?

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(CNN Spanish) — The tax reform project of the government that Gustavo Petro will lead is taking shape and it is possible that it will be presented to Congress the same day that the president takes office. The leader of the Historical Pact has insisted that it is necessary a “more progressive and fair” system. What exactly does it translate to? These are the keys.

The objective of the Petro reform, which has been at the center of the campaign, is to obtain 50 billion pesos (about US$11.3 billion). To achieve this, according to Luis Carlos Reyes, whom he appointed as head of the National Tax and Customs Directorate, the key is in a system where those who have more income progressively pay more, in eliminating tax benefits and fighting evasion, he recently told Reuters.

More taxes for those who earn more than 10 million pesos per month

In statements during the campaign, Petro explained that the highest tax burden would fall on “the 4,000 largest fortunes in Colombia,” a figure that according to his adviser came from a Canadian mission of experts that analyzed the issue and concluded that this number of people does not they were paying their fair share based on income.

What is the underlying problem? Identify those revenues.

“The multimillionaires of the country do not have their own income. They only have income through their companies. So, since there is double taxation, if they charge taxes on dividends, they say ‘look, my company already paid taxes on its profits. How do I will you charge me twice?’ But what they don’t say is that the vast majority of them, their cars, their apartment, their entire rhythm of life is maintained by the company,” CNN en Español William Sinisterra, Dr. in Economics and professor at the Javeriana University. The next source is foreign exchange.

Ricardo Bonilla, economic advisor to the Petro campaign, put it in other words in an interview with Blu Radio after the elections when addressing the changes they want in the income tax: “Today, medium and high-income individuals do not have their income fully identified, many are subsumed in company expenses and their assets are not fully identified” so they must there should be a “debug” job. Once the number is made, it could increase to about 40,000, which is 1% of the four million tax filers.

Reyes said that those who will progressively have to pay more are those who earn more than 10 million pesos per month (just over US $ 2,200).

Less tax benefits

“We will gradually dismantle those tax benefits that, without due economic and social justification, introduce serious distortions to competition, encourage mining-energy extraction and primarily privilege, or are used mostly in their favor by, natural and legal persons with high incomes and assets” , says the Historic Covenant program.

In this regard, Reyes said that the exemptions that will be eliminated, both for individuals and for businesses, are equivalent to almost 2% of the country’s GDP.

the evasion

Another of the pillars on which Reyes has focused, which is also in the Historical Pact program, is evasion. “So that the progressivity of the tax system does not remain in the good intentions of the letter of the law, a determined fight against evasion is required, and we will fight it,” he wrote when announcing his appointment as head of the DIAN.

Tax evasion costs Colombia some 17.6 billion pesos ($3.9 billion) a year, he told Reuters, and spoke of the imposition of prison sentences for those who commit the crime, something that is now applied daily.

Dividends, another pillar of Petro’s tax reform

In the Historical Pact program, a tax reform was proposed that, among other aspects, would focus on dividends: that it be mandatory to declare them and they always have to pay taxes. Sinisterra explained that one of the proposals that was handled in this regard is to increase the percentage of payment for dividends from certain figures of 2% as it is now to 15%.

Would this make businessmen leave the country? “They are talking about a stampede of people who are going to invest in another country, but the truth is that almost all countries are converging in that sense, especially in this post-pandemic moment in which the country needs cash,” he analyzed. .

Reyes assured that, with the proposed reform, most businesses that do not have special benefits will in fact pay less taxes.

And the VAT?

“My tax proposal consists of increasing taxes on bankers and oil workers, while my opponent’s proposal consists of increasing the tax on food,” Petro wrote on June 16, a few days before the second round.

Bonilla insisted this week that the basic basket will not be “touched” when asked about VAT and that more time can be expected to have an “orderly discussion” about the goods that are excluded from the tax.

Petro proposes a change in Colombia: what challenges does it face? 2:39

The OECD benchmark

Petro and Márquez’s program, which bets on an increase of 5.5 points of GDP in tax collection, says that they want to bring Colombia “gradually to the level of taxation of the OECD countries.”

In 2020, according to a study by the Organization for Economic Cooperation and Development which is made up of about 40 countries, Colombia was considerably below the OECD average. The average of these countries was tax revenues that represented 33.5% of GDP, while in Colombia the percentage rose to 18.7%.

Above Colombia and below that average were 17 countries in Latin America and the Caribbean, including three of the largest economies in the region: Brazil, Argentina and Chile. Mexico, which together with Colombia would complete the five largest, were then two steps below.

editor’s note: This article was originally published on June 27 and updated on July 22.





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