Petro’s Tax Reform Proposals Perturb Investors in Colombia

In addition to the Colombian president’s tax reform proposals, the sociopolitical environment and the country’s monetary policy are also causing concern

Colombian President Gustavo Petro
August 24, 2022 | 11:25 AM

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Bogotá — The debate surrounding Colombian President Gustavo Petro’s tax reform is about to begin in Congress, and although both Finance Minister José Antonio Ocampo and the director of the country’s tax and customs authority DIAN, Luis Carlos Reyes, have gone to lengths to explain the scope of the bill, investors are still worried.

The reform proposes several tax adjustments that have not gone down well with some business sectors or the population at large, such as the adjustment to the dividend tax rate and taxing incomes from oil, gold and coal exports, but without taxing profits, among others, and the market remains attentive to which changes will be approved by Congress, and the uncertainty is already weighing heavily on the decisions of investors in Colombia, according to a recent survey by Fedesarrollo, a Colombian nonprofit promoting higher education and development.

The concern is such that investors have put their fears regarding political uncertainty and external factors to one side and are now more fearful of the tax reforms, according to the survey.

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Fedesarrollo’s survey, carried out this month, show that the government’s fiscal policy is currently the most relevant factor in investors’ decision making, accounting for 45%, which is a four-fold increase on a July survey among investors, displacing external factors as the most important concern.

The fiscal policy predominates among the expectations generated in the market by the tax reform proposal, according to analysts at Banco de Bogotá in response to the results of the survey.

However, the market is not only attentive to what will happen with the tax reform when it comes to making investment decisions in Colombia. Socio-political conditions (24%) and monetary policy (21%) are also weighing on investors’ decisions, according to the survey.

Concern regarding the government’s monetary policy is also significant, the bank’s analysts say.

Petro’s tax reform seeks to augment contribution by $25 billion in 2023, with the target figure rising to $50 billion in the coming years. However, analysts have predicted that the real figure will be much lower, which calls into question the social effects the reform could have, as well as the actual fiscal adjustment that will be achieved, with analysts also questioning where the extra funds will be channeled to, something that has not been clarified so far.