Gustavo Petro

Colombian President Gustavo Petro. (AP)

Understanding the Petro Government's Tax Reform

By Jon Orbach

A day after his August 7 inauguration, Colombia's president sent the signature reform to Congress. AS/COA Online talks to experts about what it entails.

Supporters of Colombian President Gustavo Petro elected him to shake up the status quo. The country’s first leftist president, who took office on August 7, made big promises: to halt oil exploration, wean the country off of coal, and forge peace agreements with extant rebel groups.

But perhaps his greatest pledge is to alter the country’s socioeconomic dynamics by slashing poverty and reducing inequality. Colombia is one of the world’s most unequal countries, outpacing regional neighbors Brazil and Mexico.The Economist reports that it would take a poor family in Colombia 11 generations to reach the average income.

In April 2021, amid the pandemic and hard economic times, then-President Iván Duque presented a tax hike on income and VAT, lifting costs on everyday products. Colombians took to the streets to voice their discontent and riot squads responded with force, leaving more than 50 people dead in clashes.

Enter Petro. The new leader’s solution to Colombia’s macroeconomic needs is also a tax hike—but it’s very different to Duque’s. Silvana Amaya, a political analyst at Control Risks, describes it as “one of the most ambitious tax reforms ever presented by a government.” For that reason, it has the potential to dramatically change the state of the country, and people of all socioeconomic backgrounds have their eyes set on what will happen.

Petro introduced the bill to Congress one day after his inauguration, signaling the degree to which it is a priority for his administration. It’s not clear exactly when or if it will pass, but the push and pull for modifications has already begun. AS/COA Online spoke with experts to help explain the landmark reform.

What are the key elements of the tax reform?

A central piece of messaging from the Petro administration involves framing the tax reform as an effort to redistribute cash to the country’s poorest residents. The government argues it can do more: Colombia’s tax revenue comprises just 13.0 percent of GDP, compared with the Latin American average of 16.8 percent. At AS/COA’s 2022 Latin American Cities Conference in Bogotá, Finance Minister José Antonio Ocampo said, “The main elements of the reform are the reduction of tax on low-income people, low-income households. We're trying to focus on [taxing] high-income households in order to move toward an equitable distribution of wealth.” The bill itself says it “aims to pay off part of the historical social debt of the state to the Colombian population."

The reform intends to raise $5.6 billion (1.78 percent of GDP) in 2023 to support anti-poverty programs and more. It plans to get the funds in the following main ways:

1. Raising taxes on the wealthy

The reform would raise income taxes on the 2 percent of the population who make more than $2,300 per month. The proposal, in contrast to that of Duque, would “affect the elite the most,” Amaya said, and it would involve a permanent wealth tax on those with a net worth of more than $750,000. Taxes on occasional taxable profit—which includes inheritances, life insurance indemnities, lotteries and raffles, and more—would increase to between 20 and 35 percent from the current 10 percent, Amaya said. The exact number of how much it will increase is not yet clear.

2. Removing corporate tax exemptions

Experts say Colombia has one of the most complicated tax systems in the world. By consolidating it, this reform would remove the special exemptions that companies in many sectors enjoy, BBC Mundo reports. This in theory would help stop tax evasion and avoidance because every profit would come with a tax. This would also affect digital firms—domestic or foreign. Those that make their money via the digital economy in Colombia would have to pay a tax in addition to the VAT.

Further, the capital gains tax rate would increase from 10 to 30 percent and would apply to the transfer of fixed assets held for over two years. For Sergio Guzmán, director and co-founder of Colombia Risk Analysis, the thorniest part of the reform is the tax on unrealized gains. People who hold on to stocks would have to pay far more taxes on their value—a marked departure from current policy. The prospect of having to pay so much tax on stocks before having sold them could disincentivize people from investing.

Also in this section, Colombian-listed shares, stock trading profits, and yields from security bonds—currently untaxed—would become taxed. These corporate taxes make up about 22 percent of the additional revenue the reform aims to raise.

3. Raising taxes on sugary drinks, processed foods, and single-use plastics

These taxes, which would affect all buyers of those products, are part of the administration’s plan to fight health issues and climate change, Amaya notes. They would be commensurate with the percentage of sugar in a drink and the weight of plastic used and would account for roughly 10 percent of the reform’s incoming revenue.

4. Raising export taxes on oil and gas

Oil and gas make up 40.8 percent of Colombia’s exports, with crude petroleum taking top spot. These, along with coal and mining exports, would be subject to a new 10 percent export tax. Selling, using, or importing coal would be taxed about $4.60 per ton. These taxes add up to 23 percent of the additional revenue the reform would collect. Also, those paying royalties to the state for the exploitation of non-renewable resources would no longer be able to claim deductions for income taxes.

Sergio Olarte, chief economist at Scotiabank Colpatria, said that the mining and oil sectors would be the hardest hit by the reform, and that foreign direct investment (2.8 percent of the country’s GDP) would falter heavily. He adds that some companies are opting to invest in nearby Guyana instead of Colombia because the former has no tax on oil exports. But Guzmán thinks the extractive sector can withstand those taxes, given that more countries are looking for new oil sources, the price of petroleum and mining products is rising, and Russia closed the Nord Stream One Pipeline to Europe. “Colombia can gain quite a significant windfall from increased exports in terms of oil and gas and even coal,” he said.

What will the reform actually look like?

Guzmán reckons the tax reform won’t be as transformative as promised. “The people who voted for Petro…are expecting very broad, very ambitious, very aggressive changes,” he said. “And Petro—for all the reasons we know—is going to be unable to deliver on that.” 

He cited the makeup of Petro’s coalition in Congress as his main weakness, as it includes many “traditional parties that are not going to play ball with this broad reform.” In terms of what aspects of the reforms could change, Guzmán said: “It's better to talk about the things he's not willing to compromise on because I think everything else is on the table.” While the Petro administration seems more willing to take a hit on revenue goals, it is less likely to accept changes on what Guzmán calls the “symbols” of the reform: increasing taxes on the wealthy, the extractive sector, and processed or sugary foods. It will do what it can to avoid a bump in taxes on low-income individuals. 

Will it pass?

Petro, who had issues working with others as the mayor of Bogotá may be a changed politician in that regard, says Diana Durán of the Washington Post. He understands that he needs alliances to survive and to actually make it as president, she said, noting that key to his success will be his interior minister, who acts as the liaison between Congress and the presidency. Interior Minister Alfonso Prada is a pragmatic centrist who worked as secretary general of the presidency in the Juan Manuel Santos administration. His appointment shows that Petro may be more willing to compromise to fulfill his agenda.

Prada, for his part, has called for mobilization in support of the reform. Guzmán said this is because the president understands that public opinion is a check on executive power, and he’s trying to channel the fervor from 2021’s social unrest to push his legislative agenda. On the other side, some companies and sectors, such as tourism and oil, are lobbying legislators against the reform, saying it threatens investment and job creation.

The administration has already dialed back its $5.6 billion proposal. Before his presidency, Petro had floated the reform’s revenue goal as both $11.2 billion and $16.9 billion. These compromises, says Olarte, are proof that Colombia’s institutions and legislative processes are functioning and healthy.

Guzmán noted that Duque’s unpopular tax reform was the anomaly and that this one will almost definitely pass. He expects that to happen on December 28, in the dead of night, in an extraordinary session of Congress, because tax reforms aren’t usually politically popular. “Petro is now pressed for time to try to pass this tax reform quickly,” Guzmán says. “Whereas other members of Congress are pressed for time to not pass this tax reform as quickly, so as to extract more concessions from the government.”

What has the reception been?

The reform’s goal of redistributing funds to the country’s hungry has played well with large segments of the population. Recent polling shows that 48 percent of the population approve of the reform, while 41 percent oppose it, with 70 percent of the population in favor of taxing the top 2 percent of earners.

“The public sees the reform very positively in general because they know that the government needs to increase their tax collection,” Amaya says. “When you say to the people [that] you're going to take all the exemptions away from the companies that they don't deserve…it sounds like a reasonable thing to do.

Olarte says the reform has left many frustrated. “Petro's administration promised a tax reform focused on personal taxes, but he didn't deliver that,” he says, noting that roughly 53 percent of the proposed new revenue comes from companies. “Almost every sector is saying, ‘You promised one thing and delivered another.’” Indeed, $2.5 billion of the $5.6 billion reform is focused on collecting taxes from businesses and the oil industry. Amaya notes, though, that businesses’ moves to create anti-reform protests have drawn few to the streets. 

On the other hand, many entrepreneurs, who are the subject of tax increases themselves, view the bill negatively, not only because of the tax on unrealized gains. Lluís Cañadell, the co-founder of a fintech app in Bogotá, posted on LinkedIn that the bill is, “about to wipe out Colombia’s thriving startup ecosystem.”