November 1, 2018 / 1:00 AM / 18 days ago

Colombia presents tax measure to Congress to raise $4.3 billion

BOGOTA (Reuters) - Colombian President Ivan Duque’s administration presented a tax bill to Congress on Wednesday that aims to raise 14 trillion pesos ($4.37 billion) to finance next year’s budget, including higher taxes on the middle class and lower duties on businesses.

Colombia's President Ivan Duque speaks during a news conference at the presidential palace in Bogota, Colombia October 1, 2018. REUTERS/Luisa Gonzalez/File Photo

Finance Minister Alberto Carrasquilla may have a tough time clinching legislative approval for the bill - seen as key to reducing the fiscal deficit and avoiding a credit rating cut. Lawmakers are deeply divided over the measure, which must be approved by year-end to take effect in 2019.

“This is a progressive law that means those Colombians who have more income will contribute at a higher rate for state financing and the redistribution of wealth,” Carrasquilla told a news conference on Wednesday.

Among items in the so-called financing law are plans to raise income tax on middle and upper earners to up to 37 percent from 33 percent and reduce corporate income tax to 30 percent from 35 percent.

It seeks to ensure 13.2 trillion pesos for 2020 funding needs.

“What we’re seeing from investors is a feeling of wait and see, especially for fiscal changes, so investment decisions may be delayed until there’s clarity,” Standard & Poor’s analyst Jose Perez-Gorozpe told reporters this week.

Under the terms of Colombia’s medium-term fiscal targets, Latin America’s fourth-largest economy must reduce its fiscal deficit to 2.4 percent of GDP in 2019, from 3.1 percent this year, and to 1.5 percent in 2022.

Carrasquilla hopes the bill will help meet lower deficit targets and prevent a loss of the investment-grade credit rating.

Moody’s revised its outlook on its Baa2 rating to negative from stable in February. That followed S&P’s December decision to downgrade Colombia’s credit rating to BBB-, one notch above junk, citing concerns over the government’s ability to adequately cut the fiscal deficit.

Slipping to a junk rating would bar many foreign investors from holding Colombia’s debt and drive up borrowing costs just as money is needed to fund post-conflict spending after the end of the government’s war with FARC rebels, as well as for health and education costs.

Among the parts of the bill most likely to face serious opposition is the extension of the value-added tax to include more products, while cutting the rate to 17 percent from 19 percent by 2021.

Carrasquilla hopes the VAT measure will bring in 11.3 trillion pesos.

    “This measure will have the greatest market impact since it affects prices, monetary policy and economic activity,” Banco de Bogota said in a note to investors.

Reporting by Helen Murphy, Nelson Bocanegra and Carlos Vargas; Writing by Helen Murphy; Editing by Peter Cooney

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