Colombia's Congress approves diluted tax bill

BOGOTA (Reuters) - Colombia’s Congress on Wednesday approved a tax reform bill, watering down and almost halving the original revenue target, and forcing the government to freeze spending to meet fiscal goals.

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After weeks of discussion in congressional committees, the lower house and Senate agreed that the revenue goal to fund next year’s budget will be 7.8 trillion pesos ($2.4 billion), considerably lower than the 14 trillion pesos in the original bill the administration sent to Congress on Oct. 31.

Measures passed included increased income tax on high earners, a reduction in business taxes and a crackdown on tax evasion.

But faced with a deeply divided Congress that is creating difficulties for right-wing President Ivan Duque to pass legislation, the government withdrew a proposal to tax basic foodstuffs. Instead the finance ministry will freeze 6.2 trillion pesos in 2019 spending.

The thinner reform makes it more likely another tax overhaul will be needed in the coming years, though some lawmakers said a tougher stance on tax evasion may bring enough revenue to prevent that.

“This reform generates something positive in lowering the corporate tax burden and has an effective plan to fight evasion and contraband,” said Senator Richard Aguilar, adding that if economic growth and evasion goals are met, “I don’t see the need for another reform during this government.”

The controversial bid to place value-added tax on basic food had been the backbone of Finance Minister Alberto Carrasquilla’s plan to raise the bulk of the reform’s revenue.

But opponents criticized it as a tax on the poor that would stoke inflation.

The reduced revenue plan makes it harder for the government to meet terms of the so-called fiscal rule, which aims to cut the central government deficit to 1 percent of gross domestic product in 2027. Next year it must meet a deficit target of 2.4 percent, down from 3.1 percent this year.

While failing to meet the annual deficits targets may not be regarded favorably by credit rating agencies, which want them reduced and have called for a deep structural tax reform, Carrasquilla remained upbeat.

“We have to show our commitment to the fiscal rule,” he told reporters. “The full movie is what any rating agency - serious entities - look at.”

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

The reform also lowers taxes for foreign investors in local Treasury bonds.

Reporting by Helen Murphy and Carlos Vargas, Editing by Rosalba O’Brien and Phil Berlowitz