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Colombian lawmakers approve $4 billion tax reform after protests

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September 8, 2021

By Carlos Vargas

BOGOTA (Reuters) – Colombian lawmakers have passed a tax bill set to raise $4 billion annually, the final step in long-running efforts by the government of President Ivan Duque to get a fiscal reform through Congress.

Duque’s government has insisted the law is vital at a time of rising debt, an expanding fiscal deficit and amplified social spending in response to the coronavirus pandemic.

The bill’s passage late on Tuesday will provide a road map, the government has said, for Colombia to allay investor fears and recover investment grade credit ratings from Standard & Poor’s and Fitch, which earlier this year cut the country’s ratings to junk.

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Analysts say the reform will offer only short-term fiscal relief and the next government will face pressure to propose a more structural bill.

The law will raise 15.2 trillion pesos annually, equivalent to about 1.5% of Colombia’s gross domestic product, which will initially be used to finance spending for this year and next.

“Our projections remain: 15.2 trillion in total collection, derived from cost-cutting efforts of 1.9 trillion, 2.7 trillion from (tax) formalization efforts and the fight against (tax) evasion, and 10.6 trillion in solidarity contributions from the business sector,” Finance Minister Jose Manuel Restrepo said before voting began.

Businesses will see their taxes rise by 4 percentage points to 35% from next year under the bill, which also enshrines around 1.9 trillion in annual public spending savings through cuts to expenditures on gas and office supplies.

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A previous version of the bill, which would have increased sales tax on some goods, was withdrawn in May amid lawmaker opposition and widespread and sometimes deadly street protests.

The bill passed 76-1 in the Senate and 124-8 in the lower house.

It may be the only major reform passed during the final year of Duque’s term, which ends in August 2022.

Though the finance ministry hailed this version of the reform as the product of consensus with lawmakers, Duque has never had a congressional majority and the protests diminished his already weak popularity.

Under the legislation, businesses affected by the coronavirus will continue to receive salary subsidies from the government and these will rise if firms are employing women or people between the ages of 18 and 28.

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The law also limits Colombia’s debt to 71% of GDP with a goal of reducing it to 55% of GDP in the coming years. Colombia’s debt was 63% of GDP through June.

The government estimates the fiscal deficit will end this year at 8.6% of GDP and 2022 at 7% of GDP.

($1 = 3,812.76 Colombian pesos)

(Reporting by Carlos Vargas; Writing by Julia Symmes Cobb; Editing by Mark Heinrich)

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