Colombia’s new left-wing government will not raise corporate taxes but could cut the corporate tax rate by up to five percentage points if conditions allow, the country’s next finance minister said in an attempt to calm the nerves of business leaders.
Speaking to the Financial Times, José Antonio Ocampo said companies bear a heavy tax burden and that his tax reform plan, which he hopes to implement before the end of the year, will focus on extracting more taxes from wealthy individuals rather than businesses.
“There are too many taxes on companies, not on individuals, and solving the personal income tax issue is essential if we want to make the system more progressive,” he said.
Asked what he would do with the corporate tax rate of 35 percent, Ocampo said: “If we have the space, we would like to reduce it, but gradually. If you ask me, I think it should gradually return to the level we had before, that is 30 percent.”
Colombia has enacted dozens of tax reform plans over the past few decades, but few have made a real impact. According to the OECD, only 5 percent of Colombians pay income tax. Income tax revenues are worth just 1.2 percent of gross domestic product, compared to the OECD average of 8.1 percent.
Corporate taxes, on the other hand, are relatively high. The outgoing right-wing government of Ivan Duque initially cut the corporate tax rate from 33 to 31 percent. But when the coronavirus pandemic broke out, followed by prolonged street protests against his rule, he was forced to raise it to 35 percent, the highest level in 15 years and above the Latin American average.
Ocampo will become finance minister on August 7 in what promises to be the most left-wing government in Colombia’s history. Gustavo Petro, the next president, is a former urban guerrilla who says the country needs nothing short of a social and economic revolution to address deep inequality, widespread poverty and an overreliance on fossil fuels.
His policies upset some wealthy Colombians, causing capital flight. Petro wants to impose a wealth tax on the top 4,000 personal wealth holders and extract more from other high earners. His proposals have also spooked some foreign investors, particularly in the hydrocarbons sector, where he promises to ban new oil and coal exploration, cancel pilot fracking projects and ban mining.
Ocampo, a seasoned 69-year-old economist who served as finance and agriculture minister in the 1990s and worked at the central bank and the UN as well as in academia, said foreign investors have nothing to fear from Petro’s government.
“Modesty aside, I think my meeting calmed the markets a lot. At least that’s the message I’m getting,” he said. “This government will be responsible in fiscal and monetary matters.”
He said the new government will respect Colombia’s fiscal rule and aims to reduce the deficit by 3 percentage points over four years from the current 7 percent of GDP. The goal for national debt is to reduce it to 55 percent of GDP from about 64 percent.
Ocampo also tried to calm fears about Peter’s planned pension reform, saying it was not an immediate priority. He added that the newly elected president proposed a system that does not differ much from the one in the USA.
Ocampo said that while the government will fulfill its promise to stop oil exploration, it will take a softer approach to gas, which could serve as a transitional energy source as the country transitions to renewable energy sources.
“I asked him [Petro] specifically if there would be more gas exploration, and he said yes,” Ocampo said.
Asked about another of Petro’s more controversial proposals — for the state to act as an employer of last resort, offering jobs to anyone who can’t find one in the private sector — Ocampo said, “That’s not going to happen.”
“Obviously, I have to see how we can achieve what he did [Petro] promised in the election campaign, but at the same time he must understand that I obviously have my views on the economy, which I hope he shares.”
Asked about their relationship, Ocampo said that he has known Peter for years and although they did not come from the same political party nor necessarily share the same ideology, “he has been very kind to me so far and we have had no differences of opinion”.
“I’ve worked with two presidents before and sometimes they disagreed with me,” he said. “But it’s the same in all governments.”