Compared with its controversial predecessor, Colombia’s updated tax reform proposal is less likely to trigger mass unrest and more likely to pass in Congress since the changes shift more of the burden onto corporations. If the new draft is approved, the boost to domestic consumption would outweigh any loss of foreign investment due to the higher corporate tax rate. On July 20, Colombia’s government sent a revised version of a $3.95 billion tax reform bill to Congress. Initial reforms, proposed on April 15, sought to raise Colombia’s value-added tax (VAT) and expand the country’s tax base by lowering the minimum annual income required to pay taxes to fund public debt. The new draft, however, shifts the majority of the tax burden onto corporate firms in the country by raising Colombia’s corporate income tax rate of 30% (already one of the highest in the world) to 35% by 2022. If approved, the reform would also seek to dismantle a series of corporate and personal tax benefits, including exemptions and deductions. 

• Like the original draft, the new tax reform still seeks to raise money to cover emergency spending measures in response to the COVID-19 crisis, as well as continue a cash transfer to Colombia’s poorest citizens system that began earlier in the pandemic.
• The previous version of the tax reform included raising the VAT to 19% on gasoline and other basic services, as well as new income tax from those earning more than $656 dollars per month.
• The July 20 version of the tax reform is seeking to raise $3.9 billion in yearly government revenue — considerably less than the April 15 version, which sought to raise $6.4 billion.
• The Duque administration had previously agreed to lower the corporate tax rate, one of the highest in the world, from 37% in 2019 to 30% by 2022. However, the latest tax reform would ensure that the corporate tax rate remains at 35%.

The updated tax reform draft will likely garner higher levels of public support, giving the proposal an easier path through Congress and decreasing the likelihood of disruptive demonstrations. By shifting the majority of the tax burden off of ordinary citizens and onto corporations, the new proposal will probably provoke less widespread public anger against the Colombian government. This will, in turn, decrease the chances of mass demonstrations while also increasing the chances of the proposal passing in Congress, where representatives will be compelled to vote with public sentiment to boost their prospects ahead of 2022 legislative elections. 

• The earlier version of the tax reform saw thousands of Colombians take to the streets between April and June, with demonstrators arguing it raised the tax burden on citizens at a time economic conditions were already tough due to COVID-19. President Ivan Duque revoked the reform less than a week after demonstrations began in April, but public anger over the proposal had already taken root. The nationwide protest movement is estimated to have cost the economy roughly $3 billion in GDP, mainly due to roadblocks and strikes that stalled business activity.
• Although large labor unions like the Central Union of Workers have claimed that the new proposal does not do enough for boosting education spending and job creation in Colombia, demonstrations against the updated draft have so far been far smaller than those triggered by its predecessor. 

The passage of a long-awaited and much-needed overhaul of Colombia’s tax system would overall benefit the country’s pandemic-rattled economy by boosting investor confidence and consumer spending. The April tax reform was originally meant to boost investor confidence coming out of the pandemic, with credit rating agencies threatening to downgrade Colombia’s investment status and the country’s sovereign bonds trading at rates qualifying for junk status. The larger tax burden placed on businesses in the updated draft would likely discourage new foreign direct investment (FDI) in Colombia following the country’s post-COVID-19 economic reopening. However, the passage of the tax reform would still raise the price of Colombia’s sovereign bonds, as well as inspire credit rating agencies to reinstate Colombia’s investment-grade rating. Ease in repaying debt would also lower borrowing costs on bonds that Colombia hopes to issue in the coming year, making it more cost-effective for Colombia to overcome its economic downturn. Additionally, domestic consumption would likely increase due to the continuation of the cash-transfer program and the reopening of economic activities as more Colombians get vaccinated, offsetting any dips in FDI. 

• Colombia’s GDP shrank 7% in 2020 due to the COVID-19 pandemic.
• In 2019, FDI inflows made up roughly 4.4% of Colombia’s GDP, whereas domestic consumption comprised 68.4%.
• Two of the three major credit rating agencies — S&P Global Ratings and Fitch Ratings — downgraded Colombia to non-investment grade in late May and early June, respectively, with each citing the need to fix issues with Colombia’s tax system.