Colombia will publish a list of tax havens within two weeks, clearing the way for investors not based in such jurisdictions to obtain lower tax rates on locally sold government bonds.
Some investors may have delayed purchasing the bonds while waiting to see if their locales would be included on the list, Public Credit Director Michel Janna said in an interview. Under a law that took effect Jan. 1, investors from tax havens must pay a 25 percent tax on profits from the local bonds, while those who aren’t covered are eligible for a 14 percent rate. The tax was previously 33 percent for all foreign investors.
President Juan Manuel Santos cut the tax rate as the Andean country sought to reduce borrowing costs by attracting more foreign investors to the local debt market. The Finance Ministry is working to clarify how the withholding tax is charged to make it “more clear and transparent,” Janna said. The clarification will be ready within two months, he said.
“All decrees that help to clarify and to set a framework for investors to be comfortable to invest in Colombia is always a positive step to take,” said Janna, 33, who assumed his post on April 1 after working as head of sovereign risk for the Americas for Goldman Sachs Group Inc. “We hope more investors will come in and to have a more diversified investor base.”
Colombia’s peso bonds have rallied this year, with yields on notes due July 2024 plunging 0.79 percentage point as the government slashed the withholding tax and the central bank trimmed benchmark rates. Yields, currently within 0.03 percentage point of a record low, may fall further as more foreign investors buy the local peso bonds, said Janna, who has a doctorate in economics from Northwestern University in Illinois.
About 4.1 percent of government peso bonds, known as TES, are held by foreigners, up from 3.7 percent in December before the tax changes came into effect.
Yields on Colombia’s TES are too high compared to peers such as Mexico and Peru, Janna said. In Peru, about 56 percent of government bonds denominated in the local currency are held by foreigners. In Mexico, the rate is 36 percent.
As more foreign investors enter the market, yields on bonds of all maturities should drop, Janna predicts.
“That’s the nature of increasing your investor base and of having more access to demand for bonds at all tenors,” said Janna.
Santos on April 15 announced a 5 trillion-peso stimulus plan, of which $900 million will be spent in 2013. The measures include an expansion of a housing program for low-income families, subsidized mortgages and cheaper energy costs.
Colombia won’t issue more bonds in the local market to fund the stimulus plan, Janna said. The government has said it will sell 30 trillion pesos ($16.4 billion) of bonds in the local market this year, of which 23 trillion pesos will be sold through auctions.
The plan, known as PIPE, “won’t need any extra source of financing,” Janna said.