Colombian Committee Weighs Cuts to Foreigners’ Bond Tax

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A Colombian committee formed to advise the government on taxes is considering further cuts on the withholding rate on foreigners’ bond profits, according to Public Credit Director Milena Lopez.

The Committee of Experts for Tax Fairness and Competitivity is scheduled to report to Congress at the end of the year. If Colombia chooses to cut the withholding tax, it would be part of broader tax-law changes, Lopez said.

“There’s going to be a structural reform that needs to take place,” said Lopez, who took over the post of Public Credit Director in May. A lower withholding tax “is one of the things the Committee is studying. They will give us their view and depending on the view it will or won’t be part of a broader reform.”

Colombia chopped taxes on foreign investors’ earnings from local bonds, known as TES, in January 2013 to 14 percent from 33 percent in a bid to spur demand and reduce the country’s borrowing costs. The move has helped increase foreign participation in peso bonds, or TES, to more than 16 percent last month from 3.7 percent in December 2012.

While Colombia is considering allowing overseas settlement of the nation’s sovereign debt through Euroclear, it isn’t something that will happen soon, according to Lopez.

Bond Swap

Neighboring Peru announced an agreement with Euroclear earlier this year. Colombia will be analyzing Peru’s experience, she said.

The government isn’t considering carrying out a bond swap with TES investors this year given that the interest payment has already been made, Lopez said.

The Finance Ministry said earlier this month it will buy back as much as 6 trillion pesos ($2.3 billion) of local bonds held by the Treasury due October 2015 and June 2016 and provide in exchange securities maturing 2017 to 2030. The bond swap will happen through June 2016.

Carrying out scheduled bond swaps and issuing short-term notes, or TCOs, is something that the Ministry is also considering in the medium term, she said.

Colombia may sell dollars in the local market raised from foreign bond sales and multilateral loans at the end of this year or in 2016, said Lopez.

“It wasn’t an option before because of the peso’s appreciation,” Lopez said. “At these peso levels, monetizing dollar debt is an option.”

The peso has plunged 30 percent in the past year, the worst performance after the Russian ruble among 24 emerging market currencies tracked by Bloomberg.

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