Colombia may cut taxes on foreigners’ bond profits as soon as this year amid the Pacific Alliance’s pursuit of capital market integration, according to Deputy Finance Minister Andres Escobar. The country’s bonds rallied.
Colombia needs to reduce the levy further from the current 14 percent to remain competitive with Mexico, Peru and Chile as the markets of the Pacific Alliance member countries come together, Escobar said in an interview in Bogota.
“If we want to integrate more, we have to move,” Escobar said. “It’s very important to send a clear message to portfolio investors that Colombia is good for business. The exact timing, I couldn’t say, but it’s coming.”
The peso traded 0.7 percent lower at 2,790.47 per dollar at the close in Bogota after earlier falling as much as 1.1 percent. The country’s benchmark notes due in 2024 gained 0.98 centavo, the most since January, to 118.97 centavos per peso. The yield fell 13 basis points to 7.08 percent.
Colombia lowered 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 borrowing costs. The move has helped increase foreign holdings of peso bonds to about 16 percent last month from 3.7 percent in December 2012.
Colombia plans to stagger its tax reform efforts by sending several tax bills to Congress rather than one larger package of measures, Escobar said. He expects the bills will receive congressional backing as lawmakers have sought to advance tax reform, he said.
The government plans to kick-off the process in early August with a bill that seeks to reduce evasion by companies claiming tax exempt status as not-for-profits, Escobar said.
“When you think of a structural tax reform, there are two ways to approach it,” Escobar said. “One way is to completely change the tax regime, or you can have a clear blueprint of what a structural reform should be and get it to Congress in stages. I think the second approach is the way to go.”
The government may include the tax cut on foreigners’ bond profits in a first bill it plans to send to Congress early next month, Escobar said.
In light of the peso’s depreciation in the last year, it makes sense to lower Colombia’s withholding tax further, Escobar said. He declined to say to what level Colombia would cut the withholding tax.
The peso has declined 34 percent against the dollar in the past year, the worst performance after the Russian ruble among 31 major currencies tracked by Bloomberg, amid tumbling oil prices.
The weaker currency reflects Colombia’s fundamentals, said Escobar. Export revenue from oil, which accounts for around half of the country’s exports and about 17 percent of government revenue, has tumbled as crude prices have declined 52 percent in the past year,
“The whole principle of a flexible exchange rate is to let it go wherever it has to go,” Escobar said.
A related concern, according to Escobar, is Colombia’s current account deficit, which widened to 7 percent of gross domestic product in the first quarter.
A gap of more than 5 percent of gross domestic product is the threshold where people start to worry, he said. He forecasts the gap will narrow to below 6 percent of GDP at the end of this year and to around 5 percent of GDP between 12 and 18 months.
In a further consideration, the relatively high current account gap makes it difficult for the central bank to consider interest rate cuts even as the economy slows, according to Escobar.
Banco de la Republica has kept its benchmark lending rate unchanged since August 2014 at 4.5 percent.
“In macro terms, it’s going to be difficult to see the central bank cutting rates before it’s clear what is going to happen with the current account deficit,” Escobar said.