A day after assuming office, Gustavo Petro, the first left-wing president in Colombia’s history, unveiled a tax proposal to raise around USD 5.76 billion in 2023 to finance his ambitious social programs. Among the proposed amendments, the reform calls for the need to apply tax measures to tech companies.
Tax Reform: A Solution to Colombia’s Problems?
While the bill did not take anyone by surprise, this new proposal to overhaul Colombia’s tax code comes only a year after former President Ivan Duque introduced an unpopular tax bill that provoked the country’s largest and most violent social protests in decades. Colombians are experiencing the highest inflation levels over two decades, with unemployment rates above 10% and poverty rates close to 40%.
While campaigning, Petro pledged to reduce inequality, alleviate poverty, and help the elderly. For Petro, the proposed tax reform is the financial solution to his plan to secure jobs for all Colombians, provide subsidies to the poor, and make college tuition free. Amid worries of (foreign) investors regarding this government vision, Petro tapped centrist José Antonio Campo as his finance minister.
What’s at stake for tech companies?
At its core, the proposed bill sets out measures targeted at the National Directorate of Taxes and Customs’ (DIAN) tax collection system, including articulating rules to tax digital companies with ‘significant economic presence’ in Colombia.
In Colombia, companies are subject to taxation if they are legally-established in the country and have been operating for (at least) one year. The proposed text introduces a new layer of compliance: Companies that reach a certain level of sales will automatically be considered established in the country, hence subject to paying taxes.
While the government has yet to determine the criteria behind sales level to be considered a tax resident, a significant number of tech companies will likely fall under this category.
The move to tax according to sales level embeds Petro’s views on how to capitalize on the increasing digitization in the country’s economic activity. During the bill’s unveiling, Minister Ocampo mentioned that ‘digital platforms will begin to pay taxes in Colombia, yes or yes,’ citing Uber, Spotify, and Netflix.
If approved, the reform could also have direct implications for Over-The-Top (OTT) companies such as DiDi, Amazon and Disney. For example, companies will likely need to deploy greater resources to ensure compliance with these new fiscal obligations. Petro has previously explained his plan for tax reform as a way to incentivize electronic commerce and reduce the use of cash in the economy; however, it is still unclear how and whether this move would stimulate e-commerce and other digital companies. Further, the plan could disincentivize smaller—but still significant—players from entering the market as they would face intimidating taxing requirements.
Testing Petro’s Political Clout
Despite a high likelihood of passage, the tax bill represents Petro’s first political test and will gauge the administration’s support in Congress. Petro holds a ruling coalition in Congress after forging alliances with several parties. However, the reform is an ambitious project in a country that has traditionally been led by right-wingers.
In terms of next steps, several provisions will be discussed and amended by lawmakers over the following weeks. This includes the cap and definitions around sales levels and jurisdiction.
To learn more about this and other developments surrounding digital platforms in the Latin America region, contact Yamel Sarquis at [email protected], Melissa González at [email protected], or Rodrigo Serrallonga Mejía at [email protected]