BOGOTA (Reuters) – A tax reform planned by Colombia’s government and designed to raise money to help the country deal with fall-out from the coronavirus pandemic could have a negative effect on corporate credit, though not enough to affect credit ratings, Fitch said.
The government will seek to raise about $7 billion via the reform, significantly more than previously contemplated, based on documents seen by Reuters on Tuesday.
The reform will seek about $835 million from businesses, according to the documents, which were shown to business groups by the finance ministry. Corporations would see a cut in income taxes, but many deductions would be eliminated from 2023.
“The potential removal or postponement of tax benefits passed into law in late 2018 presents downside risk to Fitch’s forecasts for issuer operating income and cash flow,” Fitch said late on Tuesday.
Fitch estimated Colombian corporate cash flow would reach 85% of pre-pandemic levels in 2021 and fully recover in 2022.
“However, the recovery in cash flow for some sectors could be negatively affected by tax reform, particularly if higher input costs or tax burdens are passed to consumers and dampens demand,” Fitch said. “Expanded VAT on goods could also pressure demand in the restaurant, retail and other consumer discretionary sectors.”
But the tax reform will not be enough to trigger company downgrades, the rating agency said.
“Financial implications are not expected to be large enough to trigger downgrades, but an assessment of the impact on individual companies will be made upon finalization and implementation of any tax reform, and will be considered alongside other factors including economic conditions and ongoing pandemic risk.”
Colombia’s corporate tax rate of 33% was the second-highest among Organisation for Economic Co-operation and Development (OECD) countries in 2019, behind France, Fitch added.
Fitch, which predicts the Colombian economy will expand 4.9% this year, cut the country’s credit rating to BBB- from BBB in April 2020, maintaining a negative outlook.
(Reporting by Nelson Bocanegra; Writing by Julia Symmes Cobb. Editing by Jane Merriman)
