Court annuls Colombia’s royalty tax measure for US$780 million

The Supreme Court of Justice of Colombia voided a major source of revenue in the president’s 2022 tax bill Gustavo Petrowhich leaves the Government with a gap in its finances.

Tax reform passed by Congress last year prevented oil and coal producers from deducting royalty payments from their corporate tax liability.

The court said in a statement that this article went against the Constitution by violating the principles of tax equity and increasing the burden in a confiscatory manner.

This was expected to raise an average of 3.2 trillion pesos (US$780 million) per year over the next decade, equivalent to between 0.2% and 0.3% of gross domestic product (GDP), according to an estimate by Barclays Capital Inc.

In response, the president Gustavo Petro ordered the Minister of Finance, Ricardo Bonilla“cut the budget of the three branches of public power”, according to a post on his X account.

The law implemented a higher tax for companies that pay royalties in money — mainly coal companies — than for those that do so in kind, as is customary for crude oil producers.

The Colombian Mining Association had said that not being able to deduct royalties “puts the viability at risk” of many projects. In a statement in August, the agency stated that with the measure alone, on average, a coal operation would have to pay more than 140% of its profits in taxes, compared to 88% currently.

Low tax blow

The court’s decision leaves the nation without a large portion of the 20 billion pesos in annual revenue that it intended to raise with the tax reform.

“Compliance with the fiscal rule is already at risk“, said Oliver Pardo, head of the fiscal observatory of the Javeriana University, of Bogotá. He added that this simply adds to the tension and that he doesn’t believe the tax rule will be enforced next year.

The Andean nation is targeting a central government fiscal deficit of 4.3% of GDP this year, with a small increase next year to 4.5% of GDP.