This week began with unfavorable news for the financial projections of the Ministry of Finance, since the Constitutional Court made firm its decision to declare the paragraph included in the last tax reform unenforceable, which created the figure of non-deductibility of hydrocarbon royalties in the country.
It is worth remembering that through Ruling C-489 of 2023, the Court declared the unenforceability of paragraph 1 of article 19 of Law 2277 of 2022, which prohibited deducting royalties from income tax and after this, Minhacienda requested the opening of a fiscal impact incident (IFF), to defer the effects of the decision.
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Specifically, those in charge of this portfolio presented four alternatives to the high court that contemplated the possibility of deferring the effects from January 1, 2025 or at least from January 1, 2024. They also proposed deferring the effects from January 1, 2025 and provide that the highest value of the tax be recognized as a discount in equal installments between the taxable years 2024 and 2028.
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Finally, among the Government’s proposals It was also highlighted to defer the effects from January 1, 2024 and to provide that the highest value of the tax be recognized as a discount in equal installments between the taxable years 2024 and 2026.
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However, the Government’s arguments did not convince the Court, which finally concluded that it was not demonstrated that Sentence C-489 of 2023 produced serious alterations in fiscal sustainability.
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For Jaime Vargas, tax partner at Cuatrecasas, this judicial decision must be analyzed from two perspectives. The first concerns legal security and investor confidence, which sends a message of tranquility and of respect for the rules of the game, which strengthens investor confidence.
Ricardo Bonilla, Minister of Finance and Public Credit
Mauricio Moreno / Portfolio
“The other angle is that of the State’s finances, since less collection will be generated and the Government will have to make adjustments. But that is what must necessarily happen when an unconstitutional norm is approved and collection accounts are made based on it,” Vargas explained.
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However, for this analyst it is important to take into account that the effect on the nation’s finances should be limited, taking into account that the main oil producer and consequently the one who would have been the most affected by the incident would be Ecopetrol.
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“Once the incident has been rejected, what the government will no longer collect in taxes will be received in dividends from Ecopetrol; and the Colombians who have invested in that company will also receive the dividend, which by law corresponds to them,” this expert argued.
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At this point it must also be said that according to the Court, the four modulation alternatives proposed by the Minister of Finance violate the constitutional norm by virtue of which, under no circumstances, the IIF can undermine the fundamental rights protected in the Judgment, restrict its reach or deny its effective protection. In any case, it is worth highlighting that there is a right to appeal, according to the terms established in the law.
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One of the strongest problems facing the Ministry of Finance and what is complicated by this fact is the lack of cash in the Nation’s accounts, generated among other things by the drop in tax collection as a result of the economic slowdown, the uncertainty in the Dian arbitration litigation and now, for the resources that must be returned with non-deductibility.
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At first glance, the accounts suggest that the fiscal gap would exceed 26 billion pesos, which would start with the income from arbitration litigation that was projected by Dian last year at $15 billion, and then adjusted by $10 billion (about month of January) and is currently projected to be over $3 billion.
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Taking into account that the most recent data, officially published by Minhacienda in the Medium-Term Fiscal Framework, was $10 billion and now there is talk of $3 billion, there is the first gap; which oscillates over $7 billion. At this point it is worth highlighting that there is still no official law to formalize this income.
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Likewise, according to Corficolombiana projections, to this we must add that tax collection would fall by just over $16 billion as a consequence of the economic slowdown, which has strongly hit aspects of the economy such as consumption and both imports and exports.
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Now, if we add to this that only for 2024, the projection of collection due to non-deductibility of royalties was around $3.6 billion; It can be inferred that the gap exceeds the total already mentioned, which would put the country in an urgent scenario of freezing spending and investment, according to the rector of the EIA University, José Manuel Restrepo.
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“The freeze is a figure that is made very simple, it is proposed by the Minister of Finance, he normally takes it to the cabinet, to the Council of Ministers and the decision is adopted and there is no problem, all the ministers have done it in our history” , he indicated.
José Manuel Restrepo, rector of the EIA University
Sergio Acero Yate / Portfolio
This expert stated that “the most important consequence is that an additional reason is generated for non-compliance with tax collection and, with it, the tax revenue goals of the Nation,” with which reassessr the pace of spending and investment becomes essential, if we want to guarantee the fiscal sustainability.
Finally, for Henry Amorocho, professor at the Universidad del Rosario, we must not overlook that this is not a last resort decision and that it could be reversed in higher instances, and that this was a very divided ruling, since there are concepts found by the magistrates.
Henry Amorocho, professor of Public Finance, Universidad del Rosario.
Courtesy – Universidad del Rosario.
“Some analysts and dissident judges argue that royalties They should not be deductible because they do not belong to the companies that pay them, but to the Nation, according to articles 101, 102 and 360 of the Political Constitution. Royalties are an economic consideration and not a tax, therefore, they should not be deducted in the income tax return,” this expert highlighted.
Casa de Nariño did not view this ruling favorably, since they reiterate that there is a direct impact on the finances of the State, due to the resources that will no longer be received and that the public debt is growing. This is without counting the incentive to deteriorate the environment that is supported by the high court.
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