COVID-19: How did it affect the tax system and how would it recover?

The adoption of the measures implemented by the Government during the pandemic had a strong effect on tax collection and the fiscal balance.

The fiscal expenditure allocated to address the pandemic amounts to 2.7% of GDP, so a tax reform is required to increase by 2% of GDP.

The Private Competitiveness Council -CPC- presented on November 24, 2020 the National Competitiveness Report 2020-2021. In its chapter dedicated to the country’s tax system, it indicates that one of the tools used to mitigate the effects of the crisis derived from COVID-19 is tax policy.

“In the face of the sharp slowdown in economic activity, the Government adopted tax measures that seek to provide greater liquidity to individuals and companies in order to keep demand active, guarantee the survival of firms and defend employment, despite having limited fiscal space given the persistence of the fiscal deficit and the volume of public debt,” the report states.

Among the tax actions are:

– Abbreviatedrefundsof income tax and VAT credit balances, which represents an estimated cost of 3.9 trillion pesos, according to the Dian.

–Anticipationof VAT compensation to the most vulnerable population (75,000 million pesos).

–Modificationof the insolvency regime (724,000 million pesos).

–Modificationof the tax calendar, in the dates for filing and payment of income tax and deadlines for filing VAT (950,000 million pesos).

– VATexemptionsfor goods associated with COVID-19 protection, air transport service and mobile internet connection and access (1,023 billion pesos).

–Exclusionsand reductions to consumption tax.

–Tariffof 0 % for products necessary to address the health emergency.

–Threedays without VAT (450 billion pesos).

–Agreementsand payment facilities for tax obligations and suspension of terms during the sanitary emergency.

Consequences of the measures

“the total collection for 2020 will be reduced by 24 trillion pesos with respect to the figure projected at the beginning of the year, corresponding to 167.5 trillion pesos.”

The adoption of these measures had a strong effect on tax collection and the fiscal balance. The Dian estimates that, due to the economic impact of COVID-19 and the drop in oil prices, the total collection for 2020 will be reduced by 24 trillion pesos with respect to the figure projected at the beginning of the year, corresponding to 167.5 trillion pesos.

For its part, data from the Medium Term Fiscal Framework -MFMP- 2020 indicate that fiscal spending associated with pandemic care amounts to 2.5% of GDP: 0.8% of GDP allocated to the implementation of measures to adapt the health system, 0.9% of GDP to care for the vulnerable population and 0.8% of GDP to protect employment and maintain the business fabric.

Fiscal recommendations to confront the pandemic

For the CPC, the fiscal expenditure associated with pandemic care amounts to 2.7% of GDP, so a tax reform is required to increase revenue by 2% of GDP. To achieve this, the entity recommends

1.Extend the threshold from which income tax for individuals begins to be levied, in order to broaden the taxable base and increase its progressivity.

2.Include in the category of goods and services excluded from VAT only those of public interest, and in the exempt category, only those exported.

3.Expedite the implementation of the technological modernization plan and of the Dian’s human resources.

4. Toreduce evasion and avoidance by providing the Dian with instruments to combat these crimes, hand in hand with the creation of the Specialized Directorate Against Tax Crimes.

Rationalize exemptions and special tax regimes.

Opportunity to implement a structural tax reform

From the entity’s point of view, the crisis must be turned into an opportunity to implement a structural tax reform that eliminates the distortions that currently exist in the country’s tax system, which affect consumption, investment and tax collection, and limit its progressiveness.

“Implementing a structural tax reform once the country returns to the path of economic recovery would open the possibility of having an efficient and progressive tax system, which promotes business and labor formality, adapts to the globalization of tax systems and takes advantage of technological change to improve its effectiveness,” indicates the CPC.

Source: Actualícese