Chile and Colombia: The similarities of their tax reforms

On his first day of work, the new president of Colombia, Gustavo Petro, launched the tax reform promised in his campaign. It is the most important initiative of his administration, just like Gabriel Boric’s Tax Reform in Chile.

GENERAL CONTEXT

The recently assumed government of Gustavo Petro launched a tax reform committed in the electoral campaign on its first day of work. It is the most ambitious in recent Colombian history.

Coincidentally, Chilean President Gabriel Boric also included the most ambitious tax reform since the return to democracy in his government plan.

Both are the most recently assumed leftist leaders in Latin America. Petro – then-senator and presidential candidate – visited Boric for the Chilean change of command on March 11. Over the weekend, Boric traveled to Bogotá to attend the Colombian change of command. The two then had a bilateral meeting at Casa de Nariño.

To promote their economic plans, both Boric and Petro entrusted the management to finance ministers respected by the market and, in this way, to avoid noise due to the ideological origin of the presidents: Mario Marcel in Chile and José Antonio Ocampo in Colombia.

The total size of the two economies is not very different: Colombia’s GDP is about US$270 billion, while Chile’s is over US$250 billion. The Colombian population is much larger: 50 million, and Chile almost 20 million.

Regarding tax reform, both initiatives aim at greater horizontal and vertical equity; those who receive similar incomes are taxed similarly, and those who accumulate more income pay more than those who have less.

In both cases, the governments have made numerous comparisons with OECD countries -the organization to which Chile and Colombia belong- and have presented reports and statistics to support their projects.

Below, we present the coincidences and differences between the main tax initiatives of Boric and Petro.

COINCIDENCES

The first coincidence is the magnitude. These projects seek to inject the largest fiscal financing, through taxation, in decades. And there is a repeated number: while the Chilean Finance Minister aims to generate some US$12 billion in the regime, Ocampo expects to obtain some US$11 billion.

The phasing to achieve these goals is similar: four years.

Instead of concentrating on consumption taxes, the two proposals target the personal income and wealth segment. Boric’s government seeks to expand the segments subject to the Global Complementary Tax (IGC) in personal taxes.

Marginal rates are increased for those with monthly taxable incomes over CLP 4 million (US$4,500). The maximum marginal rate rises to 43% (from the current 40%), which is close to the average of OECD countries.

In the case of Colombia, the proposal proposes to affect those earning more than US$2,300 per month, which will be done through a reduction in tax benefits.

There is also a coincidence in the wealth tax. Colombia already had a tax of this type, which was temporary (2019-2021), and now they promise a greater “progressivity”. The wealth taxed would be higher than US$695,000, while in Chile, it is higher than US$5 million.

The rate in Colombia would start at 0.5%, but 1% for assets over US$1.1 million. The rate starts at 1% in Chile but would increase to 1.8% for assets over US$14.5 million.

The regime changes in both countries for the taxation of dividends. In Colombia, the tax rate for dividend payments to nationals will go from 10% to a ceiling of 39% and for foreigners from 10% to 20%. In Chile, the rate for dividends will be 22%, with a ceiling of 43%, which may be recharacterized as part of the IGC.

In sales of shares, the Colombian initiative eliminates the exemption on capital gains. In Chile, the preferential rate of 10% on capital gains will end so that it will increase to 22%, with the same re-settlement scheme on the IGC.

Both countries are producers of commodities: Chile of copper and Colombia of oil and others. While Boric seeks to install a royalty on mining, Petro will make oil, coal, and gold exports pay a higher charge of 10%. In these cases, they are also understood as taxes that compensate for the negative environmental externalities of the projects.

In fact, along these lines, Colombia will establish “green” taxes and also on sugared beverages. Boric has a similar menu in mind but will present it at the end of the year.

The Chilean Treasury calculates that the tax reform will affect around 3% of the population with more resources. In Colombia, they estimate that it will affect 2.4%. José Antonio Ocampo says in Colombia that “34,000 ultra-privileged” will pay.

Another common element is that Petro and Boric bet on injecting more revenue through anti-avoidance and anti-evasion plans.

DIFFERENCES

The first difference is timing. While Petro’s government presented its most ambitious bill, with numbers and articles, on the first working day after taking office, Boric announced it three months after arriving at La Moneda and then took several more days to send the complete bill to Congress.

Gustavo Petro and Gabriel Boric had, until two weeks ago, another very important coincidence: the political forces that supported them were in the minority in both chambers of their respective Congresses.

But while Boric continues to have a minority presence by adding Apruebo Dignidad and Democratic Socialism, Petro operated and got the support almost at the last minute of the Liberal Party (the second largest in the Parliament) and the U Party.

With all of them, Petro now has the initial backing of at least 63 senators (out of a total of 108) and 106 representatives (out of a total of 188 in the lower house). If this continues, Petro has a clearer legislative path to move forward with his tax reform, while Boric faces more significant opposition.

With information from Ex-Ante

For the full picture, see our Brazil Tax Reform: Complete Guide.