Government tax proposal does not represent any relief for the industry, it is the most harmful: ACP

The Colombian Association of Oil and Gas reiterates its concern about the tax reform and the effects it will have on the country in the medium term. The proposal announced by the Government with the coordinating rapporteurs, instead of correcting, further burdens the sector affecting its competitiveness, viability, the development of oil production, and the generation of fiscal contributions for the country and the regions.

• The tax reform would be 115% more expensive than the initial proposal submitted in August
• The impact of the reform on sector projects would affect hydrocarbon production and the generation of fiscal contributions to the country and regions
• With the tax reform, oil production would fall to 450,000 barrels by the end of the decade
• By 2026, the revenue with tax reform would be up to 10% lower than the revenue without reform, and 44% lower by the end of this decade.

The most recent proposal sets a surtax that varies based on the international oil price over the last 10 years and corresponds to a surtax of 5, 10, and 15 points. Thus, according to the analyses conducted by the guild, and considering the price projections of the Medium-Term Fiscal Framework -MFMP-, this proposal would imply that in the coming years the surtax would be between 10 and 15 points, due to the thresholds for setting it remaining very low and not reflecting the considerations for being classified as high prices. This makes this proposal excessively burdensome and high compared to other economic sectors such as finance and electricity.

On the other hand, the Government maintains the prohibition of deducting the royalty from income tax, although it eliminates the requirement that had been imposed to create a fictitious income for the royalty paid in kind. This does not compensate for the increase in the surtax from 10 to 15 points, because the higher surtax on oil generates an exponential cost by increasing by more than 50% the rate on which it is taxed (it goes from 35% to 50%). Likewise, the 30% of oil production and the 100% of natural gas production pay the royalty in cash, so they do not benefit from the adjustment; instead, for this concept, oil will have to pay an additional 41% to the Government's initial proposal.

This proposal, while considering the variation of international prices, is the most burdensome of all and does not represent relief, as it is 115% more expensive for companies than the proposal initially submitted by the Government and 5% more burdensome than what was approved in the first debate. With this scenario, the Government take for new investment projects would increase to 85%, taking Colombia out of the competitiveness map in the region, according to figures from CEPAL.

This proposal, in addition to compromising development projects of discovered resources and exploration under existing contracts, would also put at risk investments to increase the recovery factor, which sustain current production. With a cut in investment programs, which could range between 30% and 50%, production will gradually decline, and by the end of this decade, the decrease would be between 350,000 and 450,000 barrels of oil, from the 750,000 barrels per day currently produced.

The drop in production would affect the country and the regions as the contributions from the industry would be significantly lower, meaning that revenues resulting from the reform would be lost. By 2026, the revenue with reform would be up to 10% lower than the revenue without reform, and by the end of this decade, it would be up to 44% lower.

“What we have been warning from the union is the impact that these decisions will have for Colombia in the medium term, because if investments in the industry decrease, production will fall and, consequently, the contributions of this sector to the country and the regions will fall. There is a focus on the short term and not on how to maintain and take advantage of an industry and its resources, which are key for public finances, for the financing of development programs in the regions, and for all Colombians,” stated Francisco José Lloreda Mera, president of the ACP.