The main institutional challenge is the tax deficit the country is facing. This calls for the observation of a tax rule so that the government aims for deficit reduction within specific projected values.

Ricardo RUIZ Energy Sector Leader & Tax Partner EY

in figures

Government royalty for light crude: 8-25%

Government royalty for gas produced onshore and in shallow water: 80% of government royalty for crude

Government royalty for gas produced offshore at a depth of more than 305 m: 60% of government royalty for crude

Colombia’s taxing prospects

March 10, 2016

Recent measures passed by Colombia’s National Hydrocarbons Agency (ANH) have aimed to alleviate regulatory burdens and free up capital to encourage the continued development of oil and gasfields. Ricardo Ruiz, tax partner and energy sector leader at EY, analyses the challenges faced by Colombian companies as they struggle to recover in a complex investment climate and supports collaboration between the public and private sectors to move the domestic industry forwards.

What are the greatest challenges facing Colombia with regards to tax regulation?
Two measures in Colombia have a strong impact on the sector. The first is that Colombia has a regressive tax policy. This means that when companies’ profits fall, the government take is higher than it should be. In addition, the combination of taxes and royalties is designed in a disharmonic manner that generates these kinds of results. This means that at low prices, an oil or gas project may become so complex that it produces only to pay taxes, royalties and other burdens.
The second problem is the early collection of taxes, meaning that the government gets an advance on tax payments that often have to be returned. It usually takes several months for companies to recover that money.
In the current situation with low prices, companies have no liquidity, and they need to pay advance taxes that are going to have to be returned. The state is receiving money, but companies are not using their money to explore or advance, which harms the overall economic health of both the public and private sectors.

 

How have recent measures enacted by the ANH affected tax burdens?
The measures are positive because they alleviate some operations, but they are not enough. This is because the ANH only has the competence to regulate the economic rights on its own contracts. The biggest part of the government’s take is the royalties and other tax burdens that are under national authority and need congressional approval in most cases.
However, it can be possible that the government creates a positive impact on the companies’ cash by reducing self-withholding taxes applicable to the sector. These measures could be supportive, but they would still not suffice entirely. If the government wants to see results in 2016-2019, taking good care of companies now could effectively support their recovery.

How can the public and private sectors work together to create a better institutional framework?

The main institutional challenge is the tax deficit the country is facing. This calls for the observation of a tax rule so that the government aims for deficit reduction within specific projected values. These are being impacted by oil prices because the projections were made with high barrel prices. As a result, the government is not able to take quick measures because it lacks the resources to comply with macroeconomic obligations and the ensuing challenges.
Beyond the institutional framework, there is a conciliatory relationship between the Ministry of Mines and Energy and the ANH. We are in an environment where resources are needed, and exploration and production companies need better capital quality to work quickly and more efficiently. This can only happen with an agreement between both sides. This poses a challenge because the government is trying to meet its tax deficit goals while balancing the oil industry’s requests.

How has the government ensured that regulations are favourable to the development of the offshore sector?

The government has been receptive to companies that have placed requests for offshore blocks. This has been reflected in measures, such as the lifting of restrictions on the free trade zone regime. Companies investing offshore receive preferential treatment in value-added tax and income tax reductions. These measures are perceived as positive.
However, as long as oil prices stay low, the measures are will not be enough because our system is regressive. The government will have to work with companies to revisit the ways in which it can support them with additional measures, so these projects can move ahead quickly.
In the offshore sector, capital needs are especially high, and returns for shareholders have to be adequate to compensate the risk taken.

How are these challenges mitigated and a middle ground found between the public and private sectors?

Professional services companies have been using the same processes for decades. This makes results good and predictable, but there is still room for improvement through the introduction of best practices from other sectors that can be applied to the oil and gas industry.
With prices staying low, the introduction of expertise coming from other sectors is very helpful. The application of this knowledge helps the client to survive these difficult times, and offers a different perspective for the public sector to consider.

For more news and features on Colombia, click here. 

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