Colombia Finances at Risk From Legal Challenge to 2019 Tax Hikes

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(Bloomberg) -- Colombian tax increases which took effect at the start of the year are being challenged in the Constitutional Court, posing a threat to government revenue.

A motion filed by former Vice President German Vargas argues that procedural errors during the passing of the financing bill violate the constitution, according to a copy of the document sent to Bloomberg by Vargas’s office.

The motion calls for money raised by the legislation to be returned.

The law raised taxes on individuals, and would have cut them on companies from 2020. Vargas’s motion argues that the 2018 legislation failed to comply with an article of the constitution which requires that bills must first be published before approval by a congressional committee.

The Finance Ministry didn’t immediately reply to an email seeking comment, sent outside normal business hours.

Jose Gregorio Hernandez, a former president of the Constitutional Court, said that such a procedural error is indeed grounds for repealing the law.

“The court should declare the whole financing law unconstitutional as the argument is well founded in the law,” Hernandez said in a phone interview. “The only option for the government is to present another tax bill.”

Hernandez said that there is a precedent for such a decision. The tribunal in 2000 repealed a National Development Plan bill of former President Andres Pastrana on procedural errors.

It’s unclear what the the court will decide regarding money already raised by the legislation, Alejandro Reyes, principal economist at BBVA‘s Colombia, said.

“The fiscal impact may be limited if the court decides the government can keep the tax revenue, but if it decides it can’t, it will be complicated for the government,” Reyes said in a phone interview.

The legislation barely raised half the 14 trillion pesos the government originally sought, underscoring President Ivan Duque’s tepid support in Congress. With Colombia heading into regional elections in October, it’s unlikely that lawmakers will be willing revisit unpopular taxes, Reyes said.

©2019 Bloomberg L.P.

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