Although the tax reform is already firm, since it only lacks the presidential sanction, the effective tax rate (TET) of the companies continues to give people talk. The Ministry of Finance presented a report in which it calculates the increases that this would have for the hydrocarbon and coal sector in Colombia, and maintained that, after analyzing the profitability of the sectors, it will remain positive.
(Royalty budget for $31.1 billion passes to presidential sanction).
The business TET corresponds to the percentage of profits that companies allocate to paying taxes. Various business sectors argued that the reform raised this rate, especially for hydrocarbon and coal companies, which from next year will be subject to a rent surcharge, subject to international prices, of up to 15% and 10% respectively, and no longer may deduct royalties from income tax.
The results presented by the ministry indicate that the tax reform increases the effective burden of hydrocarbon extraction between 3.8 and 15.3 percentage points.
In a scenario of high prices, in which the maximum surcharge (15%) would be applied, the TET would be located at 46.8%; with medium-high prices, with a surcharge of 10 points, the TET would be 41.4%, while with medium-low prices (5% rate), the Treasury calculates a rate of 37.7% and with low prices, without surcharge, that the effective rate would be 33.6%.
“To the extent that, in the medium term, oil prices close to the historical median are expected, the reform generates only a moderate increase in the tax burden, which does not discourage new investments to increase production,” the ministry said. in his analysis.
(Ministry of the Treasury clarifies the effect of the tax on the rate for hydrocarbons).
In the case of coal, the ministry’s calculations indicate that the increase in the TET is between 6.7 and 20.2 percentage points.
The three scenarios proposed by the portfolio estimate that in a situation of high prices, with a surcharge of 10%, the effective rate would reach a level of 56.5%; Given a situation of average prices, in which the rental rate increases by 5 points, the TET would be located at 48%, while a central scenario would be 42.7%.
The ministry was also emphatic that, despite the fact that the estimates are made on the hydrocarbons sector, it is highlighted that the rental surcharge does not apply to the extraction of natural gas.
Financial profit
The analysis presented by the ministry also focused on financial profitability, and ROE was calculated for the hydrocarbon and coal extraction sectors.
“With the tax reform, in the case of the hydrocarbons sector, profitability under the different surcharge scenarios remains positive and growing in relation to the international price,” the report highlights.
According to the Treasury, this would amount to 5.1% in a scenario of low prices, 10.5% in the face of medium-low prices and 15% in the scenario of high prices. For the coal sector, the ROE projection is that it rises to 2.7% with medium prices and 7.7% with high prices.
Comparison against external analyzes
The ministry clarified that its calculations “are based on substantial methodological differences compared to those estimated by other analysts.”
In the case of Fedesarrollo, for example, The Treasury assured that the estimates include the non-deductibility of royalties for the oil sector at commercial value, and not valued at production cost, as was stated in the text of the reform.
For the calculations of unions in the mining and oil sector (Colombian Mining Association and Colombian Petroleum Association) different methodologies are applied, “which are not strictly comparable” with those of the document. According to the Treasury, the unions analyze the charges “that a new oil and gas extraction project would face, in an abstract way, and not the taxes that companies in the sector actually pay.”
According to the portfolio, this explains the higher calculations than those of the Government.
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