Colombia court strikes down ban on deducting royalties from tax income

BOGOTA (Reuters) -Colombia’s Constitutional Court has struck down part of a law that prohibited extractive companies from deducting royalties paid to the government from their taxable income, benefiting businesses and dealing a blow to government finances.

The rule was included in a tax reform from the government of leftist President Gustavo Petro, which was approved by Congress and came into effect this year, as part of efforts to fund programs aimed at tackling poverty and inequality.

“After the regulatory integration, the entire censored paragraph was declared unenforceable,” the court said in a statement late on Thursday.

Colombia’s Finance Ministry expected to collect 3.38 trillion pesos ($829 million) with the measure this year, followed by 2.79 trillion pesos in 2024 and some 2.2 trillion pesos in 2025.

Colombia’s government will now explore the possibility of taking payment in kind, such as in coal, oil, or any other exploited resources, Finance Minister Ricardo Bonilla said on Friday.

The potential workaround is being examined because natural resources “don’t enter into the accounting of those exploiting them, and given that the court’s discussion always revolves around paying royalties with money, which does enter the accounting process,” Bonilla said.

Petro voiced his objection to the court’s decision on social media.

“Following this decision, which I cannot agree with, it’s up to the finance minister to cut the budget of the three branches of public power,” Petro said in a message on X, formerly known as Twitter, referring to Colombia’s Congress, executive and judiciary.

The court’s ruling shows Colombia’s institutions are strong, said political analyst Sergio Guzman, director of Colombia Risk Analysis, adding the government will now have to consider taking different courses of action.

“Clearly this forces the government to rethink several things and have to make some adjustments that perhaps they would not like to make,” Guzman said.

Business associations and industry figures had widely criticized the government’s decision to stop businesses deducting royalties from their taxable income, and celebrated the court’s decision.

“The Constitutional Court’s ruling … opens the door to attract more long-term investment and benefits for regions, and the quality of life of Colombians,” the Colombian Petroleum Association (ACP) said in a statement.

Oil and coal are major sources of income for Colombia via exports, taxes and royalties.

“This result implies a boost to competitiveness by guaranteeing the legal security of an industry that benefits and generates opportunities for progress and development for more than 50 million Colombians,” Juan Camilo Narino, president of the Colombian Mining Association (ACM), said in a statement.

($1 = 4,077.44 Colombian pesos)