Tax benefits cost the country almost six tax reforms

Amid a complex fiscal situation and growing calls for new tax reform, a disturbing figure recently emerged from the Javeriana University Fiscal Observatory, which warns that for every $100 the Colombian government collects, it loses nearly $50 due to tax benefits.

This opens the debate on whether a new reform is necessary or simply a review of the benefits, given that the structural loss of revenue, equivalent to 49% of total revenue collection, represents one of the main challenges to the sustainability of public finances.

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Specifically, according to the report, although the country achieved a historic revenue collection figure equivalent to 16% of its Gross Domestic Product (GDP) in 2023, a substantial proportion of that effort was offset by exemptions, deductions, and preferential treatment, which, according to the Observatory's analysis, amount to 8.7% of GDP.

To put this in perspective, the fiscal cost of these benefits is more than six times higher than the revenue collected by the 2022 tax reform, which targeted just 1.4% of GDP. Given this, the inevitable question is whether it is worth maintaining a system that provides tax relief with little evaluation of its effectiveness.

An unbalanced tax structure

The new Medium-Term Fiscal Framework (MFMP), presented by the Ministry of Finance on June 14, recognizes that Colombia faces a critical situation of rising public spending, growing debt, and an insufficient revenue structure to finance the needs of the State. Therefore, in this context, reviewing tax expenditures presents a powerful and urgent alternative.

“Far from being a marginal figure, tax expenditures represent a structural component of the Colombian tax system. Between 2019 and 2023, these benefits accounted for, on average, 50% of gross revenue. The peak was reached in 2022, when this figure reached 57%, which means that for every peso collected, the State lost another,” the report states.

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In terms of GDP, the Observatory also reported that the annual loss from tax benefits has ranged between 7% and 9%, a figure that is striking due to its persistence and lack of technical oversight.

The point is that, in theory, preferential treatment in the tax system is intended to boost strategic sectors, encourage investment, or alleviate burdens on vulnerable populations. However, in Colombia, there is no clear policy that prioritizes, measures, or refines these benefits, and many survive more due to legislative inertia or sectoral pressure than proven merit.

Between 2021 and 2022, the total value of tax benefits increased from $88.3 billion to $114.3 billion, a 29.4% increase. According to the Fiscal Observatory, more than 70% of this amount is concentrated in VAT, followed by income taxes on legal entities and individuals. Thus, the structure of tax expenditure reveals a strong orientation toward sectors with greater lobbying capacity, rather than toward redistributive or regional development objectives.

Who really benefits?

One of the report's most critical findings is the high concentration of tax benefits. According to figures from the National Institute of Statistics (DIAN) analyzed by Javeriana, the top 10% of companies receive more than 90% of the available tax breaks, while micro, small, and medium-sized enterprises, which constitute the bulk of the country's business community, receive only a marginal fraction.

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This pattern calls into question the progressivity of the tax system, as rather than reducing inequalities, the current benefits regime widens gaps by providing relief to those least in need and limiting state resources to fund essential public services such as health, education, and infrastructure.

Furthermore, the lack of periodic technical evaluations is another structural weakness. Unlike direct budget spending, tax benefits do not undergo regular congressional scrutiny or are subject to efficiency rules. An exemption can persist for years without anyone assessing its economic or social impact. In many cases, the objectives that justified its creation are unclear.

“In the Global Tax Expenditure Transparency Index (GTETI), Colombia ranks 35th out of 105 countries evaluated, with just 52 points out of 100. Although the MFMP has begun to report these benefits, the information remains generic, inaccessible, and lacks cost-benefit analysis. This leaves the country without the tools to decide which benefits should be maintained, adjusted, or eliminated,” they added.

They highlighted that while Colombia is making slow progress, other countries in the region have taken important steps. Chile and Mexico, which regularly publish and evaluate their tax benefits, allowing for evidence-based adjustments, and Canada and the United Kingdom, which have institutionalized periodic review processes and require technical justification for the continuation of each incentive, have also made it mandatory to justify the continued existence of each incentive.

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"These good practices allow tax benefits to function as true instruments of public policy, rather than as permanent privileges. Furthermore, they strengthen citizen confidence in the tax system and improve the efficient use of public resources," the Observatory stated.

The true reform

In this context, the Fiscal Observatory proposes that the next tax reform cannot focus solely on raising taxes, but must begin with a comprehensive review of the tax benefit system, bearing in mind that eliminating inefficient or regressive treatments would not only broaden the tax base but also reduce the deficit without burdening taxpayers.

"We are faced with an opportunity to implement a reform that does not raise revenue, but rather corrects distortions, improves equity, and restores the sustainability of the tax system," the report states. It also proposes that all tax benefits be treated as public expenditures, with defined objectives, expiration dates, technical evaluation, and parliamentary approval.

While acknowledging that modifying the tax benefits regime will not be easy, these experts emphasize that many exemptions are protected without technical criteria and that postponing the discussion comes at a high cost. With rising public debt, pressure on the treasury, and new social commitments, the country cannot continue to reward fiscal inefficiency.

DANIEL HERNÁNDEZ NARANJO Portfolio Journalist