Colombia considers reducing VAT to reactivate tourism

15-08-24

The Colombian Ministry of Commerce, Industry and Tourism is evaluating the possibility of reducing the Value Added Tax (VAT) as a measure to boost the hotel sector, one of the most affected by the economic crisis derived from the COVID-19 pandemic and the global economic slowdown. This initiative has gained relevance in the midst of the challenges facing the country's tourism and hotel industry, and it is expected that an eventual VAT reduction could provide significant relief to the sector's entrepreneurs, who have seen their revenues drastically reduced in recent years.

The hotel sector in Colombia has been going through difficult times since the arrival of the pandemic in 2020. Although a partial recovery in international and domestic tourism was observed in 2023, occupancy levels and revenues generated by hotel services are still far from pre-pandemic levels. In addition, inflation and rising operating costs have added further pressure on hotels, which were already facing fierce competition and changing consumer preferences.

In this context, the possibility of reducing VAT appears as an attractive measure to invigorate the sector. Currently, the VAT for hotel services in Colombia is 19%, a figure that many businessmen consider high and which, according to them, discourages national and international tourists from using formal lodging services, thus encouraging informality and negatively affecting the quality of service.

For more information on this possible measure, we contacted Luis Carlos Reyes, Colombia's Minister of Commerce, Industry and Tourism, who shared with us details on the discussions taking place within the ministry. Reyes confirmed that a VAT reduction for the hotel sector is indeed being considered, although he emphasized that the proposal is still in an initial phase of study and that the fiscal impacts of such a measure need to be carefully evaluated.

“We are aware of the difficult situation faced by the hotel sector and of the importance of taking measures that contribute to its reactivation. However, we must be prudent and make sure that any change in fiscal policy is sustainable and does not compromise public finances,” said Reyes.

The minister also mentioned that the hotel sector is crucial to the Colombian economy, not only because it generates employment, but also because it is a pillar of tourism, one of the country's most important industries. “Colombia has enormous tourism potential, and it is essential that we work together with the private sector to boost this resource. The VAT reduction is one of the alternatives we are evaluating, but we are also considering other complementary measures that can support the industry,” he added.

The possible VAT reduction has been received with optimism by hotel businessmen, who have been requesting this type of tax relief for some time. The Colombian Hotel and Tourism Association (Cotelco) has repeatedly stated that the current VAT level is an obstacle to the sector's competitiveness and that a reduction could generate an immediate positive effect on the demand for hotel services.

According to Cotelco figures, average hotel occupancy in Colombia during 2023 stood at 50%, a figure that, although higher than in the pandemic years, is still below the 60% recorded in 2019. In addition, the sector has faced an increase in operating costs due to inflation and the devaluation of the Colombian peso, which has reduced profit margins and driven many hotels into bankruptcy or to operate in very precarious conditions.

Likewise, several hoteliers in the country have been contacted and they point out that a reduction in VAT would be a "breath of fresh air" for businessmen in the sector. They agree that it is not just a question of financial relief. A lower VAT would make more Colombians and foreigners choose to stay in formal hotels, which in turn could increase tax collection by volume and improve the quality of service.

Despite the enthusiasm generated by the proposal in the hotel sector, the VAT reduction is not without its challenges. One of the main points of debate is the impact this measure could have on tax collection. VAT is one of the main sources of revenue for the Colombian government, and any reduction in its rate could mean a significant decrease in tax revenues, which would further complicate the country's financial situation, which already faces a considerable fiscal deficit.

Luis Carlos Reyes acknowledged these challenges and affirmed that the Ministry of Finance is also involved in the evaluation of the proposal. “We are working hand in hand with the Ministry of Finance to evaluate all the fiscal implications. The VAT reduction is just one of several alternatives we are considering, and we want to make sure that any decision we make is balanced and sustainable in the long term,” the minister explained.

Reyes also emphasized that, should the VAT reduction be approved, it could be accompanied by other fiscal or regulatory measures to compensate for the decrease in revenue, such as strengthening the fight against tax evasion in the informal sector or increasing other taxes related to tourism.

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