Rankings report: Colombia

Colombian turmoil creates economic depression

The combination of political turmoil, radical economic reform and a depressed economy is creating a challenging environment for Colombian firms.

Colombia is floundering. The economy is in the doldrums and much needed tax reform has set the government at loggerheads with the business community. With JP Morgan predicting Colombia will lose its Emerging Market status, the country becomes less attractive to foreign investment by the day. Local accounting firms find themselves firefighting on numerous fronts: the general business environment on one hand, while on the other it struggles with a skills shortage that hampers its ability to meet demand for more specialised services.

“At the end of 2022 a law was enacted with a new tax reform that introduced important changes for Colombian companies,” said Luis Lopez, commercial manager for Alfredo Lopez y Cia, an Allinial Global member firm. “Changes such as the minimum tax rate of 15% of the adjusted financial profit, reduction of some benefits through new limitations of these, special rules for the sugary drinks sector, one time use plastics, oil and gas, as well as new taxation on the digital economy. There is also a permanent wealth tax for individuals and other anti-avoidance measures. Regarding labour and commercial law, the country is waiting for new regulations currently being drafted that, if successful, would bring important changes for the business sector.”

The tax reform bill, made law in November 2022, has been controversial. The Colombian government estimates that the reforms will raise an additional 20 trillion pesos (USD 4 billion) annually for the next four years, and it is the centrepiece of President Gustavo Petro's economic policies. But it has also been heavily criticised by business lobbies who argue that the levies on the country's top exports will discourage investment.

Duties will be levied of up to 10% on coal and up to 15% on crude oil when prices go above a certain level. The new law states that oil companies will be taxed an additional 5% when international prices are between USD 67.3 and USD 75 per barrel. That then becomes an additional 10% when prices are between USD 75 and USD 82.2 per barrel and then 15% if they climb any higher. Coal companies will face similar extra charges when prices exceed certain thresholds. Oil and mining companies will also not be able to deduct the value of royalties from income taxes.

Luis Lopez, commercial manager at Alfredo Lopez y Cia

The bill also establishes a permanent equity tax, which will be levied on 1 January of each year. Colombian resident individuals will be subject to equity tax over their worldwide net worth, while non-resident individuals will be taxed only on their assets in Colombia.

Such rapid and complicated reform should result in a boom in demand for accountancy services, but local companies are struggling with their own problems.

“The accounting industry in Colombia faces important challenges – professionals need to be up to date in IFRS standards, compliance, and regulations of different industries, and clients are increasingly requiring a comprehensive portfolio of services from firms,” said Lopez. “Additionally, finding qualified accounting professionals has become a very challenging task, not only for hiring new staff, but also for retaining them. There is a lot of speculative investment on which technology-based solutions should be added to the accounting services firms offer, which are already beginning to crystallise in real solutions for administrative-accounting processes based on RPA - Robotic Process Automation, as well as an interest in investing in research and development in accounting solutions based on Blockchain.”

The demand for accounting services in Colombia waxes and wanes with the health of the country's economy and overall business activity. “During periods of economic growth, there is likely to be high demand for accounting services as companies need to keep proper records of their financial transactions and comply with tax regulations,” said Fabian Andres Romero Acosta, audit partner at Nexia Montes y Asociados S.A.S.  “However, during economic recessions, the demand for accounting services may decrease due to reduced business activity.”

The Colombian economy is struggling and the downturn in its fortunes is affecting every business sector. After it contracted more than forecast in the second quarter of this year, Colombia’s Finance Ministry joined the nation’s top bankers and industrialists in calling for interest rate cuts to revive the weak economy. In a rare, combined statement, Finance Minister Ricardo Bonilla added his voice to the private business groups asking the central bank to ease monetary policy sooner rather than later. Colombia’s 13.25% monetary policy rate is the highest among the region’s major economies.

Fabian Andres Romero Acosta, audit partner at Nexia Montes y Asociados S.A.S

Colombia’s economic status is also becoming toxic to foreign investment. The US investment bank JP Morgan, in a recent report, warned that poor earnings across the market, combined with Colombian stocks failing to meet the liquidity threshold of the Stock Exchange’s MSCI Colcap index, could potentially reclassify Colombia out of EM (Emerging Markets), triggering outflows and lower visibility. Should Colombia lose its EM ranking, the economy would be reclassified as a high-risk Frontier Market.

Colombian inflation slowed to 11.8% last month after peaking in March, though that’s still nearly quadruple its 3% target. Meanwhile, the central bank forecasts economic growth of less than 1% this year, down from 7.3% in 2022. The political and financial situation has created new markets for local accountancy firms but fee pressure is still brutal.

“With the change of government, investors and business owners experienced significant uncertainty,” said Acosta. “It created a lot of demand for business restructuring services, while the creation of group schemes with parent companies outside of Colombia generated significant demand. The devaluation of the peso generated an important search for strategies that would allow companies to deal with the impacts generated by the increase in the dollar exchange rate, so financial and banking consulting services were in high demand during the last quarter of 2022 and the first of 2023.”

Fee pressure is a balancing act - as competition increases and clients seek more efficient and affordable services, local accounting firms face pressure to keep their fees competitive. Government moves such as the tax reforms are adding to the complexity of tax and accounting regulations, which means firms can offer specialised services at higher rates. The reality, according to Acosta, is that, in general, fee pressure in Colombia is fierce, since new small-sized firms have been appearing that offer very low fees that larger and more established firms find hard to compete with. Clients are not always convinced that quality is more important than price and this has led to a slip in standards amongst the smallest firms.

Jaime Jaramillo, operational controller at Kreston Colombia

“Colombia is a country where a large part of the business community is SMEs and microenterprises,” says Jaime Jaramillo, operational controller at Kreston Colombia. “It has been difficult to raise awareness amongst very small accounting firms of the need for international standards, which has created controversy regarding the standard of work. There is a lot of demand for tax consulting and advice, but fees are under pressure because of the amount of competition in this area, offset by the lack of skilled staff.”

Acosta is also seeing a skills shortage. “The retention of personnel is today one of the biggest challenges at the company level,” he said. “People are always looking for new work scenarios. The long hours and the high pressure that this industry typically demands is creating a high staff turnover across all firms. It is also important to note that trends in digitisation and technology may be affecting the accounting industry in Colombia, as they are worldwide. The automation of routine tasks and the adoption of accounting software can change how firms deliver services and impact the demand for traditional services.”

Merger and acquisition activity amongst accountancy firms has been very low, which Lopez feels is probably due to the lethargy and slowdown introduced by the pandemic. “However, I think in future technology is going to push a lot of M&A activity amongst accountancy firms in Colombia,” he said. “As firms build up technical skills and assets, they are going to start looking to directly target specific clients’ requirements. There will also be an escalation amongst accountancy firms as they start to develop big data and IoT (Internet of Things) skills, as well as an expansion in scopes in terms of compliance and risk management at all levels.”

Acosta sees ESG issues and issues of automation and artificial intelligence now becoming a big part of the accounting discussion. “In terms of ESG, regulatory bodies have been incorporating some requirements for organisations,” he said. “They are not yet mandatory, but in the short term they will gain importance and generate significant development for the profession. In the areas of AI and automation, work is being done to include these in the performance of operational tasks and for professionals to carry out a greater analysis of issues. Firms no longer see these as a threat and instead are generating job opportunities based on them.” 

Oscar Villaruel, audit partner, for Crowe Colombia

Political turmoil and complicated regulation will continue to bring in new business for some time to come. “The new laws and requirements of the control entities have motivated companies in Colombia to seek specialised services in accounting and in taxes and legal services,” said Oscar Villaruel, audit partner at Crowe Colombia. “The uncertainty arising from the type of government in the country has generated the need to explore new opportunities for structuring the assets of companies and adequate planning for the protection of resources. Companies have chosen to specialise services related to their back office, using accounting and tax outsourcing services, this to ensure their reporting procedures and attention to the different legal requirements.”

The next year could be critical for firms trying to balance on a high wire of needing to meet ever more sophisticated customer demands, while fighting for the skills to develop consultancy services. It remains to be seen if the controversial reforms being pushed through by the government stall Colombia’s economy altogether.