Representatives of local "free zone" exporting companies took part in an annual regional Free Zone Congress in Costa Rica at the beginning of September with one burning question in mind: will multinational exporters flee the country in 2003, when a World Trade Organization-established deadline requires countries to eliminate their income tax exoneration incentives?
President Miguel Angel Rodriguez categorically stated at his inaugural address of the Fourth Latin American Free Zone Congress: 'We will not allow Costa Rica to become less competitive than other countries. We will back a new investment scheme that will support both the company and the country.'
The current free zone export regime in Costa Rica provides eligible companies with benefits including facilitated customs procedures, the lifting of an import tax on raw materials used in the production process, and income tax exoneration of between 50 per cent and 100 per cent for 12 to 18 years, depending on where in the country the company locates. Costa Rica’s non-free zone companies pay up to 30 percent in income tax.
During the 1994 Uruguay round of trade negotiations, the WTO’s 127 member nations, including Costa Rica, ruled that tax exemptions which favour only certain commercial sectors, such as exporters, are discriminatory and agreed to phase out such incentives by 2003. Trade incentives that benefit all commercial sectors are acceptable, according to the WTO.
Figures from the Costa Rican Investment Board (CINDE) indicate that companies operating under the free zone export regime produced some US$3.6 billion in goods last year – approximately 20 percent of the country’s US$15 billion gross domestic product (GDP). This figure is up 45 per cent over 1998’s US$2 billion. Some 72 per cent of this production came from free zone companies such as US giant Intel, that operate independently of the 10 free zone business parks located throughout the country. More than 36,000 families make their living off free zone-related jobs.
The impending deadline from the WTO is naturally causing concern amongst professionals in the free zone sector, and some believe that unless Costa Rica comes up with some viable alternatives, companies will leave.
It is not yet clear exactly what the new investment scheme mentioned by the President at the Free Zone Congress will be. Foreign Trade Minister Tomás Dueñas has said that a commission comprising the Central Bank president, Finance Minister and representatives of the Costa Rican Investment Board (CINDE) and the Foreign Trade and Economy Ministries are working on a new investment framework. He said: 'We’ve been meeting for about two months, discussing various ideas to later determine a strategy that we’ll discuss further with the private sector, political parties and others. This will form part of a national strategy.' The commission is expected to issue its first recommendations within two months.
Jorge Brenes, president of both the Costa Rican Free Zone Business Association (AZOFRAS) and the Metro Free Zone in Heredia, says that analysis and negotiations on a new incentive framework must begin quickly to be in place by the January 2003 deadline. However, he does not see the year 2003 as a commercial "doomsday." He stated: 'I think this problem has been somewhat exaggerated, because today, in Costa Rica, there are around 30 companies that operate under the Free Zone Regime and already pay income tax. By 2003, more than 20 additional free zone companies will also be paying taxes, because their exoneration period will have expired. The WTO requirement will not cause the free zone system to collapse. Businesses have to understand that with this reform, they’ll have to pay income tax no matter where they decide to locate.'
Brenes, whose AZOFRAS works to promote free zone development and protect its companies’ interests, has noticed that other countries are already using alternative benefits which are apparently acceptable to the WTO: 'In Mexico and Ireland, free zone companies pay a lower income tax rate than do other businesses, and this seems to be okay with the WTO.And these are both countries that play important roles in world commerce – Mexico as part of NAFTA (the North American Free Trade Agreement with partners the US. and Canada) and Ireland as part of the European Union.'
Brenes seconded the possibilities voiced by other Free Zone Congress speakers that multinationals located in Costa Rica could deduct the income taxes they pay here from the corporate tax returns in their native countries. He also said that Costa Rica could consider a series of additional alternatives, such as providing companies with tax deductions for training expenses, local research and development or environmentally safe industrial practices in order to attract investment. Brenes concluded: 'These are only a few examples of the many things the government could do, while still falling within the framework of the WTO. This requires further analysis to determine what’s right for Costa Rica.'
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