Costa Rica Negotiating Double Tax Avoidance Agreements

by Mike Godfrey, Tax-News.com, Washington

14 March 2006

As Costa Rica prepares for its controversial switch from a territorial tax system to one where it will collect tax on worldwide income, it has emerged that the country's authorities have begun negotiations with several countries to avoid the double taxation of income.

According to an online report by Nacion.com, the director of the Revenue Service Francisco Fonseca has said that negotiations towards double taxation avoidance agreements with Israel, South Korea and Switzerland are in their early stages. Costa Rica is also in negotiations with Canada and Spain for similar agreements.

Currently, Costa Rica is not a party to any double taxation treaties. However, it has signed an exchange of information treaty with the United States with a view to promoting the interchange of tax information and to ensure that the correct level of taxation is levied in both countries as well as to eradicate tax evasion.

Last month, the long-delayed Costa Rican fiscal reform plan cleared its first legislative hurdle in the national assembly following its first reading.

The tax plan will introduce some major changes if passed, notably a switch to worldwide taxation from the current territorial tax system. Opponents of the tax plan fear that a move to a global tax system will deter wealthy foreign expats and investors from locating to or investing in Costa Rica, although it is thought that recent amendments to the legislation will allow foreigners to deduct tax paid on income earned abroad. However, the issue of expat taxation remains somewhat uncertain.

The bill must clear a second vote before President Abel Pacheco can sign the legislation into law.

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