Costa Rica Renews Tax Reform Push

by Mike Godfrey, Tax-News.com, Washington

23 June 2011

The Costa Rican government has renewed its efforts to implement a comprehensive tax reform programme, presenting a new motion to parliament which it says has the support of a cross-party group of lawmakers.

According to the government, it has presented the motion to the Legislative Assembly, which has already received the signatures of 30 deputies, one more than is required to secure its passage through parliament.

The government has stressed that these deputies represent various parliamentary factions, which will be key given recent political developments in Costa Rica. In May, the opposition parties came together to effectively reduce the government to a minority position in the Assembly, and government efforts to introduce tax reform measures have consistently hit stumbling blocks over the past decade.

The Minister to the Presidency Carlos Ricardo Benavides, along with Fernando Herrero, the Finance Minister, emphasized that the motion was the result of an intensive dialogue. Such dialogue, they argue, has created consensus on a national issue requiring an urgent solution. Herrero said of the government's intentions: "Our goal remains the same, the country needs tax reform".

The ministers went on to note that the government has held meetings with representatives of various interested sectors, along with business associations, mutual funds and the Banco Popular. It has also talked with opposition MPs and, the ministers pledged, remains open to dialogue in order to reach a national agreement on the issue. It is organizing workshops with different political organizations.

The passage of tax reform in Costa Rica has been anything but smooth. An initial attempt was made in 2002, when the then government attempted to move away from a territorial tax system, and switch instead to one taxing worldwide income. It also intended to replace the sales tax with a value added tax (VAT), a proposal which has been carried down through the years by various administrations. The reform bill fell with the collapse of the government in 2006, only to be reintroduced later that year by a new administration.

Most recently, president Laura Chinchilla has pursued the reform agenda. In January, a new set of reforms was introduced, with a key part of the government's proposals the imposition of a 14% VAT to expand and replace the present 13% sales tax. In addition, changes were planned to corporate deductibility and small business tax rules, and the taxation of capital income, which would be harmonized at a rate of 15%. An increase to the tax on vehicles by 10% was also under consideration. It is expected that the government's latest package will avoid expanding the collection of goods and services subject to the new VAT.

A recent International Monetary Fund mission to Costa Rica reported on the need for such changes. It also partially attributed the recent rise in the country's deficit to 5.5% to subdued tax revenues, and emphasized the necessity of securing a higher revenue base that increases the country’s capacity to respond to adverse shocks.

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