Costa Rican Lawmakers May Vote On Tax Reform Plan

by Mike Godfrey, Tax-News.com, Washington

13 February 2006

Supporters of Costa Rica's long-awaited fiscal reform package are attempting to schedule a vote in the legislative assembly for the latter half of this week, and reports indicate that a new intake of pro-tax reform lawmakers after the recent tightly-fought election could eventually swing the balance on the controversial issue.

First put forward in 2002, the tax package has been a divisive piece of legislation and its opponents have used a number of delaying procedures to ensure that it remains bogged down in the legislative assembly, despite attempts to fast-track the legislation.

The tax plan will introduce some major changes if passed, such as a switch to worldwide taxation from the current territorial tax system, meaning that tax will have to be paid on worldwide income by those resident in Costa Rica.

However, foreign individuals living in Costa Rica who can prove that their income has already been taxed in another jurisdiction, or are able to show that income is to be invested in the country, would be exempt under recent amendments.

In a bid to make the corporate taxation system more transparent and efficient, the bill proposes a general tax rate of 30% on all types of economic activity, a departure from the current system whereby companies declare and pay tax separately on each activity. This tax rate may fall to 25% within five years if revenues exceed economic growth.

Another important change would be the introduction of value added tax, or IVA, which will replace the 13% sales tax and expand coverage to all but a handful of exempt services, such as water and electricity up to certain usage limits.

Generally, it is thought that the tax reforms will increase the amount of tax paid by those earning more than $3,000 per month, and reduce the tax burden on those earning less than this amount.

According to a report by A.M. Costa Rica, lawmakers have reserved the early part of this week for further discussions and amendments to the proposed legislation. A vote may then come in the latter part of the week, but it is by no means certain whether it will pass.

The report also indicated that the elections held on February 5 could result in a number of pro-tax reform candidates taking their places in the new congress which begins in May. Among the supporters of tax reform are Oscar Arias Sanchez, presidential candidate from the Liberacion Party, and his Accion Ciudadana rival, Otton Solis.

It emerged after a preliminary count that Arias Sanchez had seemingly won by the slenderest of margins over his main rival, winning 40.7% of the vote to Solis's 40.2%.

However, the final result of the ballot is now not expected to be announced until the end of February, when the laborious process of recounting the votes by hand has been completed.

Recommended