Costa Rican Tax Reform Plan Hits Another Dead End

by Mike Godfrey, Tax-News.com, Washington

09 May 2011

A coalition of opposition parties in Costa Rica have gained control of the national Assembly, thwarting the ruling National Liberation Party's plans for tax reform, and agreeing to cooperate on drafting new fiscal policy.

In a development not seen for many decades, it was agreed between the five opposition parties that in joining forces the elected government would be relegated to a minority party in the assembly, and its comprehensive proposals to cut the deficit could be therefore vetoed. In its first year, the 'opposition bloc' – comprising of Acción Ciudadana (PAC), Movimiento Libertario (ML), Unidad Social Cristiana (PUSC), Accesibilidad sin Exclusión (PASE) and Frente Amplio – will be led by Juan Carlos Mendoza.

The key part of the government's proposals for tax reforms was the introduction of a 14% value-added tax to expand and replace the present 13% sales tax. In addition, changes were proposed 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.

A major fiscal reform plan designed to enhance the government's tax take has been under consideration in Costa Rica for almost 10 years in one form or another, but opposition parties have used all sorts of procedural tricks to block the legislation. With the latest events in the national assembly, it could yet be a considerable time before any changes take effect.

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