Costa Rica's Tax Plan Falls At Final Hurdle

by Mike Godfrey, Tax-News.com, Washington

27 March 2006

Just when it appeared that Costa Rica's long-delayed fiscal reform plan was about to see the light of day, a ruling by the country's constitutional court has stopped the plan dead in its tracks, possibly terminally.

In a ruling released last Wednesday, the Sala IV constitutional court once again ruled that supporters acted illegally in the Legislative Assembly by creating new procedures to "fast track" priority legislation, such as the 385 page tax bill.

The court also decided that the tax bill, known as the Permanent Fiscal Reform Package, should have passed its first of two readings last month on a two-thirds majority, not a simple majority.

While supporters of the tax plan are reportedly optimistic that the procedural flaws can be corrected and the plan resurrected, the swearing in of a new administration in May following February's elections gives them precious little time, and it would appear increasingly likely that it is the end of the road for a bill that has been batted around the legislature for the last four years.

Nonetheless, reports suggest that the incoming administration of Oscar Arias Sanchez will seek to introduce its own version of the tax bill, albeit in a slimmed down version.

Seen by current president Abel Pacheco as vital to the future viability of Costa Rica's national finances, the tax reforms would increased tax revenues by $500 million by taxing worldwide incomes, introducing value added tax on all but a handful of exempt services and introducing a general tax rate of 30% on all types of economic activity, among other measures.

However, opponents of the plan argued that the measures would deter foreign investors and discourage wealthy business persons, expats and retirees from settling in the country.

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