Costa Rica’s Tax Reform Package Reaches Legislative Assembly

by Leroy Baker, Tax-News.com, New York

27 September 2004

After more than two years of debate by the country’s lawmakers, Costa Rica’s fiscal reform package has finally reached the floor of the legislative assembly, although there remains much work to be done before the tax reforms are passed, the Tico Times reports.

The reform package proposes to make some fundamental reforms to the country’s taxation system in order to bolster the government’s tax revenues, pay off the country’s growing foreign debt, and reduce the deficit to 2.65% of GDP.

Under one of the plan’s major proposals, income tax in Costa Rica will cease to be levied on a territorial basis, meaning that a resident’s worldwide income will fall under the tax net.

The top income tax bracket would also be raised from 25% to 30% along with a general overhaul of income tax thresholds.

Another major change will see the 13% sales tax transformed into a value-added tax, extending the levy to services such as legal fees and medical services in addition to payment for goods. However, private education services would be exempt.

Corporate income tax under the plan would gradually be reduced from 30% to 25%, and special tax breaks would also apply to small and medium-sized businesses in the hi-tech sector or located in under-developed areas.

The tax-reform bill would also make permanent taxes on casinos and online gambling firms, and attempt to improve tax collection methods in general.

A decision by the Constitutional Court earlier this month to reject a legal challenge by two lawmakers opposed to the plan appeared to give its supporters fresh impetus when all seemed lost.

However, as the Times reports, lawmakers now have to trawl through and review 1,182 reform motions that were rejected by the legislative commission responsible for drafting the bill, before it can be approved.

This in itself could cause fresh conflict amongst lawmakers. Supporters of the plan have reportedly said that they are working on ways to speed up this process within accepted legal boundaries. However, those opposing the plan counter that any attempt to force through the reforms would be “undemocratic.”

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