Costa Rica's Tax Reform Saga Enters Second Act

by Mike Godfrey, Tax-News.com, Washington

16 August 2006

Costa Rica's legislators have once again begun to discuss the vexed question of reforming the country's taxation system, although it would appear likely that the same problems that blocked the former fiscal reform bill for four years could hinder the progress of the new proposals.

Little detail is known of the new bill, introduced into the Legislative Assembly last week, but it seems that the new tax plan is a mixture of the old one, which includes reforms to the income tax system and a new system of value-added tax, and new proposals championed by the recently-elected President Oscar Arias designed to redistribute wealth from rich to poor through such mechanisms as a real estate tax on luxury properties and a 0.5% financial transactions tax.

A move towards a form of worldwide taxation system, whereby income earned abroad but brought into Costa Rica, is also included in the bill. Currently, Costa Rica taxes only income derived from within its borders.

Originally, the Permanent Fiscal Reform Package, introduced under the government of former president Abel Pacheco in 2002, sought to raise an additional $500 million in tax revenue to help the government close its fiscal deficit and meet its debt obligations. The package, seen by many as an investment-killing bill, had many opponents in the assembly, and various delaying tactics were used to slow its progress.

The bill itself was eventually killed off shortly before the presidential elections earlier this year when the Sala IV constitutional court ruled that supporters acted illegally in the Legislative Assembly by creating new procedures to "fast track" priority legislation, including the tax bill.

However, Arias, rather than introducing a simplified version of the bill, as was expected after he was elected in February, has given lawmakers a nine-part monster to mull over, meaning that the legislative process is likely to be similarly protracted as under Pacheco. Arias's new proposals are also only likely to entrench opposition from pro-business lawmakers.

Moreover, with the Legislative Assembly facing a packed schedule - lawmakers are also attempting to repair a botched Immigration Bill, while the all important CAFTA free trade deal remains to be dealt with - the tax reform saga is likely to be prolonged for some time to come.

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