Deadlock On Tax Reform And CAFTA Threatens To Hinder Costa Rican Economy In 2005

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

03 January 2005

2005 will be an unspectacular year for the Costa Rican economy unless lawmakers see fit to pass the long-delayed tax reform package and ink the Central American Free Trade Agreement with the United States, Central Bank president Francisco de Paula Gutiérrez has forecast.

In order to bring fiscal deficits down to more manageable levels, Costa Rica is attempting to put in place a package of tax reforms, although continued disagreement between lawmakers over its provisions has delayed its implementation by more than two years.

According to Gutiérrez, who recently presented the Bank’s fiscal and monetary projections for 2005, the additional revenues that would be brought about as a result of the tax reforms would have the effect of reducing inflation from an expected 10% next year to levels closer to 3% to 5%. Without the tax reforms and the CAFTA deal in place, Gutiérrez still expects moderate GDP growth in 2005, which is forecast to expand at a steady 4%.

Under the tax plan’s major proposals, Costa Rica’s income tax will cease to be levied on a territorial basis, and the top income tax bracket will be raised from 25% to 30% as part of a general overhaul of income tax thresholds.

Other measures 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 payments for goods.

To help facilitate trade and investment, corporate tax will be reduced to 25% from 30% whilst additional tax breaks will be introduced to help small and medium-sized business and hi-tech firms.

Meanwhile, the CAFTA deal is also expected to boost regional and domestic trade once ratified. Agreed by signatories in May last year, the deal will eliminate tariffs and duties on around 80% of manufactured goods and 50% of agricultural products exported from the United States to Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.

However, the ratification process for the agreement in Costa Rica has become entangled with the tax reform dispute, and the government leadership has insisted that the tax reform bill must be passed before the CAFTA document is put before the assembly.

Recommended