Lawmakers Hopeful For September Vote On Costa Rican Tax Reform Bill

by Mike Godfrey, Tax-News.com, Washington

31 August 2005

Costa Rica's long delayed fiscal reform plan could come to a vote in the national legislature by the end of September, according to a report in the Tico Times.

First proposed in 2002, the fiscal reform package intends to raise some $500 million in additional revenues, pay off the country’s growing foreign debt, and reduce the deficit to 2.65% of GDP through a series of tax hikes and improved collection methods. However, various delaying tactics by opponents of the reforms have ensured that it has remained bogged down in the legislative assembly ever since, despite attempts to fast track the legislation.

The tax plan will introduce some major changes if passed, such as a switch to worldwide taxation from the current territorial tax system. This will mean that tax will have to be paid on worldwide income by those resident in Costa Rica, although in an amendment approved last week by lawmakers, worldwide income will only be taxed if brought back into the country.

However, the legislation provides certain exemptions for foreign individuals living in Costa Rica, and those who can prove that their income has already been taxed in another jurisdiction, or are able to show that income is to be invested in the country, will be granted a tax exemption. Also, money brought into Costa Rica by those during their first year of residency will be exempted.

In a bid to make the corporate taxation system more transparent and efficient, the bill proposes a general tax rate of 30% on all types of economic activity. Under the current system, companies declare and pay tax separately on each activity. However, if the taxes the government collects from both foreign and national individuals and corporations grow at a rate higher than that of the gross domestic product, then the 30% rate would be lowered by 1% each year until it is at 25% in 2010, where it would stay, the report stated. These corporate rates would also apply to companies in Costa Rica's free zones when tax exemptions expire in 2009.

The same principle will apply to the income of individuals, both foreign and national, whereby all income will be added up and taxed according to the appropriate income tax bracket. At present, different types of income have different tax rates.

Another important change will be the introduction of value added tax, or IVA, which will replace the 13% sales tax and expand coverage to all but a handful of exempt services, such as water usage up to 40 cubic meters and electricity usage up to 280 kilowatts.

Generally, it is thought that the tax reforms will increase the amount of tax paid by those earning more than $3,000 per month, and reduce the tax burden on those earning less than this amount.

Supporters of the tax package are reportedly optimistic that the bill will be put to a vote in late September or early October, although lawmakers are currently busy working their way through about 1,000 amendments to the bill in special sessions. Many of these have been proposed by the Libertarian Movement Party, which is opposed to the reforms, in an attempt to stall the bill's passage.

The issue has been further complicated by President Abel Pacheco's insistence that the Central American Free Trade Agreement can only be approved once the fiscal reform bill has been passed.

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