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Costa Rica Committed To A Higher VAT Rate

by Mike Godfrey,, Washington

14 November 2014

The International Monetary Fund has commended the Costa Rican Government for its efforts to enhance tax collection, but said that successful fiscal consolidation will also require tax rate increases.

In a statement issued following 2014 Article IV consultations, the IMF welcomed the Government's medium-term fiscal consolidation plan. In particular it supported plans to broaden the value-added tax (VAT) base to include services and basic goods, the latter accompanied by actions to mitigate the impact on lower income households.

It said that, while significant revenue gains may accrue from reducing tax exemptions and other special treatments, the substantial budget consolidation required will likely require increases in tax rates in the future, to lower the deficit from 5.5 percent of gross domestic product (GDP) in 2012-13.

The IMF therefore recommended that authorities raise the VAT rate from 13 to 15 percent gradually, and increasing marginal tax rates on higher income tax brackets as part of the introduction of a global income tax, thereby also addressing distributional concerns. It said that the Government has confirmed its willingness to raise VAT rates in steps starting in 2016, consistent with the IMF's recommendations.

The statement also said that while recent actions to strengthen tax compliance, including the draft anti-tax evasion law submitted to Congress, are appropriate, yields from such initiatives are generally uncertain and far from immediate.

TAGS: compliance | VAT rates | tax | value added tax (VAT) | tax compliance | law | gross domestic product (GDP) | budget | International Monetary Fund (IMF) | tax rates | Costa Rica | Central America

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