San José, Costa Rica, since 1956

Tax Plan Maneuver Blasted

Despite more than two years of warnings, numerous legislative commissions and heated debate between representatives of the country’s different political factions, Costa Rica has not been able to reach consensus on a major tax overhaul the government says is of vital importance for the country.

In the latest chapter of an ongoing saga, the government last week agreed to extend its “final and definite” deadline for approving the proposed Permanent Fiscal Reform Package from April 30 to the end of May.

Although not the first time the deadline has been extended (the original deadline was in late 2002), government officials say they are confident this will be the last delay.

It was not immediately clear whether the government’s Plan B – a series of drastic budget cuts to various institutions that the Finance Ministry had threatened to make if lawmakers failed to approve the tax reforms by the April deadline – is still under consideration.

FURTHER complicating the issue, representatives of the administration of President Abel Pacheco, ex-President and current presidential hopeful Oscar Arias and congressional deputies from the two largest political parties this week teamed up in an attempt to force the plan’s approval. The alliance has angered and alienated the other political parties negotiating the tax plan, particularly Citizen Action Party, which dropped out of the commission charged with studying the plan.

“It is regrettable that it was not possible for deputies to reach an agreement within the commission,” political analyst Luis Guillermo Solís told The Tico Times.

“A parallel process such as this one shows the weaknesses of the legislative organ and the inability of deputies to reach a consensus. This is worrisome. Because of these problems, something as important as the fiscal plan had to be decided in a private meeting between political leaders,” he added.

FIRST proposed in 2002 by a commission of former finance ministers, the tax plan was meant to provide a permanent solution to the country’s growing budget deficit. Unable to cover its burgeoning expenses with tax revenues, the Costa Rican government for decades has relied on the sale of foreign debt bonds to finance its expenditures.

Interest payments on existing bonds take up approximately one quarter of the government’s 2004 budget. Nearly 50% of the budget is being financed through additional bonds that will result in even higher interest payments in coming years.

By creating new taxes and improving the collection of existing taxes, the government hopes to increase revenues by an amount equal to 2.56% of the country’s gross domestic product (GDP) and permanently reduce the deficit (TT, Dec. 5, 2003).

The Permanent Fiscal Reform Package has traveled down a long and bumpy road marked with countless setbacks, legislative delay tactics and political squabbles (TT, Feb. 20). Since 2002, the plan has gone through multiple legislative commissions in charge of reforming it.

TO buy more time to reach an agreement on the complex plan, in December 2002 legislators approved a one-year “emergency’’ tax plan that expired at the end of 2003.

Throughout the entire process, the government warned of the dire economic consequences the country would face if a permanent solution to the revenue shortage were not found.

To pressure legislators into approving the plan, in February of this year, the government warned it would withdraw support for the bill if legislators didn’t approve it before April 30. In place of the tax plan, the government said it would cut ¢72 billion ($171.4 million) from the budgets of several government ministries and social programs, a scheme known as Plan B. Finance Minister Alberto Dent repeatedly said this would be the government’s final ultimatum (TT, March 12).

BUT on April 8, Presidency Minister Ricardo Toledo, on behalf of Pacheco, who was in Europe (see separate article), announced the deadline would be extended until the third week of May.

The decision was applauded by representatives of the National Liberation Party and Citizen Action Party, who had argued they needed more time to work on the tax plan.

In an unexpected turn of events, Arias – a member of National Liberation and the frontrunner in the race to become the party’s candidate for the 2006 presidential elections (TT, March 19) – on Tuesday invited Finance Minister Dent and deputies from the governing Social Christian Unity Party and Liberation to his house to discuss the tax package.

Following an hour and a half meeting, Arias and Dent reached a general agreement on how to move forward with the plan. They agreed to set the corporate income tax rate at 25% — substantially higher than the 18% rate in the original version of the plan, but still lower than the 30% companies currently pay.

Special exceptions were agreed to for small and medium businesses and “pioneering” companies, which would pay 12% and 15% a year, respectively.

THE meeting’s participants did not decide if the tax rate would apply to businesses located in free zones under the most recent proposal.

In recent weeks, the Association of Costa Rican Free Zone Businesses (AZOFRAS) and the Costa Rica Investment Board (CINDE) have recommended a corporate income tax rate of between 15% and 18% — the rate recommended by the World Bank’s Foreign Investment Advisory Service. A higher rate, they have warned, could scare off foreign companies planning to invest here (TT, March 12).

Tomás Dueñas, president of CINDE, on Tuesday criticized legislators for proposing corporate income tax rates “unscientifically” and ignoring the technical information available on the matter.

DURING the meeting, Arias and Dent also agreed to reduce the income tax rate for the lowest income brackets and make construction and monthly apartment rents lower than ¢170,000 ($400) exempt from the proposed 13% value-added tax.

They also agreed to create a technical commission composed of Dent, Unity and Liberation deputies specialized in the tax plan and Guillermo Zúñiga, who served as Finance Minister during the Arias administration (1986-1990), to give the tax plan a final look over.

The commission is expected to issue a new draft of the tax plan today to be presented to the rest of the Assembly next week as a reform motion to the current plan.

THE agreements reached at Arias’ house outraged the deputies that didn’t take part in the meeting. Citizen Action, the Libertarian Movement and Patriotic Bloc accused the government and Arias of being undemocratic.

Citizen Action deputies Epsy Campbell and Margarita Penón — Arias’ ex-wife —withdrew from the legislative commission in charge of evaluating reform motions to the plan.

“This agreement was reached in the least transparent way, behind the backs of the people,” Campbell said. “This was not decided at Casa Presidencial or at the Legislative Assembly, but rather at the house of a presidential candidate. It’s a blow to Costa Rica’s democracy.”

She compared Arias to a king, imposing his will over the rest of the country.

“This is a republic, not a place where a king gives orders and his followers execute them,” she said.

Deputy Federico Malavassi of the Libertarian Movement, a longtime opponent of the tax plan, was equally outraged.

“While the President discussed soccer scores and the need for a cardinal [at Tuesday’s weekly cabinet meeting], his minister and deputies from his party where in Rohrmoser (the west San José neighborhood where Arias lives) paying homage to Don Oscar Arias,” Malavassi said.

POLITICAL analyst Solís said he believes the alliance will allow Unity and  Liberation, which hold 35 of the Assembly’s 57 seats, to speed up the approval of the tax plan. However, he expects it will further polarize alreadytense relations between the different political factions.

Although he fears the way the Arias and Dent handled the fiscal dispute could set a precedent, Solís said he hopes it will serve as a wake-up call to legislators.

The possibility of being left out of the decision-making process could make factions more willing to work together to reach a consensus, he added.

Jorge Eduardo Sánchez, Secretary General of Unity, told the daily La Nación it was “unfortunate” that Dent and Unity deputies participated. He said it was not Arias’ role to decide the future of the tax plan, especially if it excluded other political parties.

Antonio Álvarez Desanti, Liberation’s other presidential hopeful, told La Prensa Libre the meeting reflected the “traditionalway of doing politics, which Costa Ricans have grown tired of.”


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