Tax Plan Debate Enters Final Stage

September 24, 2004

AFTER more than two years of discussion by lawmakers,the plan to overhaul the country’s tax system isfinally on the floor of the Legislative Assembly.However, before the Permanent Fiscal ReformPackage can be voted on, legislators must review 1,182reform motions that were rejected by the legislativecommission in charge of drafting and reforming the bill.It will take legislators at least five minutes to revieweach motion – nearly 100 hours in total. Each of themotions admitted for debate could take as long as 15 hoursto be discussed by the assembly’s 57 members.Proponents of the plan say they are working on a way to speed up discussion of the motions,while still respecting the rights of legislatorswho issued the proposed changes.Opponents of the plan, namely legislatorsof the Libertarian Movement Party,have called the attempts to speed up discussion“undemocratic.”THE fiscal reform is expected to makethree main changes to the nation’s tax legislation.First, the income tax for people wouldbe transformed into a worldwide tax notonly on income from salaries, but also onreturns from financial investments andsources of income outside Costa Rica. Thetop income tax bracket would be raisedfrom 25% to 30%.Second, the corporate income taxwould gradually be reduced from 30% to25%. Special tax breaks would apply tosmall and medium businesses, cooperatives,companies located in underdevelopedareas and companies involved in pioneeringtechnology.Third, the 13% sales tax would betransformed into a value-added taxcharged not only on goods, but also on services,such as legal and private medicalservices. Private education services wouldbe exempt.Though the tax plan has been modifiedgreatly during the last nine months (TT,Dec. 5, 2003), proponents still estimate itwould provide the government with additionalrevenues equal to 2.56% of thecountry’s gross domestic product (GDP).The additional funds would be used toreduce the government’s fiscal deficit andfund more social programs.The plan also aims to improve collectionof existing taxes and reduce unnecessarygovernment expenses. However, theplan is vague on how to accomplish thesetwo goals, opponents say.THE fiscal reform would overhaul theway incomes are taxed in Costa Rica. Taxrates would range from 5-30%, based ontotal annual income.Anyone who resides in Costa Rica formore than 183 days a year would berequired to pay income taxes. The first¢3.96 million ($8,870) earned by each personeach year (base income) would be taxfree.All figures would be updated eachyear to compensate for inflation.For example, salaried workers whoearn up to ¢2 million ($4,470) per yearmore than the base income would becharged 5%, those earning more than ¢2million up to ¢4 million ($8,950) above thebase income would pay 12%, and so on.People earning more than ¢30 million($67,110) per year would be in the topincome bracket, paying 30%.FIFTEEN percent of all foreign remittances,including pension payments, wouldbe included as part of each person’s globalincome.The Association of Residents of CostaRica (ARCR) opposes the proposedchange.“We’ve said all along that we don’tthink taxing worldwide income is good forCosta Rica,” Ryan Piercy, general managerof ARCR, told The Tico Times onTuesday. “For us, the problem is thatthey’re trying to change too much in onetry, instead of doing it gradually. There isstill a large amount of taxes that goesuncollected. That’s something that shouldbe focused on.”Piercy said the tax plan, in its currentform, could make the country less attractiveto foreigners considering movinghere.Financial assets located outside thecountry would be subject to optional 10%taxation if reported. If not reported, theassets would be included as part of theowner’s worldwide income if they aretransferred to the country.THE corporate income-tax rate underthe current plan would drop from 30% to25% in 2010 – the year when the WorldTrade Organization’s (WTO) ruling banningthe use of tax exemptions to attractforeign companies enters into full effect.Originally, the tax plan sought to graduallyreduce the corporate tax to 15% by2010. The Citizen Action Party maintainsthe tax rate should remain at 30% and hasissued a motion toward that end.The country’s free zones, which untilthe end of 2009 will benefit from taxexemptions, have expressed concern overthe tax rate. Timothy Scott, executivedirector of the Association of Costa RicanFree-Zone Businesses (AZOFRAS) said25% is not an “internationally competitivetax rate.”Pointing to a 2002 study conducted bythe World Bank’s Foreign InvestmentAdvisory Service (FIAS), AZOFRAS hasargued in favor of a 15% corporate tax(TT, March 12). In March, Scott said thecountry’s free zone businesses could survivewith a tax rate of 18% – as long asother types of benefits were available.UNDER the proposed reform plan,firms located in underdeveloped areas orinvolved in pioneering technology wouldbenefit from a reduced 15% tax rate.However, recent changes make thesedeductions practically unobtainable,according to Scott.He explained that companies that setup shop in underdeveloped areas wouldpay lower taxes, but are also required toinvest at least 10% of their revenues onprojects to benefit their community. Thiseliminates the incentive of operating inremote areas, he said.To qualify as a “pioneer,” a firmmust have an initial investment of $5million and employ at least 100 workers.A pioneering technology is defined asone that has not been used before in thecountry.“NO firm currently established inCosta Rica, and we have many cuttingedgefirms here, would qualify,” Scottexplained. “And if one company doesqualify, another one involved in a similaractivity that wishes to come here won’t.“This, in our opinion, would deny thecountry foreign direct investment startingin 2010,” he said.The tax-reform bill also would makepermanent the taxes that casinos andonline gambling call centers (sportsbooks)were levied under the Emergency Tax Planpassed in 2002 – a one-year plan thatexpired last year.Fiscal Reform Faces Final DebateBEFORE the Permanent FiscalReform Package can be put to vote, legislatorsneed to process 1,182 motions theybegan reviewing this week.Once a bill gets to the floor of theLegislative Assembly, legislators havethree days to reiterate motions that wererejected when they were presented to thecommission studying the plan. This wasdone last week.The proponent of each motion has fiveminutes to present the reiteration motionto the assembly. Legislators then vote onthe motion. If a majority votes in favor ofthe motion, it becomes open to discussion.Each of the 57 legislators is allowed15 minutes to discuss the motion. Afterthat, the motion is put to vote. If the majorityvotes in favor, the bill is reformed.Once all the motions have beenreviewed, the bill is voted on for the first oftwo times. If approved after the firstdebate, the bill advances.If at least 10 legislators consider itnecessary, the bill would be sent to theConstitutional Chamber of the SupremeCourt (Sala IV) for constitutional review,which cannot exceed one month’s time.If no violations to the Constitution arefound, the bill is voted on for a secondtime and if approved, becomes a law.

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