San José, Costa Rica, since 1956

Gov’t Begins New Chapter in Tax Reform Saga

A new chapter in Costa Rica’s halfdecade push to overhaul the nation’s tax system opened this week as the Legislative Assembly sunk its teeth into income-tax legislation, part one of President Oscar Arias’ proposed nine-part fiscal reform plan.

The Arias administration will try to breathe new life into legislation that has been lying dead for months, and has introduced controversial new measures of its own into the mix.

After four years of debate by the previous legislature and relentless advocacy by former President Abel Pacheco (2002-2006), the last tax plan flopped when the courts ruled in March that the way the assembly approved the legislation was unconstitutional.

Dubbed “dead” by legislators, the plan was scrapped and fiscal reformists were sent back to the drawing board (TT,March 24).

Now, with the first of the nine bills being debated in the assembly and the Executive Branch tacking new reforms onto old legislation to send to the assembly, the controversial issue of fiscal reform has been resurrected.

However, it faces perhaps stauncher opposition than before, and must make its way through an already packed extraordinary agenda this political season. Like its previous incarnation, which suffered through thousands of legislators’ motions for change, the new proposal is also likely to be remolded as it makes its way through the assembly.

Though the administration has explained portions of its new tax plan, it has been somewhat vague and tight-lipped about it.

“There are projects that have circulated through political circles, but we haven’t had a chance to see them,” said Diego Salto, a partner at the corporate law firm Asesores Fiscales Corporativos, which specializes in tax matters.

The little that is known about the ninepart plan has already drawn fire from real estate interests, bank executives and economists.

Legislators from the Libertarian Movement, which opposed ex-President Pacheco’s Permanent Fiscal Reform Package, are criticizing Arias’ tax plan whenever possible, saying the new administration’s tax plan has less steam than Pacheco’s because of its complexity, and the fact that it must make its way through an already backed-up legislative agenda.

Meanwhile, the Costa Rican government is being pressured from all sides to pass some kind of fiscal reform as the country becomes increasingly conscious of mounting inequalities that have accompanied recent economic growth.

The new fiscal reform plan includes a revamped income tax and a new valueadded tax, reforms inherited from the previous plan. Other preliminary pieces of the plan outlined by the Executive Branch are already stirring up skepticism.

A proposed tax on luxury properties – which would be used to help construct housing for those living in slums (TT, June 9) –has brought cries from the real estate industry and raised questions about how the government will assess property values.

Emilia Piza, president of the Costa Rican Chamber of Real Estate Agents, said she found “worrisome” an interview in which Finance Minister Guillermo Zúñiga told the daily La Nación that under the proposed legislation, property owners who report a property value below the market value could be hit with fines.

“Who will determine what is the market value?” she said. “That is supply and demand.”

The Finance Ministry has not said exactly how it would assess market value. Another proposed 0.5 % tax on all financial transactions in Costa Rica has others wondering what effect such a tax would have on the country’s economy.

Salto said taxing financial transactions could encourage informal transactions with cold cash as a way to avoid the tax. That could mean risky business in a country where mounting insecurity and theft have become a part of the culture.

“In a country like ours – our country does not have a lot of security – the government shouldn’t promote informal business,” he said.

Others in the financial sector also criticized the tax. Bank directors told the business weekly El Financiero that the financial transactions tax would increase the cost of credit.

Trade officials say a proposed 15% corporate income tax on businesses operating in the nation’s free zones will force the country to find new ways to remain attractive to foreign investors once it is ceases to be a tax-free fiscal haven for export businesses (TT, Aug.

4). Proposals for accomplishing this have yet to be determined.

Inherited Reform

The income tax bill, the first piece of reform to be taken up by the assembly, is essentially the same old bill that was drawn up by former National Liberation Party (PLN) legislator Bernal Jiménez during the Pacheco administration. Jiménez, whose term expired in May, touts the bill as a “progressive” way to distribute Costa Rica’s wealth more equitably to combat growing inequalities that have nearly one in four Costa Ricans living in poverty.

It would change the tax percentages on income and reform the system, requiring those who make income outside of Costa Rica but spend it in Costa Rica to declare and pay tax on that income.

Libertarian Movement leader Otto Guevara, a critic of the income tax bill, said the administration’s political capital is “eroding” as it has failed to move any real reform and is now clogging an already packed political agenda by introducing a nine-part plan into the mix.

“To throw fiscal reform into that dynamic is to risk not passing the CAFTA agenda,” he said, referring to the bible-thick Central American Free-Trade Agreement with the United States and accompanying legislation.

He said that instead of Jiménez’s reform, his party advocates a “flat tax” – a single rate for all with the exception of the poor, who would not pay any tax. This type of flat tax has been implemented in 14 European countries, Guevara said.

The income tax bill was placed on the agenda last week, but the Executive Branch may end up sending another one because legislators are questioning whether the bill should have a “fast track” procedure to speed up legislation.

Justices of the Constitutional Chamber of the Supreme Court (Sala IV) ruled that the application of the “fast track” procedure designed to speed up the progress of the Permanent Fiscal Reform Package and the approval of the plan by a simple majority, were unconstitutional.

The bill being discussed includes a “fast track” provision.

Clock Ticking

A statement from the International Monetary Fund this week brought further pressure to pass fiscal reform.

While applauding Costa Rica’s current growth trend, IMF officials encouraged Costa Rica to pass fiscal reform and CAFTA to promote more “balanced” growth.

The IMF’s call for fiscal reform echoed a similar call for fiscal change from the Catholic Church last week, when Monsignor José Rafael Barquero lamented growing inequalities in Costa Rica.

The executive has prioritized four parts of legislation to submit to the assembly: the income tax legislation, a $200 tax on licensed businesses, the luxury property tax bill, and a reform of the Code of Norms and Procedures, which will change the way taxes are collected in an attempt to eliminate loopholes.

Nine-Part Tax Plan at a Glance

Income Tax Reform: The only reform in the assembly at press time. Would involve a progressive tax for those whose monthly income exceeds ¢500,000 ($971). Tax on Licensed Businesses: A $200 tax on licensed businesses.

Reform of the Code of Norms and Procedures: Would restructure the way taxes are collected to eliminate loopholes.

Luxury Property Tax: Would tax properties valued at $150,000 and up to create revenue to build housing for those living in shanty towns.

Value-Added Tax: Would create a 13% value-added tax on almost all goods and services to replace the current 13% sales tax on some goods.

Financial Transfer Tax: Would establish a 0.5% tax on all financial transactions.

Elimination of Specific Destinations: Would reform how the government allocates tax money.

Reform of Free Zones: Would create a new tax on businesses in so-called “free zones,” which are now tax-free. The tax would start at 15% with discounts for certain sectors.

Rights and Duties of Taxpayer: Would redefine taxpayer rights and responsibilities.

Source: Executive Branch

Comments are closed.