Deadline Extended for Free-Zone Incentives

August 3, 2007

Costa Rica’s free zones have been granted another six years of breathing room after the World Trade Organization (WTO) decided to extend the deadline on which Costa Rica and other developing countries must stop subsidizing their manufacturing exports with tax incentives.

Last year, exports from free-zone companies accounted for more than half of all Costa Rica’s exports, or about $4.31 billion.

Costa Rica now has until 2015 to change its Free-Zone Law, which gives tax breaks to companies that invest a certain amount in Costa Rican facilities and export most of their production.

A WTO rule passed in 1995 banned this kind of subsidizing of manufacturing exports, but developing countries were granted an exemption until 2003. That deadline was later extended to the end of 2009, and the WTO decision last week extended the deadline yet again – and likely for the last time – to Dec. 31, 2015.

Timothy Scott, the director of the Costa Rican Association of Free-Zone Businesses (AZOFRAS), said the ruling gives “additional space for the reform of the Free-Zone Law,” which he says probably won’t be taken up until after the referendum on the controversial Central American Free-Trade Agreement with the United States (CAFTA) in October.

Scott also said the ruling helps dispel uncertainty in the market, making Costa Rica’s free zones more attractive for manufacturers who might want to take advantage of the system before the WTO rule goes into effect.

According to Costa Rica’s current Free-Zone Law, foreign businesses that meet certain investment and export requirements can be exempt from paying corporate income taxes in Costa Rica for eight to 12 years, and exempt from 50% of taxes for four to six years thereafter.

That will have to change according to the WTO rule, and in recent years, the number of new manufacturing and assembly businesses have been falling, thanks in part to the looming WTO restrictions, Foreign Trade Minister Marco Vinicio Ruíz said at a press conference last week.

Meanwhile, service businesses in free zones – to whom the WTO rule does not apply – have been increasing (TT, June 1).

In addition to the deadline for eliminating manufacturing subsidies, the WTO decision also requires developing countries to have their reform plans ready by 2013.

Various plans have been suggested in Costa Rica to meet the WTO rules and keep Costa Rica competitive in a global market – among them proposals to levy a 15% acrossthe- board income tax on all Costa Rican companies (TT, March 12, Sept. 24, 2004).

But the proposals have yet to go anywhere. Costa Rican businesses now pay income tax on a sliding scale that caps at 30%.

 

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