San José, Costa Rica, since 1956

Chasing delinquents a taxing job

It’s easy to blame excessive government spending for Costa Rica’s skyrocketing national deficit. According to the Comptroller General’s Office, 44 percent of the 2011 Costa Rica national budget will be financed by debt.

“That is like saying that if I was going to pay for my son’s school, electricity for my house and gasoline for my car, that I would finance 44 percent of it using a credit card,” said Francisco Villalobos, general director of Costa Rica’s Tax Administration. “The following month, with the same amount of income and expenditures, I have to pay interest rates. At some point it becomes unmanageable. And that is the alarm that’s now sounding in the government.”

But while government expenditures continue to drive the nation into the red, the second part of the two-headed $2.4 billion fiscal deficit monster is tax delinquency. According to the Comptroller’s Office, more than 60 percent of eligible Costa Rican taxpayers didn’t make payments in 2010.

The role of locating these delinquent taxpayers now falls to Villalobos, who became head of the Tax Administration in January. A lawyer by trade, Villalobos spent years employed in the private sector before taking on the role as tax collector.

The list of delinquent taxpayers ranges from the average “José” with a blue-collar job to some of the biggest and most recognized companies in the country.

“Nobody wants to pay taxes, right?” Villalobos said. “But it’s a law. If you live in a country and you take advantage of the infrastructure or the things offered to citizens by the state, it seems to me that you have to contribute. If you refuse paying taxes and disagree with the state for whatever reason, in other countries, you are punished for being delinquent. Here, we are just starting to arrive at that level of consciousness,” Villalobos told The Tico Times in an interview in his Finance Ministry office on Wednesday.

To get delinquent taxpayers to pitch in, Villalobos says the only logical response is force. With current tax delinquency showing no  signs  of  tapering  off,  in order to make a dent in the swelling deficit, a change in policy toward evaders is needed. 

“We only have two ways: we have a carrot and we have the stick,” Villalobos said. “We give the carrot to the horse so it walks along with the carrot, but, if he doesn’t want to walk, we use the stick. It’s just principle. You invite people to pay their taxes and pay what they are supposed to pay. But if they don’t, we have to use enforcement. Everybody does it the same way, why should we do it any different?”

Recently, the Finance Ministry has gone on the offensive to collect the luxury tax owed to the state by property owners. In 2009, a luxury tax was imposed that required every property owner that spent over $212,000 (₡106 million) on construction to pay a small percentage of a property’s value.

Beginning last month, the Finance Ministry began publishing hundreds of names of the people and companies that are delinquent on luxury tax payments. The ministry hopes public shame will convince people to pay up. In the first two years of the tax, only about 30 percent of people with “luxury” properties have made the payment.

With a large number of expats on the delinquency list for the luxury tax, Villalobos and the Finance Ministry are also trying to lure in payments by simplifying the process. To do so, luxury tax payment papers will soon be issued in English. 

“My feeling about the [luxury] tax is that the reason a lot of people didn’t pay it was because a lot of people didn’t understand it,” Villalobos said. “One of the rules of taxes is that you need to make them simple… Our job here is to make taxes easy for the taxpayers. We have already simplified the luxury tax and we are currently making the paper available in English.”

Villalobos also said that the Finance Ministry is preparing a list of frequently asked questions and answers in English to allow expats to familiarize themselves with the tax obligations that will be expected of them while they live in Costa Rica.

“It will spell out the ABCs of doing taxes when it comes to Costa Rica,” he said. “It will answer questions about registering companies when you open them in Costa Rica, when do I have to file taxes, can I request an extension, can I use my e-mail as my tax domicile, and these kind of things. People coming from other countries that are used to another system are used to going to a webpage where all of these questions are answered. We should have that sort of system. Why don’t we? It’s not rocket science.”

What Reform Could Bring

Goal number one for the Costa Rican government in 2011 is to pass a tax reform plan. But that’s so far proven difficult. Since being unveiled in January, almost every political party has vehemently opposed the plan, economists have warned against the dangers of the proposed 14 percent value-added tax (VAT) for services, and several government agencies have expressed concerns, diplomatically of course, about the proposal while advising the Finance Ministry to proceed with caution.

The national discord with the tax reform proposal was perhaps best exemplified by the 463 oppositional motions the Libertarian Movement and Social Christian Unity Party presented after giving the new plan a brief read in early February.

If the tax reform plan does pass, or at least part of it, Villalobos said the most important thing for foreigners to be aware of is the eventual taxation of capital gains.

“If you come here and you buy a piece of land, or you buy a house and live in it a while, when someone offers to buy it from you for $50,000, right now any tax on that is exempted,” he said. “If the reform passes, capital gains will be taxed 15 percent. That, to me, is the most important thing foreigners need to be aware of.”

Yet with all the current criticism of the tax reform plan, all of the possible tax alterations proposed may be for naught. Chinchilla’s government is now the third consecutive administration to dub a tax reform as a top priority, though neither of the previous two administrations made good on their promises.

While the proposed reform is analyzed, criticized and argued throughout the country, Villalobos says his role is to keep his focus on the other fiscal challenge created by delinquent taxpayers.

“I guess the big message is, we’re not going after those that are compliant. 

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