Government wants to hike taxes to boost income

March 13, 2015
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Finance Ministry officials this week presented a series of amendments to Costa Rica’s sales and income tax laws in the hopes of increasing revenue by around ₡600,000 million ($1.1 billion). That would represent 2 percent of the national economy, officials said.

The proposal, however, faces serious opposition from some business owners, legislators and unions.

“As always happens, the consumer will end up suffering the consequences,” Francisco Ovares, president of Costa Rica’s Private Accountants Association, said Thursday.

“We believe all affected sectors should read and do a deep analysis of the proposal,” Ovares said, “but most importantly, they should communicate their concerns to the Finance Ministry.”

One of the major proposed changes would swap the current sales tax for a value added tax, and increase the rate gradually from the current 13 percent to 15 percent by 2017. Switching to a value added tax would mean most services, as well as goods, would be taxed.

Businesses operating within free-zone regimes would remain exempt from the tax. Education and private health services would also be exempt, except for surgery and hospitalization.

Tourism activities would be exempt for the first year after the law goes into effect, then levied a 5 percent tax in the second year, 10 percent in the third and 15 percent starting the fourth year.

Services provided by self-employed professionals — including doctors, lawyers, architects and accountants — would be taxed. Concert and sports tickets, plastic surgery and cosmetic services, among others, would also be taxed.

The proposal does include a provision designed to soften the effects of tax increases on the poor. Authorities would define a package of essential goods and services that would be exempt from the value added tax.

The package would be revised periodically based on results of the National Institute of Statistics and Census’s survey of household income and expenses.

Final drafts of the bills will be submitted to the Legislative Assembly for discussion and voting between April 13 and 17, Finance Minister Helio Fallas said.

Proposed changes to income tax law

The proposal includes two new salary brackets for income tax purposes. Monthly income above ₡2,225,000 million ($4,120) and up to ₡4,450,000 ($8,240) would be taxed at 20 percent.

All monthly income above ₡4,450,000 would be taxed at 25 percent.

Currently, monthly income above ₡793,000 ($1,469) and up to ₡1,190,000 ($2,200) is taxed at 10 percent, while all income above ₡1,190,000 is taxed at 15 percent.

Monthly income under ₡793,000 ($1,469) would remain tax-exempt.

The proposal would also tax all remittances paid to individuals and businesses outside of the country.

In addition, large cooperatives would have to pay a 30 percent tax on their profits (all cooperatives are currently exempt).

Micro, small and medium-sized businesses would be exempt as long as they are registered as such with the Economy Ministry.

Private companies that provide energy generation services would also be exempt.

Mario Hidalgo Matlock, a tax expert with the consulting company Deloitte, said the proposed tax law changes weren’t new.

“They are very similar to those proposed during the last four or five administrations,” he said.

He said the proposed expansion of taxed services would especially hit small entrepreneurs and businesses, like beauty parlors.

He said the proposed tax on remittances “would affect the country’s appeal for attracting investors and even retirees and foreign residents sending remittances from here,” Hidalgo added.

Drafts of both tax bills, along with forms that citizens can use to submit comments and suggestions, are available for download at the ministry’s website.

Negative reactions

The tax proposals generated plenty of criticism from different sectors of Costa Rican society.

Leaders of the country’s main labor unions rejected both proposals. Eight major public and private sector unions grouped under the Patria Justa Coalition of Labor Unions, issued a joint statement, saying the proposed changes would disproportionately affect the poor and those who already pay most of the taxes.

“The government is opting for the easy way to solve its (economic) problems,” they said.

“Transforming the sales tax into a value added tax will only aggravate the already unfair tax structure,” the union leaders wrote. “Poor citizens are not the ones stealing or dodging tax money.”

Labor leaders said they were considering street demonstrations against the proposed changes.

The business sector was more guarded in its reaction. Luis Mesalles Jorba, vice president of the Costa Rican Union of Private-Sector Chambers and Associations, said the group would consult its members before submitting observations to the Finance Ministry.

Mesalles said that any solution to the problem should combine fiscal reforms with tighter controls on public spending.

He acknowledged that the government has already taken some actions to control spending, but said it had yet to address bigger problems, such as yearly wage adjustments and large cash benefits received by many bureaucrats.

The outlook for the bill’s passage in the Legislative Assembly is dubious.

Leaders from five parties — the National Liberation Party, Christian Democratic Alliance, Broad Front, Social Christian Unity Party and Libertarian Movement — publicly said they will vote against the government’s plan.

Instead of raising taxes, they said the government should make further efforts to cut public spending and improve tax collection.

During the full Assembly’s session on Wednesday, Libertarian Movement leader Otto Guevara Guth said his party will vote “against taking more money out of Costa Ricans’ pockets.”

Social Christian Unity Party leader Rafael Ortiz Fábrega said his party “will not tolerate employers and taxpayers having to pay for the government’s inefficiency.”

He said his party won’t approve any tax reform as long as the government fails to propose concrete measures for reducing spending.

Comments and suggestions regarding the proposed reforms must be submitted via a template available on the Finance Ministry’s website and emailed to: cordobazm@hacienda.go.cr or esquiveljm@hacienda.go.cr or sent by fax: 2255-4874.

The deadline to send comments is March 27.

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