San José, Costa Rica, since 1956
Taxes

Government wants to hike taxes to boost income

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.

Contact L. Arias at larias@ticotimes.net

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SirVivor

Is there anyone who really believes that additional taxation solves more problems than it creates?
Instead of addressing high electric rates, the underlying costs of doing business in this country and government over-spending lets just tax our way out of the problem. Yea … that is the correct answer I am sure.

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John

Since you asked, I for one think (believe is a loaded word) that additional taxation CAN solve more problems than it creates.
It just depends who is taxed, and how.
A form of progressive taxation, based on profit for companies or income for individuals, is always the fairest way to raise revenue, which is necessary to pay for government services, including the ones we all scream we want more of.
The high electricity rates argument, by the way, is a red herring; Average Costa Rican electricity rates are the lowest in Central America except for Honduras, where they’re heavily subsidized.
Honduras: 17.75 cents per kW/h; Costa Rica 18.48; Panama 18.88; Nicarague 21.09; El Salvador 23.07; Guatemala 24.42.

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Steve

John I don’t know where your getting your rates from, However here are the actual rates of Costa Rica. You will find that your numbers are completely wrong. In actuality the price per kwh is 17.50 for the first 200 KWH then it is 31.32 there after. I have not checked them all but I believe the other countries average rates are solid and do not very much. This is straight from the ICE web page.

SERVICIO DE DISTRIBUCIÓN
Tarifa T-RE Residencial
a. Aplicación: Se entiende por consumo residencial el servicio para casas y apartamentos de
habitación que sirven exclusivamente de alojamiento permanente. No incluye áreas
comunes de condominios, áreas de recreo, moteles, hoteles, cabinas de recreo, hospitales,
hospicios, servicios combinados residencia – negocio, edificios de apartamentos servidos
por un solo medidor, ni establecimientos relacionados con actividades lucrativas.
b. Precios mensuales:
Primeros 200 kWh a ¢ 93/kWh
Por cada kilovatio adicional ¢ 166/kWh

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Steve

One pedestal fan uses about 70 KWH per month as they normally average about 100watts.
Your average A/C uses about 2 kwh per hour running at 100%.
A rice cooker when in use burns almost 1kwh per hour
Light bulbs burn alot of power if your using normal bulbs. But at 6$ plus for the economical bulbs not everyone can afford them.
As for Taxes, axes do work when they are implemented properly. I believe that if a proper income tax is implemented here perhaps the taxes of luxury items could be reduced. In turn creating products that are able to be purchased by lower income families. There would still be a tax but not the 100% markup like it is now. So you increase income for the government from taxing the rich a bit more. How about 20% or even 25 % if your over a certain level. The current system is really not a system for success. It only keeps the poor down and makes almost every item a luxury to have. Judging by the amount of people that can afford 60 or 80 K cars I believe they might even welcome paying a higher income tax if it would lower imported item taxes. Just imagine how much the Government could make if they only charged 10% tax on internet sales.

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John

The rates I posted came from a full-page ad taken out by ICE in La Nacion March 1, 2015. It is on page 15A.
ICE placed the ad because of inaccurate information being bandied about regarding its rates.
As I stated, and as the ad states, these are the AVERAGE electricity rates paid in the countries mentioned. Normally, the first few hundred kW/h are the cheapest, and rates increase after that, to encourage conservation.
When I pasted what you quoted into Google, I could not find exactly the page you quoted from, although I did find some other ICE/CNFL rates, including what looks like a proposal to vary charges based on time-of-day usage.
(My tip to you if your 100-watt pedestal fan is using 70k/w/h per month, which is a lot for a fan, is to not run it 24 hours per day, 30 days per month. The fan actually is using just 1 k/W/h for every 10 hours of use, or 1/10 of one kW/h, if I’ve calculated correctly.)

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Ben

John wake up and smell the Coffee. Costa Rica is a bloody mess.

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Steve

I see so many people driving 60 to 80K cars and living in huge luxury homes. Why not restructure the income tax system. The rich seem to be skating away here without paying anything. The max tax is 15%. Maybe it’s time to raise that up a bit. Poverty is on the rise here and you want to keep piling on taxes that go to the consumer? That just does not make sense to me unless you really have not a care in the world about the poor in this country. There should some kind of tax on tourism business. I don’t understand why they act like they cannot pay anything. All we need is for everyone to contribute. Then you have these development companies that owe millions in Caja’s for it’s employees but they get away with it because they have connections in government. The following site has alot of interesting stories. http://robertomorasalazar.ticoblogger.com/2014/05/05/carlos-arroyo-quiros-de-grupo-mapache-y-sus-representadas-adeuda-a-nuestra-seguridad-social-23-millones-de-colones/

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SirVivor

The Costa Rica government has obviously decided to cater to high-income travelers and wealthy investors. The problem is they cannot compete effectively in this market and there are too few victims … I mean tourists.

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