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Costa Rica government releases details on tax reform plan, including big increase in income tax, capital gains

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August 11th, 2015 (ICR News) The Solis administration released some details of its plan for tax reform on Monday, encompassing six bills that would significantly increase citizens’ and residents’ tax burden.

 

The reforms include ditching the current 13% sales tax in favor of a 15% value-added tax (VAT) on both goods and services.  Exceptions would apply for basic food staples and education services.

 

For most workers whose earnings fall within the taxable range, income tax would increase from 10% to 25%.

 

Transfer tax on motor vehicles would double from 2.5% to 5%.

 

Transfer tax on real estate would also double from 1.5% to 3%.

 

The Ministry of Finance also seeks to tax all types of capital gains, including investments, bank CDs, and real estate transactions, at 15%.

 

The plan also calls for increased tax enforcement and a number of measures to crack down on tax evaders.

 

Costa Rican president, Luis Guillermo Solis warned late last month that the country’s economy could not survive another year without new tax revenue to tackle the government’s soaring fiscal deficit.

 

The president had earlier promised upon taking office in 2014 to not raise taxes during the first two years of his presidency.

 

Strong Opposition

 

The reforms are facing strong opposition in the Legislative Assembly, with lawmakers from seven out of nine political parties opposing the reforms.

 

The parties in opposition to the reform: The National Liberation Party (PLN), Social Christian Unity (PUSC), the Libertarian Movement (ML), Costa Rican Renovation, National Restoration, Accessibility Without Exclusion (PASE) and the Christian Democratic Alliance, all believe that the Solis administration needs to cut public spending – including “mega salaries” paid to public servants – before asking the country’s citizens for more tax revenue.

 

Only the ruling Citizen Action Party (PAC) and the Frente Amplio (Broad Front / FA) support the reforms.

 

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  • prdatki

    What Louis needs to do is audit all of CR government, remove all benefits to politicians, cut their pay by 50 % . He then needs to privatize ICE ,AWA etc. cut 30 % of employes , ,start from the top.THe Prisoners should work, grow there own food and do very hard labor. Legalize Marijuana, tax it and use the Money for schools. May be jail the last 3 Presidents for Corruption.

    • Angel Ace Atencio

      So So true! I think you should run for president! You’d get this country in shape in no time. These added taxes are going to do a lot of damage for everyone and the country in general.

      • Jim Krueger

        No new taxes or fees! Get rid of these crazy pensions, they are not legal anyway!

    • Ben

      The problem with privatizing in Costa Rica there would be so much violence in Costa Rica if they even tried to privatize anything like ICE or AYA. The pubic sector union´s are like gangs and mafia and control the goverment by fear of Violence. Your thinking is right but the goverment would never allow there to be so much violence against themself. If Costa Rica had an Army they might try to Privatize the country. The police do very little already you think fighting against the crazy public sector Union they would fight?

    • Absolem

      Without a doubt, legalizing marijuana would be a huge revenue source. I do not believe Costa Rica could regulate and control like Colorado, USA, however, tourism would increase, pharmaceutical companies and universities from around the world would flood the country for research and development, and Costa Rica would be in the forefront of legal weed, which will hit world wide in the next decade or so. Give up the antiquated marijuana prohibition and harness this natural resource before other countries do.

  • Yeims

    I regard this idea to levy higher taxes on the citizens as only treating the symptoms of the problem and not the problem itself Obvious, of course, but in thinking this through a little more, it is equally obvious that treating the symptoms will only expand the original problems, plus add a host of new ones. The writers and sponsors of this bill should stop to reconsider this BIG MISTAKE they are about to make.

  • Ben

    What the heck is the goverment thinking? The goverment is going to drive business out of the country very fast. More Taxes on everything except beans and rice i see. The president is now showing he wants to drive business and unemployment to 30%. Medical tourism is going to take a large hit and 15% tax on any money coming into the country will drive HP and IBM out of the country. Maybe that´s what the president wants for everyone to leave even the Costa Rican. I know so many Costa Rica that eat one meal a day now so with all the new taxes coming they will eat a meal every other day.
    Shame on the president for not cutting Salaries of pubic Sector first.
    I expect lots of protests soon in Costa Rica. Thing in Costa Rica are going to get very messy and crazy. Costa Rica is now Greece.

    • Roald

      Enforce the current laws in place and go after the tax tax dodgers. Call for audits on all government officials. Show us promises can be kept Señor Solis and lead your country, do not penalize those that pay their fair share.

  • Ken Morris

    Striking to me is how some of these proposed taxes, especially the income tax, seem to remain lower and less progressive in “social democratic” Costa Rica than they are in the US. Indeed, relying upon a 15% VAT while keeping income tax rates comparatively low for high earners is a fairly regressive way to go about things.

    The devil though is in the details, but they may not be worth looking into now. The bill seems DOA in the legislature anyway.

    • Ben

      Costa Rica has a 3 billion shortfall so expect some crazy stuff from congress.

      • Ken Morris

        I’m still fearing that congress will do nothing about the $3 billion shortfall. I hope I’m wrong, but it looks to me like the opposition bloc wants the PAC to fail more than it wants to address the country’s problems.

        • mthorman

          That certainly sounds like politics as usual. Isn’t that what’s happening in the USA?

          • Ken Morris

            Similar, but in the US legislators have to stand for reelection every 2-6 years and to some extent are held accountable by the voters. Here the voters barely know the legislators, who are elected by party slate, and they can’t run for reelection anyway.

          • http://insidecostarica.com/ Timothy Williams

            Excellent point and perhaps the biggest problem in this country’s political system in my opinion.

          • Ken Morris

            My opinion too.

            To amplify it, it finally dawned on me that Costa Rica’s frustrating government bureaucracy is indirectly a result of the way legislators are elected too.

            Since the legislators aren’t directly beholden to the voters, they could care less about providing constituent services. This is very different from in the US, where after a person gets the runaround from a government bureaucracy, they eventually call the office of a legislator, where a staffer contacts the bureaucrats and usually resolves the problem.

            This providing of constituent services by elected officials provides oversight of the bureaucracies that have no equivalent oversight in Costa Rica. As a result, while bureaucracies are frustrating everywhere, they stay frustrating in Costa Rica for a very long time.

    • SDPUS

      Bingo! The world economy simply can’t function when countries allow their wealthiest citizens to escape paying taxes.

      Greece, Italy, Spain, USA, Costa Rica…it does’t matter where. Allow corporations and the wealthiest to avoid taxes, and it is your mainstream citizen who suffers.

      Socialize the costs and privatize the profits. Then hope they trickle down…obviously not a recipe for creating a succsessful Social Democracy. But it seems to keep the Oligarchs happy…

    • mthorman

      As usual, your thoughts are compatible with reality. I always follow your comments.

  • winkdarren

    The new tax proposal includes the following;

    • A new capital gains tax would be instituted that would be 15 percent on any profit in the sale of real estate except for the primary residence.

    • Public agencies, such as the Refinadora Costarricense de Petróleo S.A. and utilities, would pay income taxes. Of course, these would be passed on to the consumer.

    • New VAT – The rate would be 14 percent the first year and increasing to 15 percent in subsequent years

    • Tax applies to rentals more than 403,400 colons a month, electricity over 50,000 colons a month and water above 30 cubic meters a month.

    • Money coming into the country would be taxed 15 percent.

    There are many more items in the tax plan, but these stood out as particularly bad for business. Imagine we see a 15% sales tax applied on top of gas and electricity? Wow taxes already on top of taxes on top of taxes… Can someone explain how a multinational company who pays income tax in Costa Rica is supposed to pay 15% on all money they transfer to Costa Rica? Every single payroll needs to send an extra 15%??? Does anyone think any of this shit through?

    My prediction .. this will not pass, not by a long shot. The president will say some bullshit about how he’s cut spending, then the following week announce a bunch more projects that waist money. Costa Rica’s credit status will be lowered to total junk bond status, the government won’t be able to pay its bills, and there will be riots in the streets!

    NOT!

    Nothing much will change, the credit status of Costa Rica will go to junk status, but the Colon will just devalue to 700 to 1 USD, there by saving the government 20% on its bills to its employees. Costa Rica will continue to borrow money, yes at a higher interest rate but because the Colon has just devalued 20% it won’t find it so hard to pay its bills. In one single action paying the over paid public sector employees is no longer such an issue. Yes yes, there will be rapid inflation, we already saw it when the colony his 565. But hey… it will go from 550 – 700 over the next 18 months.. Suddenly the government salaries are more realistic and everything goes on like normal

    Pura Vida

    • winkdarren

      I should also point out this also fixes the 6 million colony a month pension issue. The pensions are in colonies so devalue the colony a good 20 – 50% and suddenly their pensions are more realistic too.

    • Ben

      I think congress is starting to see that the country is in major trouble so expect anything.

  • Jimmy Kirk

    There are many of us that are citizens or residents that have to learn to live within our budget, so why is it that a governing body cannot do the same as the people they are elected to protect and speak for?

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