In order to access the $1.75 billion credit requested from the IMF, the Costa Rican government proposes to tax financial transactions, increase the tax on the profits of companies and individuals, and increase the tax on real estate.
On the afternoon of September 17, and in the context of a severe economic crisis that had been going on since before the beginning of the pandemic, the Alvarado administration presented the plan with which it intends to mitigate the fiscal impact of the Covid-19 crisis, a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a credit of $1.75 billion.
In order to tax the total amount of profits of individuals or corporations based in Costa Rica, regardless of where their profits are generated, a bill was submitted to the Assembly that seeks to amend the Income Tax Law.
Currently in Costa Rica a territorial income system is applied, which consists of taxing profits produced exclusively at the local level. If the Income Tax Law is modified, the situation could change.
In Costa Rica, modifications to the salary tax brackets establish that income of up to $1,394 will be exempt from collection of the tax, and those exceeding $1,394 and up to $2,046 will pay 10%.
On June 25, the Ministry of Finance published in La Gaceta the new income tax brackets to be applied to salaries between July 1 and September 30, 2019.
The publication details that the tranches will remain like this:
Until April 26 will be in public consultation the regulations of the Income Tax Law in Costa Rica.
From the Ministry of Finance statement:
April 12, 2019. As was done with the first proposal of the regulation to the Law of Value Added Tax (VAT), the Ministry of Finance made available on its website, the first draft of the project "Modifications and Additions to the Income Tax Law Regulation", which regulates Title II of the Law to Strengthen Finance, No. 9635, of December 3, 2018.
Reducing the income tax exemption threshold for individuals, increasing property taxes and raising VAT from 13% to 15% is part of the institution's proposal, arguing that in the country "the tax/GDP ratio is relatively low."
In the medium term, the positive effects on confidence and progress of structural reforms, including those related to OECD membership, should reduce risk premia and stimulate investment, boosting growth to 3.25%, reported the International Monetary Fund (IMF).
The new tax reform proposal presented by the Ministry of Finance of Costa Rica includes the creation of a global income system to impose and collect a tax on the profits of companies and individuals.
Taxing all of the profits of natural and legal persons, including those currently paid separately by the identity code income method, is the principal new feature of the new tax reform plan presented by the Ministry of Finance.
In Costa Rica, the new proposal from the Solis administration's imposes tax on a greater amount of goods and services, such as air tickets, books, packaging and bottling, but with differentiated rates.
As the government's initial idea to convert the sales tax into a value-added tax and raise it from 13% to 15% did not prosper, the Ministry of Finance decided to expand the range of goods and services to be taxed, in order to compensate part of the funds that could not be raised from raising the rate from 13% to 15%.
Since September 25, foreigners who acquire securities from the local stock market will have to pay 8% tax on the dividends generated.
The differences that had arisen regarding how much and in what form the tax on dividends generated from investments made by foreigners in securities on the local stock market should be collected, have been resolved, and the Ministry of Finance confirmed that the tax will be collected from September 25th.
A bill already approved in Legislative Commission intends to increase the tax paid on income from investment funds from 5% to 8%.
The bill leaves unchanged income tax paid on the profits generated from real estate development funds whose projects are"... popular housing and middle income housing, and those of environmental interest and public works."These will still only incur the rate of 5%.
The Government is once again bringing to the table the concept of global income, to force tax residents in the country to declare and pay taxes on profits earned abroad.
The Ministry of Finance has announced that"... they are working on a substitute text to a reform of income tax, which would mean a profound change to the initiative which is in Congress."This proposal is for tax any income generated from commercial activities outside of Costa Rica, by those tax residents who stay at least 183 days a year in the country.
The union of builders has warned that the proposed sales and income tax increases will make costs of services and supplies more expensive, raising the cost of building a home by 12%.
From a statement issued by the Costa Rican Chamber of Construction (CCC):
Families that want to build a house will have to pay about 12% more for it, with the proposed changes.
Among the new features are VAT refunds to those who pay for private medical practices with cards and the establishment of a new fiscal year, from January 1 to December 31.
From a statement issued by the Ministry of Finance:
Bill on value added tax (VAT):
New Features
- This project establishes a value added tax (VAT) levied on sales of goods and provision of services in Costa Rica.
A bill is proposing that new small businesses pay no income tax in the first year of operation, pay 25% of the total amount in the second year and 50% in the third year.
According to the text, during the first year of activity, this kind of new small businesses should not be taxed. For the second year, the obligation changes to 25% of the total amount of income and then increase to 50% in the third year of operation.
A bill put forward by Liberal MPs in Costa Rica proposes that during the first three years of operation, new companies would be exempt from paying income tax.
The proposal states that during the first year the new companies would be completely exempt from income, the second year they would be charged 25% of income tax incurred and 50% in the third year.
The Ministry of Finance has postponed until April 17 the deadline for companies to make their comments on the draft legislation reforming income and sales taxes .
Originally the deadline for providing comments on the tax proposal was March 27, but at the request of several sectors it has been extended until April 17, according to the chief of Finance, Helio Fallas.