Food companies in Costa Rica say that eliminating VAT from the basic basket in the tax reform proposal would create an incentive for imported foods, over and above local production.
The Costa Rican Chamber of the Food Industry (Cacia) reacted to the decision of the deputies to exempt VAT of 1% and 2% on the products of the basic basket in the Bill of Strengthening of Public Finances, which is being discussed in the Assembly.
Leaving out VAT on private education and the basic basket, the substitute text of the bill to Strengthen Public Finances was approved in the legislative committee.
The controversial substitute text of the Bill Strengthening Public Finance that has already passed the first filter, and may now be analyzed by the Plenary of the Assembly, left out two of the taxes that the Alvarado administration intended to implement in its plan: VAT of 1% and 2% on products in the basic basket and 2% on private education services.
The high level of financing and the economic slowdown explain the increase in the fiscal deficit of the central government, which at the end of July reached 3.3% of GDP, the highest in the last six years.
The decrease in tax revenues, due to a slowdown in economic activity, added to the high level of government debt, explained the strong rebound in the fiscal deficit in the first half of the year.Of the total deficit, about two thirds correspond to interest.
The proposal to increase the tax on interest on financial investments in Costa Rica could eventually make credit more expensive for both the private sector and the government.
In the view of the National Securities Exchange (BNV) it is worrisome that initiatives such as an increase in tax on income from financial investments are being discussed without knowing in detail and clearly the impact that something like this could have on the stock market and the country's financial activities.
The cost of not making decisions about the serious fiscal problem affecting Costa Rica "is incommensurable and has the potential to affect not only the economic but also the social and democratic order of the country."
This is the emphatic and clear position of the Comptroller General of the Republic of Costa Rica regarding the serious and risky situation in which the public finances of the country find themselves.Furthermore, as is well mentioned in the report "Fiscal and Budgetary Evolution I semester 2018", published recently by the institution, if decisions related to solving problems of short-term liquidity and modifying the structure of public expenditure to the medium and long term continue to be delayed, the cost to the country will be much more than just economic.
Businessmen in Costa Rica recognize the importance of the fiscal reform needed by the country, but they are calling on the Alvarado administration to pay attention to equally complex problems, such as unemployment and high production costs.
The business sector has taken stock of the first 100 days of the government of Carlos Alvarado, and in a discussion outlined the urgent challenges facing the country, such as how to achieve economic reactivation, advancing a proposed teleworking law, promoting dual training and investing in improving road infrastructure.
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 order to facilitate the formalization of more companies, in Costa Rica the private sector has proposed to the government the implementation of a fiscal amnesty exclusively for the informal sector.
The Costa Rican Union of Chambers and Associations of Private Enterprise (Uccaep), proposes that the tax amnesty be carried out avoiding retroactivity and reprisals, and that it has a short period of duration.
Although insufficient, the package of government spending containment measures proposed by the Alvarado administration is a good first step on the way forward to resolving Costa Rica's delicate fiscal situation.
The Minister of Finance, Rocio Aguilar, presented before the Legislative Assembly a plan to contain government spending that includes, among other measures, decreeing "...
The Government and the private sector have started negotiations to create a proposal for fiscal reform, which could include, among other things, changes aimed at achieving the financial sustainability of the Social Security scheme.
Without revealing details of the first sessions, the Higher Council of Private Enterprise (Cosep) reported that the reform negotiated with the authorities is focused on preventing insolvency of the Nicaraguan Social Security Institute and guaranteeing the country's economic growth.
According to Fitch Ratings, the fiscal outlook still faces considerable uncertainty in Costa Rica, despite the promise of President-elect Carlos Alvarado to carry out comprehensive reforms to reduce the deficit significantly.
In the view of the ratings agency, "... President-elect Carlos Alvarado's strategy for the future is not yet clear. Pressing the smaller 'fast track' bill might be politically easier, but it could reduce the urgency around additional reforms; Supporting a larger package could be more politically difficult."
The Costa Rican Congress has approved a fast track bill that would transform sales tax into a VAT of 13% and establish a 4% rate on the purchase of packaging, wrapping and raw materials, among other things.
The bill that could be approved by the Legislative Assembly also includes "... taxes on books in all their formats, air tickets, purchase of packaging and raw materials, as well as equipment and machinery (except if there is an express exoneration) and services for agricultural and agroindustrial production."
Lack of fiscal reform continues to erode Costa Rica's public finances, constraining its long-term growth prospects and highlighting its vulnerability to external shocks.
Fitch Ratings has changed the outlook from stable to negative, due to "diminished flexibility to finance its rising budget deficits and public debt burden, as well as persistent institutional gridlock preventing progress on reforms to correct the fiscal imbalance."
EDITORIAL
Costa Rica is running out of time.The decision taken by Fitch Ratings to reduce from the outlook for the sovereign debt rating from stable to negative reflects a serious problem that the country faces and shows us that, in the not very long term, the rating agency could lower this rating, currently in the BB category.
In the third quarter of the year, the fiscal deficit was 2.4% of GDP, with a 6% increase in total expenditures compared to the same period in 2016.
A report presented by the Ministry of Finance of Panama shows that the deficit of the non-financial public sector amounted to $1.43 billion at the end of the third quarter, registering an increase of $585 million.