QCOSTARICA – Approaching mid term and delays in getting through his tax reform plan, Costa Rica President, Luis Guillermo Solís, has appealed to legisalture for approval before the end of the year.

The President said at a press conference that approval of the tax reforms is a top priority. He said that, following a two-year moratorium on tax increases, it is time to implement austerity measures.

Last year, a tax reform bill was forwarded to the legislature to boost revenues. The bill contains a proposal to replace the 13% general sales tax with a value-added tax (VAT) with an initial rate of 14%. The rate would rise to 15% in the second year. It also contains an increase in individual income tax rates on a sliding scale up to 25%.

Costa Rica’s inability to pass these reforms recently led Standard & Poor’s Ratings Services to lower its long-term foreign and local currency sovereign credit ratings for Costa Rica. The ratings agency said that it believes Costa Rica is unlikely to pass a substantial fiscal reform in the near future due to the country’s fragmented Congress and the protracted process for agreeing upon legislation.

As a result, the agency expects that Costa Rica’s general government fiscal deficit will continue increasing this year and surpass seven percent of gross domestic product (GDP) in 2017, which would boost net general government debt above 45 percent of GDP.

The International Monetary Fund (IMF) said in a statement in March that Costa Rica needs to target a fiscal adjustment of 3.75 percent of gross domestic product (GDP) in order to stabilize the public debt-to-GDP ratio.

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