QCOSTARICA – Of course, I’m referring to the Government having the necessary intestinal fortitude to deal with the current economic crisis. Costa Ricans by nature do not like conflict, hence the most famous saying that is repeated over and over, “Pura Vida”(translation: the good life; the pure life; or all is well; take your pick), supposedly is a reflection of life in Costa Rica on a daily basis.

Lately, on the Executive Branch side of the Government, we’ve heard from primarily the President and the Minister of Hacienda (Tax Department), promoting a fiscal reform package that would increase personal income taxes, substitute a VAT tax for the current Sales Tax and increasing the Tax from 13% to 15%, and proposing measures to fortify the tax collection process. One of the most recent Decrees from the President, provides the Tax Department with the power to require Lawyers and other professionals, to disclose certain client information for tax purposes. This, of course, will not be enforceable with respect to Lawyers, as the Lawyer/ Client confidentiality provisions are sacrosanct and the College of Lawyers has responded to the Decree stating as much.

Taking all of the response by the Executive Branch to the economic crisis as a package, it has been extremely “weak-kneed” and clearly would be ineffective in solving the problem. Any fiscal reform package has little chance of success of passing in the Legislature, before significant Government spending cuts are made, primarily in the Public Sector wages and benefits area, as has been well stated by the Opposition.

Even then, I would suggest that the fiscal reform package has little chance of passing, as proposed, or even in a “watered-down” amended form, as the Legislators who will have to pass it, will all be negatively affected by its implementation and although possibly giving “lip-service” along the way in the political process, will not support the proposals when it comes time to vote. It would appear from the proposals made to-date by the Government, that they really don’t understand the nature of Costa Rican Society and what is clearly “doable”, or not.

I’ve lived and worked in Costa Rica for seventeen years and I can state categorically, that what I’m saying here, is historically correct as to the eventual outcome of this matter.

Having said the foregoing, this is my take on what is required to solve the current economic crisis:

1. Public sector wages and benefits must be capped and in the case of benefits, such as pensions, rolled-back. Wages, likewise must be rolled-back in an incremental manner over a short time period. Will this create a hardship for those affected; of course it will. Could there be civil unrest generated by such a move, as has happened in Greece under similar circumstances; yes, possibly it could. Do you want to point fingers at who is responsible for this economic mess of Public Sector wage and benefit spending being out of control; Oscar and Rodrigo Arias are your men to point at, as was admitted by them in the recent meeting with President Guillermo Solis. The Arias’ stated that they had not properly considered the effect of raising a few hundred upper level professional Public Sector salaries during the 2008 economic down-turn (Oscar Arias was President), as to the effect on the Public Sector salaries and benefits paid to the Civil Service employees as a whole.

2. The tax structure and the related structure for the cost of doing business in Costa Rica must be made competitive with other countries to attract foreign investment into Free Trade Zones, the tourism sector, and the like. This will have the effect of stemming the current growing unemployment problem in the Country, put more money in the hands of employed Costa Ricans, and generate more general tax revenue through pay-roll deductions for those so employed. There will also be a reduced cost to the Government for social and domestic problem solving associated with the rising unemployment circumstances.

3. The effective exchange rate between the Colon and the U.S. Dollar must be made real, as opposed the current Central Bank manipulated exchange rate currently in effect. The true exchange rate is probably somewhere between 600 and 700 colones to the U.S. Dollar. This will certainly be a hardship for those Costa Ricans paying loans, or mortgages in dollars, with wages and salaries being received in colones. Obviously, monthly payments to service such debts would rise for those affected by such an exchange rate adjustment. However, the adjustment would certainly stimulate the Exportation Sector of the Economy and would further bolster foreign investment in the Country and tourism in general; again, producing more general tax revenue.

In my opinion, this three point plan of attacking and solving the current economic crisis in the Country, is the only viable plan to follow, but it will require a President and a Government as a whole, to have “the right stuff” to implement it.

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Richard Philps

Attorney Richard (Rick) Philps is a Canadian citizen, naturalized as a citizen of Costa Rica. Rick practiced law in Victoria, B.C., Canada as a member of the Law Society of British Columbia, for fourteen years, prior to moving to Costa Rica in 1998. Rick then earned his Bachelor of Laws and Licensing Degrees (Civil Law), with Honours, and a Post-Graduate Degree in Notary and Registry Law, from the Metropolitana Castro Carazo and Escuela Libre de Derecho Universities, in San Jose.

Rick is a member of the Costa Rica College of Lawyers, and practices law in Costa Rica in the areas of real estate and development, corporate, commercial, contract, immigration, and banking with the Law Firm of Petersen & Philps, located in Escazu, a western suburb of San Jose.

To contact Attorney Rick Philps about hiring him as your Costa Rican Attorney, please use the following information: Lic. Rick Philps – Attorney at Law, Petersen & Philps, San Jose, Costa Rica Tel: 506-2288-4381, Ext. 102; Email: rick@costaricacanadalaw.com Website: www.costaricacanadalaw.com

  • Jimmy Kirk

    I have the tendency to agree with this solution as opposed to taxing away the investing of foreign funds.

    • costarick

      An added benefit in encouraging foreign investment, rather than taxing it way, is that with foreign investment comes an imposed work ethic by the foreign investor geared to a higher production than that which exists in Costa Rica in a general domestic sense. Overtime, this change in work ethic in the Costa Rica workforce will help boost Costa Rica from its Developing World Country status, to that of a true First World Country, based on the increase in production.

  • winkdarren

    Great post Richard. One of my questions is, doesn’t simply valuing the Colon, “correctly,” fix most of the issues beyond just boasting the export market. My logic being, if the Colon is devalued 25% to the USD that would effectively reduce pensions and salaries 25% at least with respect to international loans. The government plans to continue borrowing .. so doesn’t lowering the Colon help on a dramatic scale, as I am certain they largely borrow in USD?

    • costarick

      Yes, I believe that adjusting the Colon to the true U.S. Dollar exchange rate will go a long way to solving the problem based on international finance issues. The problem will be for Ticos, earning wages and salaries in Colones and paying domestic loans and mortgages in U.S. Dollars, of which there are many, particularly in the Public Sector. These people will be hurt, having been lured into an unsupportable financial circumstance unwittingly, by the lack of appropriate due diligence being conducted by the Arias Regime, two Governments previous, in raising Public Sector salaries without considering the downstream effect.

  • Michael

    Totally agree with your 3 point solutions. But what about a 4th; cracking down on tax evasion? I realize that it is culturally acceptable to avoid paying taxes here, how many professionals attorneys, doctors, dentists, architects etc. only deal in cash with no factura volunteered? Cracking down on evaders would obviously help this deficit pit. But this is after all a cultural issue and we all know how hard it is change Tico’s attitudes towards accepted norms?

    • costarick

      I agree with you on point #4 and the cultural reasons why it probably wouldn’t be effective.

  • Ken Morris

    Not much in your goals to disagree with–depending upon the details, I think we all agree with these–but I do have reservations about your political analysis.

    First, I fear it’s the legislature rather than Solís that may not have the “right stuff.” I’m afraid that the opposition bloc prefers to run the country into ruin in the hopes of winning the next election than to address the problems.

    Second, while I agree (Who doesn’t?) on salary and pension reform in the public sector and want to see bills passed that do this in conjunction with tax bills, I think you underestimate the legal fallout (and therefore costs) of trying to seriously reduce these costs over any short term. Realistically, I think we’re looking at reforms that will only slowly cut costs. These remain important, and again I would personally tie tax bills to these, but I think these are long- rather than short term fixes.

    Third, as much as I too want to see an accurate exchange rate, and agree that longterm this will be better for business too, I’m afraid that doing this short term may create more problems than it solves. The problem is that the banks have huge loan portfolios in dollars, and any sudden decline in the value of the colon will spark a wave of defaults. This in turn will make for an “all hell is breaking loose” situation. The only solution that I can see is a return to something like a crawling peg policy. It has to be done, since if it isn’t it will eventually happen suddenly anyway (and all hell will break loose), but while the window of opportunity remains slightly open, I think it’s best to easy into this slowly, perhaps coupling the easing with a bill forcing banks to allow dollar loans to be exchanged for colon loans.

    But besides this, I have a question: Is lawyer/client privilege so sacrosanct in Costa Rica that lawyers keep mum when their clients commit crimes (like tax evasion) and do you favor this?

    In the US, lawyers are foremost officers of the court, and actually cannot fail to report clients who they know are breaking the law. Mind, the lawyers get really good at fudging this responsibility. When it appears that their clients are fixing to tell them about illegal activities, they tell their clients to shut up and remind them that they, the lawyers, are officers of the court and are duty-bound to report them if they keep jabbering. Even after a client confesses to a crime before a lawyer, a good lawyer may respond, “But couldn’t it have happened this way?” and then proceed to suggest a line of defense that conforms with the facts but isn’t criminal. Even so, at the end of the day, a lawyer in the US cannot fail to report a client who the lawyer knows has broken the law. It’s a fuzzy line, but not one I like to see erased.

    If Costa Rica’s lawyers must place lawyer/client privilege above their responsibilities to uphold the law, I think this is bad policy.

    • costarick

      With respect to the lawyer-client privilege aspect of your piece, I disagree with what you state happens in the U.S., Canada, and indeed Costa Rica as well, with respect to the protocol asserted by this privilege. Lawyers are Officers of the Court, but they are not the police. There is an absolute lawyer-client privilege that exists in all three jurisdictions for Lawyers not to disclose any communications they have with their clients, even if it involves details of a crime that has been committed, and, of course, not to counsel the committing of a crime by their client(s). The only exception to this rule of the privilege is if the Lawyer obtains information from their client(s) in advance of a crime being committed, that if such information were provided to the police, it would prevent the crime from being committed (eg. the client is on their way to a bank to rob it).
      With respect to the balance of your piece dealing with my economic reform proposals, I don’t disagree that people with dollar loans and mortgages and earning their income in colons, would be hurt by a significant adjustment in the dollar-colon exchange rate to a realistic rate of exchange, as I have stated. Civil unrest may arise. However, I believe that the implementation period for these proposed reforms can be much shorter than you propose, as has recently been seen in the similar circumstances facing Greece.

      • Ken Morris

        Thanks, this clarifies it. I wasn’t aware that there was a distinction between future and past crimes, but it makes sense that there is. I guess this means that lawyer/client privilege prevents lawyers from from ratting on clients who have cheated on their taxes in the past, but obligates a lawyer to report a client who is fixing to cheat. This is probably about the right place to draw the line, and it would seem that empowering the tax authorities to force lawyers to turn over clients’ confidential information is an excessive grant of power.

        Though I guess the next set of questions involve accountants, bookkeepers, and so on, as well as then what other investigative authority the tax collectors ought to have. They need some, since otherwise everybody would cheat.