Intent on solving the country’s current financial problems, the government today (Thursday) presented to legislators a new tax plan with the expectation of reducing the gap between expenditure and income from 5% to 2% of Gross Domestic Product (GDP).

Among the most relevant points of the government’s proposal is a 15% Value Added Tax (VAT) – Impuesto sobre el Valor Agregado (IVA) in Spanish – on items like online streaming services, such as Netflix, HBO Go, Bing, iTunes Store and Claro TV, and others. Not made clear was if the VAT would apply to music streaming services such as Spotify or Apple Music.

The VAT would apply to all goods and services, among them lawyer fees and private health services, though the latter would have a different (lower) tax rate, and would be refunded to users who pay with plastic rather than in cash.

The proposal exempts private education.

The proposed bill, Ley de Fortalecimiento de las Finanzas Públicas (Law on Strengthening Public Finances), is the latest proposal by the government of Luis Guillermo Solis in an effort to increase tax revenues for state coffers.

This new comprehensive reform, which emerged following the liquidity crisis announced by the President on August 1, and although similar in scope to the previous proposals, includes changes to the public employment system to place a cap on the salaries of senior managers, as well as reform the way in which salary incentives (bonuses, etc.) are paid today.

The proposal also aims to put an end to the growth in public spending.

Progressive VAT. According to Deputy Minister of Finance, Fernando Rodríguez, the bill would have a mechanism that would reduce the VAT rate from 15% to 14% if the government achieves a primary surplus (more income than central government spending); In case the situation deteriorates again, the tax rate would return to 15%.

The VAT would replace the current 13% sales tax on goods.

The proposal also deals with income tax and tax on investments, among others tax items.

The Ministro de la Presidencia (Chief of Staff), Sergio Alfaro and President of the Legislative Assembly, Gonzalo Ramirez, confirmed that legislators have no objection to fast track the bill.

However, Ramirez did comment that the opposition legislators are still waiting for the government to send signals of austerity to evaluate if there should be a start of the discussions on the proposed tax reform.

Two points made by Ramirez that would be seen as positive signals is the government stop spending on advertising campaigns (propaganda) and curb or stop spending on travel.

Hacienda, Casa Presidential and Legislators are to meet again in a week to evaluate the progress of the bill.


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