COSTA RICA NEWS — (Bloomberg) Stung by a debt downgrade and company firings, Costa Rica’s new government is seeking to bolster its finances by targeting tax evasion in the US$50 billion economy, Ministro de Hacienda (Finance Minister) Helio Fallas said.
The Luis Guillermo Solís government will in January send to the Legislative Assembly legislation making it harder for companies to avoid a 30% income tax by fracturing themselves into smaller units, Fallas and Deputy Finance Minister Fernando Rodriguez said in an interview yesterday. The goal is to narrow a fiscal deficit that could reach 6.7% of gross domestic product next year, up from 6% this year, they said.
“The fiscal deficit has been growing for years,” Fallas, who is also Costa Rica’s vice president, said in an interview with Bloomberg from his office in San Jose. “It’s like a train traveling at 150 kilometres per hour and we have to figure out how to hit the brakes.”
Costa Rican debt was cut to junk by Moody’s Investors Service in September, citing the country’s failure to contain the deficit and difficulties in pushing tax changes through congress. Winning legislative support for President Luis Guillermo Solis’s fiscal package remains a challenge after April elections that left the legislature divided without any party in the majority.
“In Costa Rica democracy is backward,” said former Vice President Luis Liberman. “The minority commands and one congressman can stop you for anything,” he said, adding that the opposition lawmakers “won’t give the government a blank check.”
Central Bank President Olivier Castro agreed that the divides in the Legisalture could delay passage of the legislation. “They are going to attack the government from all sides but I think that in the end the reform is going to pass,” Castro said in an interview today.
Solis is seeking to regain momentum after some of the country’s biggest foreign investors, including Intel Corp. and Bank of America Corp., decided to limit operations in the country, firing 1,500 workers each. President Solis has since courted investors in Silicon Valley, Toronto and New York. Amazon.com Inc. boosted its presence in the country, adding a fourth service centre and plans to fill as many as 1,000 jobs, Costa Rica’s investment promotion agency said Oct. 8.
Costa Rica’s economy expanded 2.8% in August from a year earlier, the slowest pace since April 2013. The economy will expand 3.6% this year and 4% in 2015, according to the median estimate of six economists in a Bloomberg survey taken in August.
In addition to seeking more foreign investment, Rodriguez, the deputy minister, said the government will also ask the legislature to simplify the personal income tax and eliminate exemptions. President Solis said last month he would propose legislation by year-end converting a 13% sales tax into a value-added tax (VAT).
Tax evasion totaled 13.4% of GDP in 2012, more than the country’s tax take of 13.2%, Fallas said at a forum on fiscal issues Oct. 28. He said the government aims to cut the fiscal deficit to 4% of GDP and boost tax income to 16 percent before the current government’s term ends in 2018.
“We want to live like Scandinavian countries but we don’t want to pay the level of taxes that we have to pay,” former Deputy Finance Minister Edna Camacho said in an Oct. 28 speech. “This is a fundamental problem.”