QCOSTARICA – A casado without meat or eggs would be the meal for many if the government’s new tax reform is passed as presented to the Legislative Assembly.
The casado is a traditional Costa Rican dish of rice, beans, platano, egg and a piece of meat – steak, chicken or pork. But, under the new tax plan, the piece of meat or egg would be a luxury.
The tax reform introduces a number of changes to the present system, like the move from the current 13% sales tax on goods to a value added tax (VAT) on goods and services. The proposal also raises the tax from 13% to 14% in the first year of the new tax and 15% starting on the second.
What this change alone mans is that many of the goods and services commonly used everyday will be taxed, including a number of items in the “canasta basica” (basic basket). In real terms, it means that a family spending ¢100,000 colones on their shopping would have to pay ¢115,000 for the same purchase.
Affecting foreigners are items like the purchase of real estate, legal and accounting services, even medical bills (unless you pay with a credit or debit card).
The plan also calls for a capital gains tax and a tax on money entering the country.
A hair cut will be taxed. Car repairs will be taxed. Personal care products such as toilet paper, toothpaste and a toothbrush will be taxed. Household cleaners such as soap and detergents will be taxed. The list goes on. To try to offset the effect the pocketbook, vegetables, rice, bread, milk, tortillas, and fruits will not be taxed.
A tax on monthly rentals over ¢403,500 colones (about US$765 dollars) is part of the new tax plan. There are changes to the income tax that will affect just about every worker in the country, 97% is the estimate. There are tax increases, up to double, for vehicle and real estate transfers.
The government assures us there is not other way out for the country, to resolve the fiscal deficit, but to introduce tax reforms.
The proposed plan does not have strong support in the legislature. Seven of the nine parties the Liberación Nacional (PLN), Unidad Social Cristiana (PUSC), Movimiento Libertario (ML), Renovación Costarricense, Restauración Nacional, Accesibilidad Sin Exclusión (PASE) and Alianza Democrática Cristiana parties, demand the government cut public spending before starting the debate on the tax reforms.
Only the ruling party, the Partido Acción Ciudadana (PAC) and the Frente Amplio (FA) support the changes. However, the FA is opposed to the VAT raised from 13% to 15%, accepted Gerardo Vargas, his chief of legislative block.
The government also lacks the support of the private sector, who want to see a more efficient use of public resources and spending.
The president of the Unión Costarricense de Cámaras y Asociaciones del Sector Empresarial Privado (Uccaep) summed it up this way to La Nacion, “in the country there is confusion with the tax issue, because there is only talk about taxes. The discussion should be comprehensive and incorporate the issue of public spending.”
Defending the government’s action to cut spending, the Minister of Finance, Helio Fallas, said one of the efforts made in that area is keeping public sector salary increases for the second half of the year to only 0.08% or capping higher pension payments.
Sources:
- La Nacion – Planes tributarios llegarán al Congreso con débil respaldo
- Diario Extra – Casado se quedará sin carne ni huevos
- La Republica – Renta e IVA ya están en la Asamblea
Start taxing expats more and they will flee or reconsider moving and investing in Costa Rica. Many countries to choose from and if you are no longer competitive, many people will choose another country over Costa Rica. It is not the expats who have created the problem, so why come after them? Many of us are not that much better off than a lot of Costa Rican people. Start by eliminating the “bonus” paid to public employees and those working for quasi public agencies (ICE, Recope, etc.,), cut out all the other perks they receive and control and cut spending at all levels of government. Give people an incentive to work and show them that the government is good stewards of their tax money and it is being put to good use and maybe, just maybe, people would be more honest with paying their fair share of taxes? Maybe they no longer value the expat contributions to the country? IF they keep targeting us, I feel that they will soon face the same fate as Greece and Puerto Rico. Pura Vida?
The new tax proposal includes the following;
• A new capital gains tax would be instituted that would be 15 percent on any profit in the sale of real estate except for the primary residence.
• Public agencies, such as the Refinadora Costarricense de Petróleo S.A. and utilities, would pay income taxes. Of course, these would be passed on to the consumer.
• New VAT – The rate would be 14 percent the first year and increasing to 15 percent in subsequent years
• Tax applies to rentals more than 403,400 colons a month, electricity over 50,000 colons a month and water above 30 cubic meters a month.
• Money coming into the country would be taxed 15 percent.
There are many more items in the tax plan, but these stood out as particularly bad for business. Imagine we see a 15% sales tax applied on top of gas and electricity? Wow taxes already on top of taxes on top of taxes… Can someone explain how a multinational company who pays income tax in Costa Rica is supposed to pay 15% on all money they transfer to Costa Rica? Every single payroll needs to send an extra 15%??? Does anyone think any of this shit through?
My prediction .. this will not pass, not by a long shot. The president will say some bullshit about how he’s cut spending, then the following week announce a bunch more projects that waist money. Costa Rica’s credit status will be lowered to total junk bond status, the government won’t be able to pay its bills, and there will be riots in the streets!
NOT!
Nothing much will change, the credit status of Costa Rica will go to junk status, but the Colon will just devalue to 700 to 1 USD, there by saving the government 20% on its bills to its employees. Costa Rica will continue to borrow money, yes at a higher interest rate but because the Colon has just devalued 20% it won’t find it so hard to pay its bills. In one single action paying the over paid public sector employees is no longer such an issue. Yes yes, there will be rapid inflation, we already saw it when the colony his 565. But hey… it will go from 550 – 700 over the next 18 months.. Suddenly the government salaries are more realistic and everything goes on like normal
Pura Vida
I believe you made a couple errors.
No, replacing a 13% sales tax with a 15% VAT, even if fewer items in the basic basket are tax free, does not mean that “a family spending ¢100,000 colones on their shopping would have to pay ¢115,000 for the same purchase.” It does look like as proposed the bill would raise the taxes on the poor, but not by this much.
I also don’t get how you find that an income tax that only kicks in on incomes at about double the average income will affect 97% of the population.
Ken, I saw an interesting comment on another new site this morning. I get the impression from your comments here and on other sites, you think this new tax is generally a good thing. However, what about this comment? “Since the new taxes won’t affect 97 percent then only 3 percent of the population, and I’m rounding it up to five million for ease of calculating, will be paying the 1.5 billion dollars. That means that 150,000 taxpayers will each be paying an average additional $10,000 per year. That’s a pretty steep increase for those affected.”
Yeah, I saw this comment too, but think it needs some factual verification and clarification before it is debated.
Replacing a 13% sales tax with a 15% VAT (that exempts fewer goods) will increase the taxes on 100% of the population. Similarly, an increase in the vehicle transfer tax will affect around 25% of the population. It’s just factually wrong to assert that only 3% of the population will see a tax increase.
I have to guess, but I think the 97/3% may only refer to the increase in income taxes. Most Ticos (and many expats, should they fall under the income tax requirements) wouldn’t pay any income tax at all, since their incomes aren’t high enough. Then, while gosh I’m forgetting the details, I think the initial income tax brackets are the same as they were. The only increase in income taxes would affect the highest earners.
If my guessing is correct, the questions would then be how much in income taxes the highest earners now pay and how much is fair for them to pay. I don’t know the answers to these questions, although I do know that Costa Rica is now currently more unequal internally than the US and maintains about the same amount of inequality as Mexico. I also know that in general middle-class societies are better in all kinds of ways than societies with large gaps between the rich and the poor, so I might favor a higher income tax on the Tico wealthy.
However, I’m totally guessing now about the details of bills that probably won’t pass anyway. The only thing I know is that as presented the 97/3% thing is just factually wrong.
Thanks for taking the time to write such a comprehensive response.