Friday 3 December 2021

Constitutional Court Gives The Green Light To The Tax Reform Bill

The decision was unanimous, paving the way for the plan fiscal to move to second debate and if approved to the president signing it into law

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The Constitutional Court (Sala Constitucional, also known as “Sala IV”), on Friday endorsed the process of the tax reform (plan fiscal) promoted by the government of Carlos Alvarado, in its task to put in order the country’s finances and avoid an economic crisis.

Fernando Castillo, chief justice of the Sala Constitucional. Photo Rafael Murillo

The tax reform bill was approved in the first debate and sent to the Constitutional Court for a consultation before it would make it back to the legislative floor for second (and final) reading, discussion and voting and subsequently, if approved, passed to the president’s signature.

Unanimously, the Constitutional Court declared that it found no procedural flaws in the bill. See the full text of the statement to the press.

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The Sala IV decision also eliminated the 38 vote rule to be ratified, as the judges concluded that this will not affect the functioning of the Judiciary, unlike what the Corte Plena (Full Court) had said, which alleged that it affected it by imposing measures of containment of spending of public salaries.

The aim of the plan fiscal is to reform taxes and introduce measures to contain spending. It will transform the sales tax into a value-added tax (VAT), which will tax items such as professional fees, gym memberships, even Netflix, for example, among others that today are exempt.

In addition, it will increase the income tax on the highest salaries and pensions by up to 25%.

At the same time, it will put a brake on the exponential growth of public sector salary bonuses (perks) while freezing all public sector above ¢4 million monthly for two years.

The tax reform bill was approved by legislators, in the first debate, on October 5, with 35 votes in favor and 22 against. Support for the bill came from ten legislators from the Partido Acción Ciudadana (PAC), 15 from the Partido Liberación Nacional (PLN), nine from the Partido Unidad Social Cristiana (PUSC), one from the Partido Republicano Social Cristiano (PRSC) and the independent Erick Rodríguez.

The votes against came from the 14 legislators of the Partido Restauración Nacional (PRN), today they are divided into six of the PRN and eight of the block of independents who will be forming a new political party.

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The others against, one from the Frente Amplio, three of the Partido Integración Nacional (PIN), one of the PUSC, two of the PLN and one of the PRSC.

Following are some of the measures in the tax reform:

  • The change from the 13% sales tax on goods to a 13% value added tax (VAT or IVA in Spanish) on goods and services. Items like legal fees, Uber and Netflix, among others, will be taxed.
  • A reduction of 4% on private medical bills is paid in plastic, in addition to the 2% on medications.
  • Public universities will pay the VAT (with conditions), while private education is exempt.
  • Public transport will also be exempt of the VAT.
  • Housing rents under 1.5 monthly bases salaries (currently ¢648,000 colones) are exempt of the VAT.
  • The 13% tax will apply to electrical services over 280 kW hours consumer per month and water use over 30 cubic meters.
  • Income tax over ¢817,000 colones monthly will be taxed up to 25% (from the current 15%). Salaries below ¢817,000 colones monthly will not pay income tax.
    The introduction of a “global income”, a mechanism that would require paying more income tax by people with larged incomes by applying a single rate to all income sources that is currently taxed individually.
  • A new 15% tax on capital gains on real estate, stocks, software or licenses, among others. The tax is applicable to a personal residential property, inheritance or lottery winnings.
  • The income tax on interest income will increase from the current 8% to 15%.
  • The income tax year will change to January 1 to December 31, from the current October 1 to September 30.

There are also changes in the way the government distributes income and places measures on public spending, including the awarding of bonuses and incentives of public sector employees. An example is the severance pay, capped at 8 years instead of the current 12 and in some public sector institutions can be up to 10 years.

The plan fiscal would also impose a cap on the salaries of the President of the Republic, heads of public institutions and boards of directors, ie ICE, INS, AyA, Recope.

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The text of the Plan Fiscal…


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