Wednesday 5 October 2022

Finance Minister rules out VAT increase and tax on bank transactions

Elian Villegas denies options that the ministers of Presidency and Planning presented to legislators

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04 October 2022 - At The Banks - BCCR

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QCOSTARICA – The Minister of Finance, Elian Villegas, totally ruled out that the Government is going to propose an increase of one percentage point in Value Added Tax (VAT) – IVA in Spanish -, or the creation of a tax on banking transactions, in the negotiation of fiscal adjustment with the International Monetary Fund (IMF).

Elian Villegas, Minister of Finance (Ministro de Hacienda)

With the statement issued Wednesday, Villegas denies the version that the ministers of the Presidency and Planning, Geannina Dinarte and Pilar Garrido, presented to the legislators, who are heads of the political party factions, in a meeting at the Presidential House, on Tuesday, January 5, less than a week before negotiations with the IMF begin.

“The increase in VAT from 13% to 14% does not work. The other thing that does not go is a tax on bank transactions,” said the Treasury chief.

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According to Villegas, these ideas will not even be a second option in the negotiation with the IMF: “In the proposal that we have to negotiate with the Fund, starting next Monday (January 11), there is no VAT increase.”

“In the income axis, we have several components, there is the project to eliminate exemptions, which would provide (the government) income,” explained the minister.

In new taxes, the Government aims to generate an amount equivalent to 0.80% of GDP to help balance public finances and, so far, has proposed the following measures in this regard: new tax on luxury homes, global income, and on lottery prizes.

However, the returns on these options add up to between 0.41% and 0.53% of GDP. The difference is due to the resources that generate global income, depending on the proposed model.

In other words, the Government still lacks between 0.30% and 0.40% in the planning of new revenues. It was in this context, according to the legislators, when the ministers of the Presidency and Planning the VAT and the bank transactions as options.

However, Villegas now denies them and insists that there are other possibilities. He mentioned, for example, a temporary increase of one and a half points in income and capital gains tax. The rate would go from 15% to 16.5% for two years.

Taxes proposed as to now

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The new tax on luxury homes, raised by the Government, would be charged to those valued at more than ¢200 million colones, at a rate of 0.5% per year. This plan would contribute 0.17% of GDP in income.

Regarding the global income, it would be a new scheme so that the taxpayer has to pay on their unified income, according to a table of rates that the Treasury has, for now, under review.

Villegas said that the global income yield, depending on the adjustments made, could range between 0.12% and 0.24% of GDP.

The lottery tax is already in the legislative stream and proposes that a 25% tax on lottery winnings over ¢250,000 colones. This project would generate 0.12% of GDP.

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In eliminating exemptions, the Government proposed to reduce by 50% the tax benefit on the returns of the pension funds, as well as completely eliminate the benefit on the school salary of the public sector and the differential treatment for surpluses distributed by cooperatives and solidarity associations.

The minister assured that eliminating exemptions would generate resources equivalent to 0.53% of gross domestic product (GDP).

On the other hand, the Government will propose a plan to obtain 0.20% of GDP through contributions from state companies.

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