Monday 20 March 2023

Plan Fiscal (Tax Reform) Approved in First Debate. But Strike Will Continue!

The bill is now subject to a Constitutional Court review before going back to legislators for second and final vote

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This Friday the members of the legislative assembly approved the law on strengthening public finances in the first debate.

Rain or snow (OK now snow in Costa Rica) detained protesters against the Plan Fiscal (Tax Reform) outside the legisltive buildings on Friday afternoon

Friday afternoon, by a vote of 35 in favor and 22 against, legislators approved in first debate bill 20.580, known as the Plan Fiscal (Tax Reform), in which the Government intends to collect some ¢422 billion colones in taxes, less than 2% of the Gross Domestic Product (GDP) and alleviate the fiscal deficit that now exceeds 7%.

The tax package includes changes in sales and income taxes, in public employment and in the fiscal responsibility of the Government.

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Following are some of the highlights of the bill:

Taxes on consumption of goods and services

  • The Value Added Tax (VA) – Impuesto de Valor Agregado IVA) in Spanish –  on goods and services replaces the current general sales tax on goods, but maintains the rate of 13%, with some exceptions. With this change, more services are incorporated that will pay the tax.
  • A reduced rate of 1% is imposed on the products of the basic basket.
  • On the other hand, services currently exempt will be charged, such as professional services, gyms, streaming applications (ie Netflix) and other services such as Uber.
  • Other services that will pay less are those of private medicine (4%, with a refund for those who pay by electronic means), in addition to the medicines (2%).
  • In the case of public universities, they will pay VAT on the purchase of goods and services, but they will be refunded what they pay for this tax.
  • Private education remains exempt, as well as public transport, purchases of boards of education and books in print or digital version.
  • The VAT applies to rents of ¢648,000 monthly or higher.
  • A 13% VAT will apply to the consumption of electricity that exceeds 280 kilowatts/hour per month and water that exceeds 30 cubic meters.

Tax on Income

Income tax is tiered, created so that those who earn more contribute a higher percentage of their income.

  • Salaries below ¢817,000 per month do not pay income tax.
  • Salaries of ¢817,000 monthly and up to ¢1,199,000, the income tax is 10% (the current income tax).
  • Monthly salaries of ¢1,199,000 and up to ¢2,103,000, tjhe income tax is 15%.
  • Monthly salaries of-of ¢2,103,000 and up to ¢4,205,000, a 20% income tax will apply.
  • On monthly salaries in excess of  4,205,000, an income tax of 25% will be paid.

Global income is a mechanism that would require paying more income tax to people who have more income. It implies including the totality of a taxpayer’s income by applying a single rate even on income that is currently taxed separately.

Tax on capital gains is a new tax that taxes 15% the profits when selling properties, such as houses, lots, stocks, software or licenses. The tax applies to personal and corporate gains. Exempt from capital gains a personal home, inheritance and lottery winnings.

Tax on investment income, profits generated by financial tools such as investment certificates, interest on loans or government bonds, would rise from 8% to 15%.

Cooperatives will see the tax that the cooperative members must pay on distributed profits, given that they are the owners increases from 5% to 10%.

How they voted.

Other changes

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The tax year will be from January 1 to December 31. Currently, it is from October 1st to September 30th.

Performance evaluation: Only “very good” or “excellent” public employees will be entitled to an annuity incentive, with the exception of those who work in the municipal regime.

Cesantía (severance pay) is capped at 8 years. Currently, state institutions such as the Instituto Nacional de Seguros (INS), Banco Popular, Refinería Costarricense de Petróleo (Recope) and the Junta de Administración Portuaria y de Desarrollo Económico de la Vertiente Atlántica (Japdeva) pay up to 20 years. Employees covered by a collective agreement will be recognized for up to 12 years if they already have the right to seniority.

A salary cap on the President of the Republic, ministers, executive presidents of institutions and boards of directors. For example, the president’s monthly salary would be ¢6.6 million and that of ministers ¢5.4 million. Board members would receive ¢2.6 million, while executive presidents ¢8 million.

Opponents to the Plan Fiscal watched while legislators voted

What happens next?

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We’ve been down this road before. A lot of euphoria and celebration by the promoters of the change, a lot of anger and frustrations by those opposed or do not see the benefit of this package, though believe some reform is needed.

President Carlos Alvarado, in his message Friday night, said it was a day to thank the Legislative Assembly “that in the midst of our democratic framework has approved in the first debate the project 20,580 of Strengthening of Public Finances, an important and urgent step in the goal of taking Costa Rica towards a healthy economy and stable.”

“We go ahead, there is still a way (to go), but I trust in the permanence of the commitment shown today. Each person in Costa Rica counts on that we continue to build. We are very close to adopting courageous and substantive measures.”

For its part, the business sector received the approval with optimism, but, at the same time, urged the Government not to delay actions to completely shore up the public finances.

Constitutional Court review

The bill, before legislators can begin their discussion that leaders to vote in second and final debate, will now be sent to the Constitutional Chamber and other government institutions for review and approval.

Strike continues

Albino Vargas, head of the largest and strongest public sector worker’s unions, on Friday called on other union leaders to continue the strike

The public sector worker unions have vowed to continue with the strike that began on September 10.

The secretary general of the Asociación Nacional de Empleados Públicos (ANEP) – National Association of Public Employees, Albino Vargas, recommended to his fellow unionists that the strike continues.

The ANEP is one of the largest and strongest unions.

On Friday, after learning of the approval of the Fiscal Plan, Vargas took the microphone on the outskirts of the Legislative Assembly building and spoke to those present that he had already spoken with the leaders of the other unions who are in agreement to continue the strike.

On the social networks, Vargas said, “My respectful recommendation is that the strike continues, I spoke now with other union leaders who think the same, we expect official statements soon.”

The union sector is pinning its hopes on the possibility that the Constitutional Court rejects the tax bill with the claim that 38 votes would be necessary for approval. The plan was endorsed in the first debate with 35 of the 57 votes.

According to Vargas, there are “specialists” and “experts” who have told him that 38 votes are necessary, which is why the legislators and the government should not “chant victory.”

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"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

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