(QCOSTARICA) Costa Rica president Carlos Alvarado on Thursday outlined the proposed new taxes that would be imposed in order to obtain a US$2.25 billion dollar loan from the International Monetary Fund (IMF).
In addition, there is an increase in income tax for monthly earnings of ¢840,000 colones and over.
The proposed tax would be applied on all electronic purchases, money transfers, ATM withdrawals and even credit (loan and credit card) payments.
The Government’s proposal to the IMF would generate the most resources is the idea of introducing a tax on all bank transactions for a period of four years.
According to the estimates of the Central Government, the tax would generate about ¢3.6 trillion colones, as specified by the Economic Council in a document summarizing the measures that will be presented to the IMF.
Currently, the country has a fiscal deficit close to 10% of GDP, the document indicates that this tax would generate three points of GDP in each of the first two years and two points of GDP in each of the following two years.
Specifically, there are six banking transactions that would be taxed:
- ATM withdrawals.
- Credit and debit card payments.
- Fund transfers, including those made by Sinpe Móvil and loan installment payments.
- Foreign exchange operations.
- Stock operations of the National Stock Exchange.
- Check clearing.
The tax would be paid by the originator of the transaction. That is, whoever withdraws money from the ATM, pays with a card (debit or credit), makes a bank transfer or send money through Sinpe Móvil (the mobile interbank transfer app by the Central Bank) and writes the check.
In 2021 and 2022, the tax rate would be 0.3%, that is, ¢300 for every ¢ 100,000 in all payments, transfers and withdrawals from ATMs that are made.
Then, in 2023 and 2024, the rate would drop to 0.2%, that is, ¢200 for each transaction.
For example, withdrawing ¢50,000 colones from an ATM would cost ¢150 colones, paying rent of say ¢500,000 colones by way of a Simple Movil transfer would cost the ¢1,500. Those fees are during first two years and then ¢100 and ¢1,000 respectively during the next two.
The Alvarado administration relies on the fact that other Latin American countries have resorted to this type of tax since the mid-1990s, to increase their income in times of emergency.
According to the Government, the tax would drop in the third year because it is expected that, by that time, the usual tax revenues will begin to stabilize, “once the economy has returned to its natural growth path.”
A document sent to legislators, on the proposal to the IMF, affirms that, during the first two years of the tax, a third of the proceeds would be used “entirely” to subsidize social security contributions to promote employment.
The idea is to reduce by approximately five percentage points the charges that employers must pay on the salary of each worker, which today is equivalent to 26.3%.
In the remaining 24 months that the new tax will be in effect, half of the proceeds would be reserved for the same purpose.
As stated by the Government, after four years, the tax would cease to be collected.
Temporary and permanent taxes
The government’s fiscal adjustment plan divides the measures into two categories: temporary and permanent.
The tax on transactions is in the first category, that is temporary, along with an extraordinary increase in the income tax, a labor mobility plan, and the sale of the National Liquor Factory (Fanal), the International Bank of Costa Rica (Bicsa), and State land.
Among the permanent measures are a new property tax on real estate, a program to combat tax evasion, a reform of public employment, global income, and the elimination of exemptions.
Consequences for the economy
While the government argues that the tax on bank transactions has “advantages” in the context of the crisis the country is going through. According to the authorities, it has a low administrative cost and does not generate a contractive effect on the activity of the economy.
“It is relatively easy and cheap to collect for the authorities, the tax base is wide, therefore, with a low tax there is a great income from collection. That is why, in the short term, the tax is successful in increasing tax collection,” says the document prepared by the Economic Council.
However, the Government recognizes that the tax has the unwanted side effect of pushing some sectors to use more cash.
That sentiment is shared by critics of the tax who argue that the transactions tax measure will see more use of cash, reduced deposits and transfers in financial institutions or “unbanking”.
According to the government, it is for this reason that the tax is temporary and extraordinary. According to its projections, as it will be charged for a limited period, “the effects on unbanking will be low.”