Costa Rica tax reform 'desperately needed'

Costa Rican lawmakers are mulling reforms to the country's sales and income tax codes - changes that are "desperately needed," according to a local tax expert.

The last reform was implemented in 1997 and the world of commerce has changed a lot since then, Lyndsey Wheeler told BNamericas, citing as examples the emergence of online platforms such as Uber and Airbnb.

"They're looking at a couple of tax reforms in the country," said Wheeler, managing director of financial and business compliance services firm TMF Group's Central America and Jamaica operations.

"It's desperately needed," she said. "The tax legislation in Costa Rica is really behind. If you consider everything that happened after 2000 in terms of new businesses, sales and internet, the legislation doesn't take into account a lot of the realities that we face today."

A bill has not been submitted yet and a question mark hangs over whether one will reach the statute book this year as the country prepares for a general election in February 2018.

"It's doubtful this is going to go through," Wheeler said. "There doesn't seem to be much time. But stranger things have happened in Latin America. Sometimes things can be approved quite quickly."

The country is spending more than it is earning, Wheeler pointed out. And improved tax collection rates would help the government balance its books.

"We're spending more than what's coming in, the country in general," Wheeler said.

Government debt in Costa Rica has risen annually since 2008, when it was almost half the current level at 25% of GDP, rating agency Moody's said in a February report. That month Moody's downgraded Costa Rica's government bond rating a notch to 'Ba2' and maintained its negative outlook on the rating.

"The main reason behind Costa Rica's rising debt burden is a high fiscal deficit, which has averaged 5.1% of GDP from 2011-2016 and may reach close to 6% of GDP this year and next. The high deficits are increasing the government's annual borrowing requirements, which Moody's estimates will reach 12% of GDP in 2017, compared with 10% in 2014," Moody's said in the report.

In an August report, fellow agency Fitch - which downgraded Costa Rica's rating in January to 'BB' from 'BB+' said: "Costa Rica's high central government deficit, averaging around 5% of GDP since 2009, is a result of structural spending increases and institutional gridlock preventing tax increases to fund them."

Fitch said: "The government announced spending containment measures to ease the pressure, but Fitch believes scope for these is narrow given Costa Rica's rigid spending profile. It also aims to restart talks around stalled tax reforms in pursuit of a more lasting solution to the fiscal imbalance, and to seek new authorization for external bond issuance to ease pressure on the local market. However, prospects for meaningful progress on these proposals in Costa Rica's gridlock-prone legislature appear dim in Fitch's view, especially given upcoming elections in February 2018."

COSTA RICA REINTRODUCES CORPORATION TAX

Wheeler spoke to BNamericas as the country reintroduces corporation tax, which applies to all corporations, limited liability companies, or foreign branch registered in Costa Rica's mercantile registry.

The main aim of the annual tax, which came into force at the start of the month, is to boost the coffers of law enforcement agencies to help combat crime, local paper El Financiero reported.

Both active and inactive companies will have to pay. The highest rate is about US$370 a year.

In January 2015, the constitutional chamber of the supreme court of justice of Costa Rica had ruled the law unconstitutional because changes to the final version were not publicized. In March a new law was approved and published.

About 70% of companies in Costa Rica are inactive, Wheeler said. They tend to be used for holding assets, such as homes or vehicles.

From November-June 266,000 companies in the country were dissolved because they were more than three years in arrears in corporation tax, Wheeler said.