Costa Rica Tax Changes Pass to Supreme Court After Congress Vote

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    Costa Rica’s Congress last night gave initial approval to an overhaul of the tax system aimed at paring a fiscal deficit equal to more than 5 percent of gross domestic product.

    The legislation now awaits a Supreme Court ruling on opposition allegations that its fast-track treatment by lawmakers was unconstitutional. The tribunal takes an average 18 months to decide on constitutional matters, court spokeswoman Vanlly Cantillo said.

    The new system would add about $650 million annually to government revenue, according to the Finance Ministry. Changes include replacing the 13 percent sales tax with a 14 percent value-added tax and imposing a 15 percent tax on dividends earned by companies that enter the country’s free-trade zones after 2015.

    Costa Rica’s $40 billion economy, the second-biggest in Central America, is weighed down by a fiscal deficit equivalent to about $2 billion, approximately the amount the country earns from tourism. Central bank President Rodrigo Bolanos said in January that as a result, economic growth will slow to 3.8 percent this year from 4.2 percent in 2011.

    The legislation’s approval by Congress was the “biggest and most progressive” fiscal agreement in the nation’s history, Finance Minister Fernando Herrero said. Thirty-one of 50 legislators present voted in favor.

    “This is a fundamental step to contain the risk facing the national economy,” Herrero said in a statement.

    Given a favorable ruling by the Supreme Court, the legislation would require a second approval by Congress and then need presidential ratification before becoming law.

    U.S. companies Intel Corp. (INTC), International Business Machines Corp. (IBM), Hewlett-Packard Co. (HPQ), and Oracle Corp. (ORCL) have units in Costa Rican free-trade zones.

    By Adam Williams

    From Bloomberg

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