“Global Income Tax” was Approved by Unions and Employers during the Costa Rican National Dialogue

The change in Costa Rica to a “global income system”, one of the points of the original government proposal for an agreement with the International Monetary Fund (IMF), was approved and validated by unions and employers during the national dialogue.

This agreement, reached during the last two days of the forum that lasted three weeks, would mean a transformation in the way both individuals and companies pay taxes. Under the “global income”, people must add all the income they obtain in addition to their salary, for example consulting or independent work, and pay taxes on the total, according to a single progressive scale. However, it also means that they would have the ability to make deductions for medical expenses or for paying interest on a mortgage.

Meanwhile, for companies it was agreed that the rate may not exceed 27.5% during the dialogue, compared to the current 30%. This tax would apply to rents that now pay lower rates. For example, the interest they receive from financial investments still pay 15%, according to Adrián Torrealba, former director of Taxation.

“A company that has payments to make in a certain term, instead of having it retained, invests it in the short-term financial market. There they generate interest, but in reality these investments are affected by business activity”, explained Torrealba, “The effect would be that those interests would also enter the ‘global pot,'” he added.

Increase tax revenue
With the introduction of global income, the Government estimated that tax revenues would increase by 0.1% of gross domestic product (GDP) as of 2023. That is the year in which it would begin to collect this tax while completing its implementation.

In addition, during the dialogue, it was pointed out that this would move the country closer to the rate of 25% that the countries of the Organization for Economic Cooperation and Development (OECD) have on average.
President Carlos Alvarado stressed that this would be at least the fifth time in 18 years that the application of global income has been considered. Since 2002, it was promoted in the country during the administration of Abel Pacheco by the Ad Hoc Commission of former Finance Ministers. The country for the moment applies what is called a “cedular” system, in which they maintain different income tax certificates.

How does the global income work?
“With the 2018 tax reform, they tried to give it some kind of “globality”, but they did not finish incorporating all the elements”, said Priscilla Piedra, Tax partner at Deloitte and former director of the Treasury. “It is a complete change in the way we have been paying taxes, very similar to what happened with VAT: we had a sales tax that had a series of rules and we went to a VAT tax.”

“It would be the same, we are changing the model under which the rent, or profits, are charged in the country. Everything is going to change, because the scheme we have now is an income in which each of the manifestations of wealth is taxed independently with differentiated rates that are not communicated between them”, she explained.

Also, the agreed text indicates that it would pass to an income based on the person, in which the treatment of income from wages and individuals with gainful activity would be standardized.

“In the end, what companies generate are profits that must be distributed to their owners, who are individuals. That is why it is said that it is a global income centered on the individual ”, explained Piedra.

Next steps of the Finance Ministry
Elian Villegas, Minister of Finance, commented that global income would make the tax system much easier when it comes into operation in 2023. “It goes to an income system where what is done is that, at the end of the period, the tax is canceled at a certain rate ceiling. The payments that have been made for the other taxes, which have a lower rate, are considered as payments on account. In this way, a settlement will be made at the end of the period”, he explained.
“Now what follows is that the Treasury carries out a study where it will weigh what it is receiving today for the different taxes that can be imputed, for example to a legal person or a natural person. From there, it will determine from a technical point of view, what is the rate to be charged in each case,” said Villegas.

Global vs World income
The concept of global income is different from that of world income, in that a tax would be applied to residents of the country that are generated in the rest of the world. According to what was agreed during the dialogue, what would be introduced is a dual income system, in which passive income is not globalized.

In other words, the returns on a certificate of deposit or on equal debt security would pay 15% on the returns (as long as it does not affect the profitable activity of the company). However, Torrealba pointed out that a world income system should eventually be introduced for passive income.

Resonance Costa Rica
VIA Beleida Delgado
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