Government proposes sales tax of 14% in fiscal reform

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    On Tuesday, the Costa Rican government presented to Congress a fiscal reform plan that proposes to transform the sales tax on a value added tax (VAT) and increase its rate from 13% to 14%.

    The original intention of the Executive Branch was to set a tax of 15%, but they decided to drop the amount of their request as part of a strategy to try to reduce opposition from the deputies.

    To replace that money, the Chinchilla administration now seeks to raise two other taxes: that of vehicle ownership by 10 points and the transfer of immovable property, from 1.5% to 3%.

    This was established in the bill called “solidarity tax” by the minister of Finance, Fernando Herrero, and the president, Marco Vargas.

    In the case of private education, the proposed tax rate is 10%, which in the case of higher education applies only to courses accredited by the National Higher Education Accreditation (Sinaes). For non-accredited courses, the tax would be 14%.

    Exempt from the sales tax is a baseline consumption of electricity, water and rental.

    So far, the amount of exemption to renters has not been defined.

    The other two major changes in this tax are the extension services and the reduction of exempt property.

    Another important pillar is the income tax, whose biggest change is the application of a 15% rate on certain income such as interest on bank deposits.

    Smith emphasized that it is a joint reform that falls mainly on the higher income groups. He estimated that 20% of households with higher incomes will pay 60% of the taxes.

    Context of crisis. Herrero claimed that the plan comes at a time when public finances are in crisis.

    He said the government deficit ended last year in an amount equal to 5.3% of gross domestic product (about ¢983,000 million), the highest since 1994 and the largest in Latin America.

    This year’s projection is that the deficit will be 5.8% of production. That, according to Smith, is a threat against the country’s competitiveness, economic growth and stability.

    Through the fiscal reform, the government intends to increase revenues in an amount equal to 2.5% of production (¢500,000 million).

    Furthermore, measures to reduce spending aims to save an amount equivalent to 0.20% of production and efforts to combat tax evasion is expected to generate revenues equivalent to 0.25% of production.

    68% of the extra revenue that would generate reform would come from new taxes. 24% would result from changes in income, a 4% property tax on vehicles and 4% tax on the transfer of property.

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