Temporary increases to the sections of Income Tax for individuals and legal entities, and the imposition of a tax on all bank transfers made in the country will mark the proposal in accordance with the International Monetary Fund (IMF), to access a credit service expanded for $ 1.75 billion with the multilateral entity.
This was indicated by sources in direct communication with authorities of the Executive Power in the Legislative Assembly, just hours after the Government presents the list of reform proposals that it will take to the IMF and try to convince it of the existence for a national route to alleviate the country’s difficult financial conditions, aggravated by the COVID-19 Pandemic.
In terms of Income Tax, the proposal would include temporary surcharges for all salaries and income of individuals above ¢ 840,000, in the same four sections that are currently used to collect the tax. In the case of legal entities, a temporary increase of several percentage points would also apply to the 30% rate currently charged. The Income Tax is considered a progressive tax, because it is charged proportionally on the generation of resources of each person; that is, from their wealth.
In addition to the Income surcharges, the proposal would also include a four-year tax on all bank transfers, with no exceptions. This tax would first be 0.3% during the first two years and then it would become 0.2%.
These are the measures that would generate a greater amount of fresh resources to face the complicated financial condition of the country, aggravated by the SARS-CoV-2 Pandemic in the coming years; however, the magnitude of its estimated impacts is pending presentation.
Costa Rica already applied income surcharges during the administration of Abel Pacheco, in 2002. At the beginning of that government, even more extensive measures were agreed, with a maximum validity of two years, through the Fiscal Contingency Law.
Along with these taxes, the proposal to the IMF would also raise 0.50 percentage points for the Real Estate Tax, which currently charges just 0.25% per year on the value of the same and is directed to local governments. The additional percentage would go directly to the Ministry of Finance, for expenses of the Central Government, and would be established permanently (not temporarily, like the other proposals).
Additionally, it would resume the proposal to tax the profits of “large cooperatives”, a compromise of the legislative fractions during the discussion of the Law for Strengthening the Public Finances that had finally been buried before a negative opinion of the Economic Affairs Commission of the Legislative Assembly.
Despite the increase in business charges that would be implied by the additional taxes in matters of income and banking transactions, the sources added that a compensatory measure would be promoted with the reduction in the payment of social charges by employers. Specifically, they would stop paying 5% of the salaries of all their workers who usually turn to the Family Allowance Fund (FODESAF) and the resources would remain at the expense of the State.
And public spending?
The proposal to the IMF would also include a commitment to cut public spending in four ways: some exemptions would be reconsidered, including the elimination of the income exemption for school wages (known as the thirteenth public sector wage); the reform of public employment and its single salary scale would be promoted; the payment of annuities in the public sector would be suspended for four years; and the sale of Banco Internacional de Costa Rica (BICSA) and the Fábrica Nacional de Licores (FANAL) would continue.
School salaries would pay the Income Tax on the same scale as the rest of the deposits; while the reform to public employment is kept in legislative discussion and currently the Government and Administration Committee of the Assembly refines a prompt opinion of the text.
Regarding public sector annuities, the Government would now aspire to suspend payment for two more years than those initially proposed to Congress, when it said that suspending the payment of these increases would imply savings of ¢ 44,000 million in the Central Government and ¢ 23,000 million in autonomous institutions if it were applied only in 2021 and 2022.
Finally, the sale of BICSA and FANAL would leave the State ¢ 14,000 million (0.04% of GDP) and ¢ 10,650 million (0.03% of GDP) respectively, as indicated by the Government last February .
All these measures had already been announced previously, although with small variations. The proposal will be officially presented 11 days before negotiations with the IMF for the three-year financing package to begin. The Executive and the BCCR have said that the agreement with this entity is crucial for the financial stability of the country, not only because of the inflow of resources but also because of the fiscal impact of the commitments acquired and because of the impact of the agreement on the confidence of the international markets and, therefore, in the best credit conditions that they would offer the country.
The Government of the Republic has already agreed to a loan for $ 500 million with the IMF this year. However, this operation was processed through a Rapid Financing Instrument (IFR), due to the COVID-19 Pandemic, so it did not require fiscal commitments of any kind.