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Government tax increases coming your way

Costa Rica

Last week the government brought forward a proposal it will present to the International Monetary Fund in order to secure a loan for 1.75 billion. The loan is deemed necessary to keep the country running and be able to pay ongoing commitments.

The proposal needs the approval of the legislators in order for the government to present the proposal, which the IMF may accept or refuse.

The majority of the proposals involve raising taxes rather than cuts to spending, at a time when the country faces massive unemployment, business restrictions and a flotilla of new fines and rules that seem to change weekly if not more often.

Some of the proposed taxes are temporary, which has little meaning if one considers the number of Bailey bridges that were temporary but have been in place for decades.

One of the proposals is to impose a .3% tax on all banking transactions. which translates to only 30 colones for every 10000 colones transaction. For the following two years the rate will drop to .2%. The justification is the amount is so small it will be insignificant to most individuals. However, everytime you take money out of the bank, make a deposit, move funds from one account to another, change dollars to colones or colones to dollars, make a purchase with your debit card, pay you phone or electric bill or rent these charges would apply. Fees can add up quickly.

Sure many will barely notice the charge, but for those struggling to make ends meet during these difficult times or those on a fixed income, it is yet another burden.Additional items include:

  • A VAT refund will be given to the 320,000 poorest households estimatd to be about 5 billion colones or just over 15000 colones per household.
  • A 25% tax on lottery winnings exceeding 50% of the base salary amount
  • Elimination of the income exemption on school salaries
  • Elimination of family income credits
  • A global income tax on natural and legal entities who have more than one source of income
  • A real estate property tax equivalent to .75% with .25% going to municipalities and .5% going to the State.

This is by far the biggest concern for home and property owners. Whatever you pay now to the local Municipality, double it and add that to what you pay now. If your property tax is 100000 colones, it will be 300000 colones. If 200000, it will be 600000. Nice....

And for those who still work for a living, you are not left out.

If you make over 840000 colones a month, roughly $1400 USD, you pay 12.5% in income tax, up from 10%. If you make over 1233000 per month, just over $2000USD you are taxed at 20%. Over 3600USD per month costs you 25%, and over 7200 USD per month costs you 35% in taxes.

Not to worry as this is only temporary, whereas the property tax is permanent.

Seems odd after all these years of trying to move the country towards a cashless system, where every transaction is done online via computer or cell phone, that they come up with a system that would guarantee a move away from keeping money in the bank and instead using cash whenever possible.

It didn't take long for the critics of this proposal to make their opinions heard.

The Costa Rica Chamber of Hotels (CCH) has expressed total opposition to the plan. The concern is the plan moves in the opposite direction of where the country needs to go to reactivate the depressed economy. Costa Rican simply cannot afford more taxes, especially in the middle of the worst economic crisis in decades.

The Costa Rica Chamber of Construction (CCC), the Costa Rica Union of Chambers and Associations of the Private Business Sector (UCCAEP) and the Costa Rica Chamber of Industries (ICRC) are untited in their oopposition to this proposal. The main concern is the State is raising taxes while offering little in regards to cuts in public spending and encouraging new investment. This plan does the opposite.

With a published rate of unemployment at 24.4%, the country needs to reopen business and do what it can to increase investment and employment, in so doing increase the taxes it collects. Taking on more debt and increasing taxes on the population is not going to solve the problems.

There are more than 322 government institutions in the country, with many overlapping powers. This bureaucracy has the effect of slowing down the economy as business waits for approvals or required permits before they can move ahead. It's time to start streamlining these institutions that all compete for funding which in turn could make them stronger and more effective. The more savings the State can find through making State run organizations more efficient rather than through cuts to essential services, the less they need to borrow.

It is important to note that the government still needs approval to send this proposal to the IMF, and even then the IMF may want to see more spending cuts and sales of government assets in order to approve the loan.

We can expect to hear more about this over the coming weeks.