1. It is Time to Pay the Piper: CR is reaching it's end point of being able to borrow -it has to go the the IMF- which conditions loans on fiscal reforms. Government wants $1,75 billion of bail out money is is proposing a number of new taxes... yes, they way they will also cut costs but we know that that never actually happens... The taxes proposed may undergo substantial changes but they involved charges on all financial transactions (supposedly designed to raise the equivilent of 3 pts of the GDP, doublt or trible the property taxes, and increase income taxes... It is hard to figure out right now the actual consequences of this but certainly the cost of living will increase subsantially, more payments will be driven underground, and regardless of the features to attract expats, this will be a significant deterrent. Will the government REALLY cut thier expenses? Ha!! teachers are now working on a third year of full pay and no effective teaching... the court system has ground to a halt, Immigration is closed still, so many government people receiving substantial pay for no productivity... amongst my friends, we have often felt that property taxes needed to increase. The tax on financial transaction will affect mainly the wealth and businesses... poor use cash or barter... the increased income tax seems significant but I suspect so few people here actually pay income tax that it won't contribute much regardless of the efforts the government has taken to curb cash transactions...
1. Costa Rica proposes tax measures as part of IMF negotiations
The Costa Rican Presidency on Thursday announced the fiscal measures it will present to the International Monetary Fund (IMF) as part of negotiations to secure $1.75 billion in financing.
According to a statement from Casa Presidencial, the changes are intended to protect key institutions — such as the Social Security System (CCSS) — and avoid placing undue burden on the middle and lower classes.
“We have set out to build a proposal to achieve a reasonable agreement, which includes a significant decrease in spending and an increase in income,” said Elián Villegas, Minister of Finance.
The three-year agreement with the IMF “is our best option,” said Rodrigo Cubero, president of the Central Bank.
Government proposes tax measures
The government introduced tax measures on income, expenditure and assets.
Among them is a 0.3% fee on banking transactions for two years, subsequently dropping to 0.2% for a further two years.
“It is projected that with this tax, it is possible to finance what will no longer be received by social charges and the reduction of public debt,” Casa Presidencial said.
Income taxes would also increase for Costa Rica’s highest earners. An additional 2.5% would be charged for those making above ¢840,000 monthly (about $1,400); an additional 5% for those making above ¢1,233,000 (about $2,050); and an additional 10% for income greater than ¢4,325,000 (about $7,250).
Businesses and legal entities with large net incomes would also see a tax increase depending on their reported income.
A 5% tax would be charged “for remittances abroad to income from Costa Rican sources of natural and legal persons not domiciled in Costa Rica.”
Finally, the government proposed an increase of 0.5 percentage points in property tax on real estate, and the elimination of tax exemptions to cooperatives, among others.
The government hopes to reduce its costs through the closure or merger of decentralized bodies, the elimination of annuities, the reduction of political debt by 50%, the process of voluntary mobility of public officials, and the sale of assets such as the National Liquor Factory (FANAL) and the International Bank of Costa Rica (BICSA).
All measures will be brought to the Legislative Assembly for debate; they will also be presented to the IMF.
Costa Rica’s negotiations with the IMF
Costa Rica requested $1.75 billion in financial assistance from the IMF as part of the entity’s Extended Fund Facility (EFF).
It represents Costa Rica’s first EFF negotiations since the financial crisis of the early 1980s. At the time, Costa Rica struggled to adhere to the IMF’s terms.
“When a country borrows from the IMF, it commits to undertake policies to overcome economic and structural problems,” the organization says. “Under an EFF, these commitments, including specific conditions, are expected to have a strong focus on structural reforms to address institutional or economic weaknesses, in addition to policies to maintain macroeconomic stability.”
The IMF was founded in 1945 and is headquartered in the United States. Costa Rica is an original member of the organization, though its membership didn’t become official until early 1946.
Costa Rica has a history of lending commitments with the IMF. The majority were stand-by arrangements (SBA), which are short-term loans with fewer conditions.
Most recently, the IMF in April approved $504 million in emergency assistance to help Costa Rica address the coronavirus pandemic.
Prior to the pandemic, the IMF said Costa Rica’s economy had “turned around since mid-2019” with modest growth expected in 2020.
Costa Rica’s negotiations with the IMF regarding the EFF are expected to begin later this month.
2. Taxes on Bank Transactions? This is part of the Costa Rican Government’s Proposal to the IMF
The Government of Costa Rica presented this Thursday to the Legislative Assembly the proposal (Plan to overcome the fiscal impact of the pandemic) to negotiate with the International Monetary Fund for a new loan of $1.750 Billion.
“We need to maintain economic stability and activate employment to improve the situation in the country generated by COVID-19. If we do not act, the risk is in the high interest rates, devaluation, more unemployment, and poverty, which would affect everybody and in particular those with less resources. For this reason, we need to act and do it fast, the delay on this would be awfully expensive”, stated President Carlos Alvarado.
The President made emphasis in that those that “have more” will pay more.
Under this scenario, some of the proposals include:
• A temporary tax to all financial transactions that would be of 0.3% over the amount of the transfer for the years 2021 and 2022 and 0.2% the following two years.
This includes ALL bank transactions. (Deposits, Withdrawals, Transfers etc)
According to Treasury Minister Elian Villegas, this is the equivalent in income for the state of changing the VAT from 13% to 20% and the idea is to finance the elimination of a 5% that is currently paid by employers as part of their social security fees to FODESAF
• A raise in the percentage paid as income tax for salaries over ¢840,000 (approx. $1,425.00 USD), meaning that:
Salaries over ¢840,000 and under ¢1,233,000 (approx. $2,090.00 USD) will go from paying 10% to paying 12.5%.
Salaries over ¢1,233,000 and under ¢2,163,000 (approx. $3,666.00 USD) will go from paying 15% to paying 20%.
Salaries over ¢2,163,000 and under ¢4,325,000 (approx. $7,330.00 USD) will go from paying 20% to paying 25%.
Salaries over ¢4,325,000 will go from paying 25% to paying 35%.
• Tax over lottery prizes: A 25% tax would be applied to prizes that exceed 50% of a base salary.
• Property taxes to go from 0.25% to 0.75% with the differential to be transferred to the central government instead of the municipalities.
The government argues that they are looking for “balance” and therefore they will not raise the percentage of VAT, salaries under ¢840,000 will remain intact (without tax deduction), they will not implement mass layoffs and will only resort to the sale of the actives the government had committed to publicly, which include the National Liquor Factory (FANAL) and the International Banco of Costa Rica (BICSA).
Costa Rica already faced a complicated fiscal situation since before the pandemic and because of the effects of the pandemic expects the worse economic contraction since 1980.
The proposal will have to be approved by the Legislative Assembly in order to present it to the IMF by the beginning of October.