Country Rankings - Costa Rica
Jan 05, 2017 Costa Rica: lateCosta Rica was recently chastised by the International Monetary Fund (IMF) for repeated failures to overhaul its tax system and replace its general sales tax with a much more internationally familiar value-added tax system. On the first issue, the IMF probably has a point. Tax reform might mean that the country loses some of the more attractive features of its tax system, like territorial taxation. But lingering uncertainty, caused by successive years of legislative paralysis on this matter, is probably worse. However, as to the IMF's second point, I would advise Costa Rica to look long and hard before it plunges into the VAT. It is certainly the case that countries without VATs or GSTs are vastly outnumbered by those jurisdictions with such tax regimes in place. And there are plenty of arguments in favor of them. VATs can help to broaden national tax bases so that there is less pressure to tax incomes, with more of the burden falling on consumption, which many economists argue leads to much less economic distortion. The invoice and credit system underpinning VATs and GSTs can also help companies maintain cash flow, which is particularly helpful for small firms. Nevertheless, things can get very complicated very quickly when governments start introducing multiple VAT rates and exemptions and try to pick winners with the VAT system. And unless VAT legislation is watertight and drafted in such a way that it is not open to interpretations, all sorts of absurdities can ensue.
Feb 23, 2016 Costa Rica: apathyOn the other hand, at least we can say that the UK is attempting to tackle what are perceived to be problems (the property market, the EU, etc). At the other extreme, we have Costa Rica, which after more than a decade, is still trying to pass a major fiscal reform package designed to put the Government's finances on a more assured footing. Granted, there are some controversial elements to the original proposals, including a switch from a territorial to a worldwide basis of taxation, and investors won't like that. And overall, the package is meant to increase tax revenue as a share of the economy. But for taxpayers, and particularly for foreign investors, policy paralysis is just as bad as a situation where the rules are apt to change frequently, because it also breeds uncertainty and a lack of confidence in the government and the legislature. The lack of a political consensus on the fiscal reforms earned Costa Rica a rebuke from Moody's Investors Service earlier this month, and it also gets another execration from me this week.
Feb 05, 2015 Costa Rica: sooo sloooowApparently, taxpayer dissatisfaction with the United States tax code has reached a 12-year high (or should that be low?). But if you're a frustrated US taxpayer growing increasingly impatient at congressional impotence on tax reform, then try living in Costa Rica! Ever noticed how, when a car alarm is blaring away in the street, instead of investigating or calling the police, people tend to ignore it? In fact, they might not even notice it, having mentally filtered out this particular noise-pest long ago. The same could be said of Costa Rican finance ministers when they issue their regular calls for the completion of long-awaited tax reform, which has been on the drawing board in one form or another for more than a decade now. Last week, incumbent finance minister Helio Fallas urged lawmakers to finally approve measures designed to shore up the Government's increasingly shaky finances. The trouble is, Costa Rica's Legislative Assembly makes the US Congress look positively dynamic. Costa Rica's legislative set up is one of checks and balances, similar to America's own constitution. The emphasis in Costa Rica though appears to have been placed on checks, rather than balances, and controversial bills like tax reforms are all too easily killed by endless committee reviews and constitutional court challenges. The Central American Free Trade Agreement, which Costa Rica eventually ratified in 2009, several years after the other signatories, almost suffered a similar fate. But don't just take my word for it. Costa Rica was upbraided and downgraded by two international ratings agencies recently for the slow (non-existent, rather) pace of fiscal reform. However, it is also the content of the present tax package that earns Costa Rica a rebuke. This country has been one of the most successful in Latin America economically, having managed to supplement its largely agrarian economy with high value-added export industries, such as the manufacture of microchips. Costa Rica has one of the highest levels of FDI per head in the region, and is also a popular retirement destination for Americans. This is partly due to its benign (for foreigners) territorial tax system, which will be swept aside in favor of a worldwide system if the tax measures are ever introduced. One could argue that it is because Costa Rica doesn't collect enough tax from foreign companies and individuals that the Government has a 5 percent budget deficit. But Costa Rica also has a reputation for Kafkaesque bureaucracy and regulation, which could account for a substantial proportion of the deficit. It doesn't have an army, so it must be spending money on something.
Sep 25, 2014 Costa Rica: dilly-dallyingWhile too much change too quickly can unsettle investors, so too can change happening at a snail's pace. Or less than a snail's pace in the case of Costa Rica. I'm struggling to think of another country that has taken so long to attempt to put into law a package of fiscal reforms. There is India of course, but you can sort of understand why that is if you are familiar with the country's numbing bureaucracy. But investor-friendly Costa Rica? The answer to this conundrum lies with Costa Rica's legislature, which is often its own worst enemy, tending to paralyze when any issue of national significance is put before it. We saw this with the Central American Free Trade Agreement, which was ratified by Costa Rica years after it was approved by its other members. And for over a decade now, the Legislative Assembly has been incapable of passing a fiscal reform package drawn up as far back as 2002. These reforms aren't exactly good news for Costa Rica; they are designed to increase tax revenues in order to tackle the country's budget deficit and rising debt, which is largely the result of previous governments' spendthrift ways. But the impasse is just fueling uncertainty and in the meantime piecemeal tax rises have taken place, making the tax system steadily less attractive. And since 2008, public debt has jumped alarmingly from 25 percent of GDP to 40 percent. Worryingly, since May, the country has been led by a President with no previous political experience (on second thoughts maybe that's not such a bad thing) who wants to raise taxes, although not for the first two years and, confusingly, has also pledged an overhaul of the tax system. Perhaps the problem is that there are too many checks and balances in the legislative system. Costa Rica was recently praised by Moody's for its "entrenched democratic tradition," but almost in the same breath the ratings agency said this was an obstacle to law-making and consensus building. Consequently, it downgraded the country's credit rating to junk status due the failure to deal with its mounting fiscal problems. Nonetheless Costa Rica remains one of the most favorable countries in Latin America for foreign investors. Although labor costs are relatively high, the territorial income tax regime is a major draw, and recent administrations have set about diversifying the economy away from agricultural staples like bananas and coffee towards hi-tech manufacturing by creating free zones and passing laws to create a small but thriving financial services sector. However, with the downgrade and the closure of Intel's microchip assembly operation – a significant contributor to the country's exports – things are starting to look quite gloomy for Costa Rica unless the clunky legislative machinery can find another gear.