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Costa Rica: Domestic Corporate Taxation

Introduction

Costa Rica is not a financial center in the traditional sense and so does not distinguish between onshore and offshore activity. The main taxes affecting a business are business income tax, employers social insurance, withholding tax, import duty and sales tax at 13%. Tax exemptions applying to businesses under various foreign investment incentive schemes are described in Offshore Legal and Tax Regimes.

Since 2002, the government has been struggling to pass a Permanent Fiscal Reform Package in an attempt to reduce the country's deficit. The key components of the package are a switch from a territorial tax system to one which taxes worldwide income and the replacement of the 13% sales tax with a Value Added Tax system; taxes payable by Free Zone companies would also be increased over a period of time.

The bill itself was eventually killed off shortly before the 2006 presidential elections when the Sala IV constitutional court ruled that supporters acted illegally in the Legislative Assembly by creating new procedures to "fast track" priority legislation, including the tax bill.

In August, 2006, following Oscar Arias's election to the presidency, Costa Rica's legislators once again begun to discuss the vexed question of reforming the country's taxation system, although it would appear likely that the same problems that blocked the former fiscal reform bill for four years could hinder the progress of the new proposals.

The new tax plan is a mixture of the old one, which includes reforms to the income tax system and a new system of value-added tax, and new proposals championed by President Arias designed to redistribute wealth from rich to poor through such mechanisms as a real estate tax on luxury properties and a 0.5% financial transactions tax.

A new tax on corporations has also been proposed as part of the comprehensive tax reform plans. The $200 tax would apply to all personas juridicas, or legal persons, and will be payable within ten days of the start of a new tax year, which will run from January 1 to December 31.

In August 2009, the International Monetary Fund noted that the tax reform was needed to reduce the government's fiscal deficit. "Fostering an early consensus on the need to increase revenues would be desirable to ensure a swift debate and passage of tax reform," the Fund stated.

The need for tax reform was also flagged up in the IMF's 2008 Article IV consultation, when the IMF observed that:

"The authorities and the mission agreed that the approval of a substantial tax reform, including a revamp of the income tax and Value Added Tax (VAT), remains a priority."

Efforts to introduce tax reform have continued with the latest efforts initially meeting with wide approval. However, the finance minister was forced to resign in early 2012 and the reform bill was shelved. The revised proposal contains no further taxes and no revamping of the sales tax. Instead, much needed revenue is to be raised by stricter enforcement of tax collection, eliminating luxury goods from tax exemption and freezing public sector wages.

Details below apply to the pre-existing tax regime, which remains in force.

 

 

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