Taxes and Deficits for 2012
During the previous tax year the Costa Rica Department of Revenue had the “brilliant” idea to abolish paper returns and force all taxpayers to fill out their tax return by downloading special software from the Tax Department referred to as EDDI 7. I am all in favor of technology to make things easier but this clearly does not.
Taxpayers must use that format to file electronically or print the return to pay the tax. You would think that getting money into the government coffers in any way shape or form would be a priority.
Then we have the Costa Rican legislature – They along with the current President have decided that they cannot cut government spending and instead have decided to raise taxes across the board to maintain the current spending levels. If they get their way for 2012 the tax scenario could be very different.
Tax on Corporations. A law which would impose an annual tax on Costa Rican corporations of US$300 for active companies and US$150 for inactive holding companies has passed in the Legislature and should be operational in the first semester of 2012.
The Fiscal Tax Plan (Plan Fiscal) is currently being debated in the Legislature and attempts to “fast track” the plan have been halted by the Costa Rican Consititutional Court.
The Tax Plan as it currently reads would increase taxes across the board and create new taxes. The law would create a Value Added Tax (VAT) of 14% which would now be paid on services as well as goods. The real estate transfer taxes would double from 1.5% to 3%.
The tax plan introduces a 15% capital gains and increases the tax on dividends and interest payments received from 5% to 15%. The law would also impose a 15% tax on companies that operate within the Costa Rican free trade zones starting in 2015. Currently all free trade zone companies operate tax free. The law also moves Costa Rica away from the current territorial tax system where the country only taxes income generated from within Costa Rica to a global tax system where Costa Rica would tax its citizens (individuals and corporate) for any income earned worldwide.
Now About The Deficit
The tax proposal previously discussed is an attempt by Costa Rica to cut its current deficit which is 5,5% of GDP one of the largest in South America.
The graph below shows the difference between government revenue and government expenditures, a steady increase in expenditures of course ! Under current conditions Costa Rica will finance 45% of its budget with loans.
Despite this recklessness the Costa Rican economy bounced back from a negative GDP of -1.9 in 2009 to 3.5% in 2010, 4% in 2011 and for 2012 it is expected to be in the 4% to 4.5%.
It could be a bumpy ride if the government can’t control its spending habits.