Source: Banco Central

With a fiscal deficit approaching six percent of gross domestic product (GDP), Costa Rica is increasingly looking at tax reform as a viable option. At one point, the administration of President Luis Guillermo Solis hinted at the possibility of increasing enforcement, which many analysts believe is sorely lacking in Costa Rica; alas, such an option is taking a backseat to a proposed measure of a wide-reaching and uniform value added tax (VAT).

The current proposal comes from the Executive Branch, and it supports a 15 percent VAT on various goods and services. This proposal arrives in the wake of recommendations by executives from the International Monetary Fund and the Inter-American Development Bank; these institutions warn that the current situation in Costa Rica is unsustainable and could drive the country into the next Greece or Puerto Rico.

The vast reach of this reform could impact private and public enterprises. The oil and energy monopoly, known as RECOPE, as well as other utilities such as the Costa Rican Institute of Electricity (Spanish initials: ICE) and its subsidiary National Power and Light Company (Spanish initials: CNFL); these are entities that are already requesting fee increases ahead of VAT being enacted and imposed.

According to recent commentary authored by Lindsey Nicole Wheeler, Managing Director of international tax consultancy TMF Group:

 

The 15% [VAT] will be imposed to foreign investments, specifically. The Costa Rican government plans to raise an additional 2% of GDP – about ¢600,000 million (1.125 billion US) – each year to solve the Central Government’s fiscal deficit. Companies operating or looking to do business in Costa Rica must bear in mind the possible effects of this reform.

 

 

Once the respective changes in the tax system are defined, it is necessary to identify the impact of these within each company and make the corresponding applications and / or modifications, depending on the case. Only then you can avoid default penalties.

This potential VAT comes at a time when Costa Rica is trying to curb capital flight; as recently reported by The Costa Rica Star, various foreign companies have been exiting our country in search of cheaper labor markets such as Vietnam and El Salvador.