The Costa Rican Government announced a plan to overcome the pandemic impact on its economy. This plan will be submitted for consideration of the International Monetary Fund (IMF) with the objective to obtain a credit for $1,750 million.

The increasing tax deficit, altogether with the covid-19 crisis, has forced the Costa Rican Government to request the IMF a credit facility to restore the economic stability of the country.

The plan contains three main chapters: expense reduction, support for the private sector and new revenue.

1. Expense reduction:

Regarding the expense reduction, the plan contains elimination of budget accounts, voluntary labor mobility, temporary suspension of privileged pensions and annuity payments to public employees, among other measures.

2. Support for the private sector

On the economic reactivation chapter, the plan proposes a reduction on electricity and LPG gas rates, and the elimination of a portion of the contribution that employers currently pay as part of the social security contributions that is intended for social assistance.

3. New revenue

The measures included on the plan to increase the Government revenue are temporary increase of taxes, creation of a new tax and the change of the current tax regime.

First, the plan proposes temporary increase of the income tax –for entities and individuals-, the salary tax and the real estate tax –a tax payable by owners of local real estate-.

The plan proposes to create a financial transactions tax, similar to the tax known in other countries as the “Tobin tax”. This tax will be of 0.3% on any financial transaction made within the national banking system, for the first two years. For the third and fourth years, the tax will be of 0.2%.

The third topic refers to a change of the current tax regime, from a schedular regime –various taxes for the same individual depending on the type of income obtained- to a global taxation system. This proposal aims to tax the different types of income with a single tax, without making differences by origin or destination, or by type of taxpayer.

4. Other measures

Other measures include increasing the withholding tax rates for foreign remittances on 5%, applying a 25% tax to lottery prices that exceed approximately $375, application of income tax to cooperatives considered as Large Taxpayers and Big Territorial Taxpayers (currently exempt), equalization of all passive income tax rates to 15%.

The Executive Chamber with the Congress will discuss this plan in the following weeks, and it will then be submitted to the International Monetary Fund.

This plan arises approximately 15 months after the implementation of a tax reform, which created the capital gains tax, the passive income tax and the VAT.

Therefore, a thorough discussion of the plan and the impact it might have on the economy will be necessary, for it to receive more approvals from different sectors of the country, that have had to adapt to the recent taxes implemented and the economic crisis due to covid-19.

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