The Chinchilla administration presented its tax package to legislators Monday, and the proposal contains a 14 percent value-added tax instead of the 15 percent levy that was predicted.
The reduction in the tax rate appears to be a concession by the administration to win more votes in the legislature. The plan is designed to reduce tax evasion and raise 500 billion colons or about $1 billion.
The new value-added tax will cover private schooling, private medical care, and more basic food products. There also is a doubling of the transfer tax on real estate.
President Laura Chinchilla did not participate, but Francisco Herrero, the finance minister, did as did Marco Vargas, the minister of the Presidencia. Getting the document was Luis Gerardo Villanueva, president of the Asamblea Legislativa.
As it stands, the proposals would have an impact on real estate sales and development and medical tourism, as well as traditional tourism and language schools.
The proposal, as well as others already in the legislative hopper, will be evaluated by lawmakers. They will receive opinions from the government and the public.
A medical tourism provider already produced a criticism. That appears today HERE.
The chamber that represents business owners said that its experts would evaluate the proposal. A statement from the Unión de Costarricense de Cámaras y Asociaciones del Sector Empresarial Privado noted that the Contraloría General de la República estimates tax evasion is as much as 3.6 percent of the gross national product.
A value-added tax is one way of reducing evasion because each taxpayer has to report on the individual or business before him or her in the supply chain. A supplier of raw materials would collect 14 percent tax on the product. A manufacturer would collect 14 percent on his wholesale price and subtract the tax the firm has paid to the materials supplier. The retailer would collect 14 percent tax from the final customer and subtract what was paid to the wholesalers when taxes are paid to the state. So each link in the chain would have an interest in making sure others pay their fair tax. Ultimately, the end consumer pays all the tax.
There still would be room to avoid the taxes. For example, properties can be sold as part of a corporation without payment of the transfer tax. And even when the property transfer tax has been paid, many buyers deliberately understate the value to reduce the tax.
Generally a value-added tax is a boon to accountants because the computation is complex. Under the Chinchilla plan, their services would carry a 14 percent value-added tax, too, as well as the services of other professionals like lawyers.
A summary of the tax released by Herrero’s Ministerio de Hacienda insisted that the tax burden would fall more on the well-off. That’s because value-added taxes are considered to be regressive. The summary stressed that by reducing the number of food items that are exempt from taxes, the well-off who buy more such items would pay more tax. Basic foods would continue to be exempt. A graph said that the top fifth of the population in terms of income would pay 60 percent of the tax burden.
The summary said that now much of the exempt items are consumed by high-income earners. That also is the rationale to seek a 15 percent tax on passive income like rents and interest and why private schooling and private medical care is proposed to be taxed.
The text of the proposal will be published shortly in the La Gaceta official newspaper. That is when the full details become known. Reports so far have been based on summaries from the administration.
Here is a basic outline of the Chinchilla administration tax proposal:
- No income tax increase for those earning 651,000 colons or less a month, about $1,300.
- Passive income like rents and interest would be subjected to a 15 percent tax.
- The current 13 percent sales tax would be replaced by a 14 percent value-added tax.
- Many now-exempt food products would be included in the new value-added tax
- Medicine would be exempt from the value-added tax
- A 14 percent value-added tax would be assessed on the services of professionals and contract workers, such as lawyers, accountants, physicians and dentists.
- A 14 percent value-added tax would be assessed on private health care.
- The tax would be assessed on utilities like water and electricity.
- Public transportation, buses and taxis, would be exempt from the 14 percent value added tax.
- Registered small- to medium-sized companies would pay from 10 to 25 percent income tax.
- A 3 percent tax would be assessed on the sale of property. That is twice the current rate.
- Tuition to accredited private educational institutions would be taxed at 10 percent. Tuition at unaccredited schools would be taxed at 14 percent.