Tax plan is reborn with some revisions to speed passage

The central government sent a revised tax plan to the legislature Tuesday. The proposal contains some changes that are expected to attract more votes from lawmakers.

The plan still is to collect $1 billion more a year in taxes, mostly from the 20 percent of the population that is engaged
in commerce and investments. That amount represents about 2.5 percent of the gross domestic product of the country. The central government is running an annual deficit of more than twice that at 5.5 percent or about $2.2 billion.

The plan is similar to that which has been presented previously, including a proposal for a 14 percent value added tax to replace the 13 percent sales tax.

The value added tax would be broadened to include professional services like that of lawyers, physicians and medical practitioners. The tax also would be assessed on education and medical services. However, the new plan reduces tax on hospital services and exempts the first 110,000 colons a month in tuition at private schools.

Casa Presidencial said that the government is running a loss estimated at $2.6 million a day. The government supports 22 ministries, including a sports ministry that is in the process of being created. The budget also supports other branches of government.

The new text increases to 233 the number of basic food products that would be exempt from taxation. That had been expected because some lawmakers complained about the limited number of exempted food product.

The government presentation likened the current situation to a home where the expenses were greater than the income and the family has to rely on ever-increasing credit card debt. The proposal also said that the nations’ independent institutions probably do not have high reserves, and many that do are safeguarding their money to compete in open markets. Critics had suggested that these reserves be tapped to help the central government.

The proposal would not take effect for at least six months after passage, it said.

Some other aspects of the proposals:

*Anyone earnings 1 million colons or less a month will pay no taxes. That is about 85 percent of workers.

* Small businesses will pay just 25 percent on their net income.

* Certain investment benefit will be eliminated because these benefit 5 percent of the population, but pension funds will continue to receive special tax treatment.

* Investment income that now is tax free will be taxed at 15 percent.

* The government also will seek to tax foreign individuals and firms that operate in Costa Rica. These would pay 15percent on gross earnings here. The government used an example of a foreign bank that makes loans to Costa Ricans. Costa Rican banks now pay a 30 percent income tax but on net earnings.

* Private school tuition will be taxed above 110,000 colons a month, a bit more than $200.

* Hospital services that had been proposed to be taxed at 14 percent would be taxed 10 percent.

Some 30 legislative deputies voted to substitute the new text for the existing one. Now the whole package goes back to committee for discussion and possible amendments. There is no guarantee that the legislature will pass a tax bill, but President Laura Chinchilla’s Partido Liberación Nacional holds 24 seats in the assembly and just 29 votes are needed to pass a bill.

Meanwhile the Ministerio de Hacienda and its tax-collecting Dirección General de Tributación is trying to increase compliance.

One advantage of the new proposal is that the tax on professionals like lawyers and physicians could be used to estimate their annual income. That way the government could see if the professionals underpay their income tax.

The Chinchilla administration has labeled the tax proposals as a step to increase citizen security. But other than hiring hundreds more street policemen there have been no concrete proposals.

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