Solis says he will seek new tax on global income

President Luis Guillermo Solís said Sunday that his administration would seek a global tax in addition to a value-added tax.

The president said that the bill Casa Presidencial presents to lawmakers after the first of the year will contain a 13 percent value added tax, a percentage equal to the current sales tax. He said that the bill would exempt education and medical, although he was not specific. That such a tax proposal was coming has been reported previously.

The global tax also was not explained in detail. The last two administrations sought similar taxes, but the measures never got through the legislature.

By adopting a global tax, Costa Rica would be in the same category with the United States and become one of only a few nations that tax its residents for earnings outside the national borders.

There is a movement in the United States to dump the global tax in favor of a territorial system that Costa Rica has now.

Although there still are no specifics now, previous proposals gave credit for income tax paid elsewhere. So expats would not face double taxation on foreign pensions or earnings, if that method is adopted.

The president gave his message in a recorded television segment. He was responding, in part, to
criticism that the annual budget is too high.

He said the Ministerio de Hacienda, headed by Vice President Helio Fallas, made a big effort to cut spending and managed to obtain a reduction of 420 billion colons. That’s nearly $770 million.

However, Solís said the budget is dictated by payment on debts accumulated by the last four administrations and constitutional payments mandating certain amounts to education. He also said the administration was investing in health, agriculture and higher pensions for the poor. He said he would not cut essential programs.

The value-added tax will generate 300 billion colons more in taxes, he said. That is about $550 million.

Officials are counting on a value-added tax to reduce tax evasion. Under this system, taxes are paid at each step of the manufacturing process on the value added at that stage, and the end consumer pays an amount to cover all these taxes.

Because the taxes paid is a deductible amount, individuals and firms are likely to declare it. So the government will know all about their purchases and how much their vendors took in. Vendors recoup the taxes paid by adding it to the price for the next step of production.

Basic criticisms of a value-added tax are that the system requires much more paperwork and that the extra costs early in the supply chain reduce production.

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