Proposed transfer tax may breach free trade treaty

A Solís administration plan to tax money leaving the country and imports that enter may run into trouble with the Central American Free Trade Treaty.

A proposed decree that would assess the 15 percent tax has been posted for discussion on the Web site of the Ministerio de Hacienda. A news story Tuesday in A.M. Costa Rica caused concern among some expats.

The money would be used to provide funds for the new Banca para el Desarrollo, an entity to finance small business.

Chapter 10 of the Central American Free Trade Treaty covers investments, and the central theme is that foreigners receive the same treatment as citizens of the participating countries.

Article 10.9 says “Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory.”

The article specifically lists, among others, contributions to capital, profits, dividends, capital gains, proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment, interest, royalty payments, management fees, and technical assistance and other fees.

Most of the items on the list are exactly what Costa Rica seeks to tax.

The big question is whether the phrase “freely and without delay” means they cannot be taxed. The treaty contains an arbitration clause.

One expat businessman wanted to know if he purchased a fleet of vehicles from Asia if Costa Rica would levy the 15 percent tax on the importation. According to the text of the proposed decree, the answer is yes.

Cost Rica already taxes the importation of vehicles. When the free trade treaty was being negotiated, the United States took a timid position and claimed that the current tax on imported automobiles was a local matter and not one for the trade treaty. That opinion has not been challenged, although it would be beneficial for U.S. autoworkers if the tax were voided.

Naturally, all these import taxes would eventually be passed on to the consumer.

Expats expressed concern about the proceeds from sale of Costa Rican real estate. The proposed decree says such financial transactions should be taxed when the money moves outside the country. That applies to both individuals and corporations, it said.

Because the finer details of the proposed transfer tax have not been disclosed, a lot of questions cannot be answered now.

If the decree eventually becomes law, the finance ministry will have to draw up regulations to implement it.

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