Taxpayers should continue tomonitor the progress of the tax reform bill as new taxes might be enacted.

On February 28, 2018, Costa Rica's Congress approved a fast-track discussion and approval process for a tax reform bill referred to as the Law on the Strengthening of Public Finances (the Bill). It appears Congress intends to submit the Bill for a vote at the end of April.

The Bill would eliminate the sales tax and establish a value added tax (VAT) of 13% on the sale of goods and the supply of all types of services within Costa Rica. A reduced rate of 4% would apply to certain goods and services, such as private health and education services, plane tickets and commissions paid to pension funds. Certain basic foods would be exempt from the VAT.

The VAT paid on the purchase of goods and services would only be creditable when used in the carrying out of taxable transactions. The Bill would require local banks that issue credit or debit cards to act as VAT withholding agents for their cardholders' international purchases of tangible goods, intangibles and services through the Internet or any other type of telecommunications platform.

The Bill would give the tax authorities the discretion to determine whether expenses paid to entities in tax havens or non-cooperating jurisdictions are deductible for corporate income tax purposes.¹

Additionally, capital gains would generally be subject to a new tax rate of 15% when realized (in cash or in kind). A reduced rate of 8% would apply to income derived from: (i) securities issued in local currency by a "public interest entity" created to raise funds to solve housing problems (in Spanish: Sistema Financiero Nacional para la Vivienda) and (ii) securities issued by local savings and loans cooperatives.

The Bill would subject the wages of public sector employees to a ceiling. The Bill also would establish a fiscal rule to limit the growth of the national budget based on the central government's level of indebtedness.

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ENDNOTES

¹ The Bill defines tax havens or non-cooperating jurisdictions as those jurisdictions: (i) where the corporate income tax is less than 40% of the applicable Costa Rican corporate income tax rate (i.e., currently 30%) or (ii) that do not have a Tax Information Exchange Agreement or a Double Taxation Treaty comprising a provision for the exchange of information.