Costa Rica Proposing Tax Increase to Stem Inflows

Costa Rican President Laura Chinchilla sent a bill to Congress yesterday that proposes boosting a tax on capital inflows by as much as 30 percentage points.

The government is seeking to increase a levy on foreign investors who transfer profits earned from capital inflows to as much as 38 percent from the current rate of 8 percent, Finance Minister Edgar Ayales said in a presentation to congress yesterday. The bill also proposes that banks with foreign clients deposit up to 25 percent of the value of an investment with the central bank.

“These are temporary measures aimed to discourage the entrance of foreign capital that is damaging to the national economy,” the bill said.

In the past 10 months, Costa Rica’s central bank has purchased more than $1.5 billion of U.S. currency to stabilize the colon, according to the bill. President Chinchilla said Jan. 15 that “speculative capital inflows are real and massive weapons of mass destruction” against the Central American economy.

Ayales said last week that lower interest rates may be adopted to reduce capital inflows that have made the country’s currency the best performer in Latin America this month, according to data compiled by Bloomberg. The colon has climbed 2.2 percent against the dollar in January through yesterday.

“Capital inflows enter Costa Rica because we have an exchange-rate system where the currency is basically guaranteed to be stable,” Ayala said on Jan. 17. “If Costa Rica pays interest rates of 10 percent, as we did in December, and rates abroad are around 2 percent, there is an enormous return that investors can take advantage of.”

(Corrects to say the proposed increase is 30 percentage points in the first paragraph.)
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