Costa Rica Tax Overhaul to Face 2017 Delay, Lawmaker Says

Costa Rica will delay plans to raise taxes by a year until 2017 as President Luis Guillermo Solis struggles to win support for measures to narrow a widening fiscal deficit, the head of the legislature’s Finance Committee said.

Solis, who took office in May after vowing not to implement new taxes before 2016, sent a bill to legislators this week aimed at tackling tax evasion. Plans to present two additional bills turning the sales tax into a value-added tax and a separate bill to revamp the income tax scale will be delayed until 2016, said ruling party lawmaker Otton Solis.

“We are looking at the middle of 2016 for the presentation of everything, the value-added and the income tax,” said Congressman Solis, who isn’t related to the president. “Optimistically we would implement them in 2017.”

The delay comes as Costa Rica’s economic outlook darkens following decisions by Intel Corp. and Bank of America Corp. to cut jobs in the Central American country. The central bank last month reduced its GDP forecast for the year to 3.6 percent from 3.8 percent, with growth slowing to 3.4 percent in 2015. The government this week said the budget deficit will widen to 6.6 percent next year from about 6 percent in 2014.

The government will introduce legislation on the value-added tax and income tax scale in early 2015, deputy Finance Minister Fernando Rodriguez said, adding that the income tax changes will probably take longer to implement and may not go into effect until 2017. The value-added tax could be carried out earlier, he said.

“When they enter into effect will depend a lot on how long they take to get approved,” Rodriguez said in a phone interview. “Debate in congress takes a long time and their approval will depend a lot on that.”

Intel Exports

Intel accounted for about 21 percent of the country’s exports of goods, or 14 percent of total exports, according to Costa Rica’s investment promotion agency, known as CINDE. The Santa Clara, California-based company had said it was cutting its workforce in the country as part of an effort to consolidate operations. Intel later announced plans to invest $6 billion to upgrade a chip factory in southern Israel.

Solis’s ruling party holds 13 of the 57 seats in congress and is divided among its own ranks, making it difficult to push through legislation, the Eurasia Group said in a report today. President Solis’s predecessor, Laura Chinchilla, struggled to get tax changes through congress even as her party had greater control of the legislature.

To help rein in spending, the government has announced a series of measures, including freezing public salaries and cutting travel budgets.

Costa Rican bonds have returned 8.8 percent this year, more than the 7.8 percent average for other ‘BB’-rated countries, according to JPMorgan Chase & Co.’s EMBIG index. The country’s currency has lost 7 percent against the dollar over the same period.

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