Costa Rica

Costa Rica: Tax reform is needed to ensure inclusive growth

 

01/08/2017 - Costa Rica has made significant economic and social progress over the last decades. Real GDP per capita continues to increase at rates which outperform many other Latin American and OECD countries. But while living standards and well-being have increased, tax reforms are essential now to ensure the sustainable development of Costa Rica’s economy, according to a new OECD report.


OECD Tax Policy Reviews: Costa Rica 2017 provides an in-depth assessment of Costa Rica’s tax system and underlines the key tax policy challenges facing the country. The report – the first edition of a new country analysis series – identifies the need for a tax reform to help the country to balance its budget as the current budget deficit, which is over 5% of GDP, is not sustainable.


The three main recommendations to Costa Rica are: to broaden its tax bases, strengthen its efforts to tackle tax avoidance and evasion, and bring more informal taxpayers into the formal economy.


The report suggests that Costa Rica should take immediate steps towards modernising, simplifying and improving the fairness of its tax system to ensure that the burden of taxes is shared more equitably across the population. The report also calls for reform of the excessive earmarking of tax revenues, which strongly constrains the government’s public finance decisions if Costa Rica is to place itself on a path of fiscal sustainability in the long run.


A corner stone of the tax policy review’s recommendations is the introduction of a broad-based and modern VAT/GST system, covering both goods and services. The existing sales tax exempts most services from tax, meaning that a significant amount of revenue is currently not being collected by Costa Rica’s tax system and that the tax distorts the functioning of the economy.


As a result of a high statutory corporate income tax rate, many businesses face relatively high effective tax rates, which discourage domestic and foreign direct investment in Costa Rica. The corporate income tax base is relatively narrow and Costa Rica should evaluate how it can broaden its CIT base and lower the rate.


Additional efforts are needed to make Costa Rica a more inclusive society. Indeed, while the social security system has been successful in reducing inequalities, the high level of contributions makes it costly to hire workers and reduces the incentives for employees to work in the formal economy. A key challenge to address is the lack of information sharing between the tax administration and the social security systems, which opens up possibilities to evade taxes. Improved information sharing between the tax and social security administrations is a key priority.


The report also calls for a reform of the personal income tax. It recommends lowering the income threshold above which personal income tax has to be paid, to align with international practices. Harmonising the tax treatment of different types of labour income should also be a priority.


Costa Rica has put forward an ambitious climate policy agenda and is an environmental and climate policy frontrunner. There remains scope to improve the environmental effectiveness of its tax policies, including by extending the excise tax on fuels to cover all fossil fuels.


In April 2015, OECD Member countries agreed to open membership discussions with Costa Rica and the country's accession process is currently underway. However, the OECD Tax Policy Reviews: Costa Rica 2017 does not form part of the assessments undertaken to support the review of Costa Rica for accession purposes and does not prejudge in any way the results of the ongoing reviews of Costa Rica by OECD committees as part of this process. Rather, the report aims to contribute to the design and implementation of tax reform efforts to be discussed in Congress in August, and will help Costa Rica continue modernising its tax system while improving living standards for all.


Further information on OECD Tax Policy Reviews: Costa Rica 2017 is available at www.oecd.org/tax/oecd-tax-policy-review-costa-rica-2017-9789264277724-en.htm


Media enquiries should be directed to Pascal Saint-Amans (+33 6 26 30 49 23), Director of the OECD Centre for Tax Policy and Administration, or Carolina Ziehl (+52 55 9138 6235), Media Manager for Latin America or the OECD Media Office (+33 1 45 24 97 00).

 

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