Change in the Legal framework  of the Tax Administration

It was not possible for the President Laura Chinchilla’s administration to approve a tax reform that modernize the pillars of the system (sales and income tax, outdated VAT), and increase the tax pressure. That task will probably correspond to the next Government (after May 2014), because otherwise the public debt will become unsustainable (presently the Government finances current wages with debts).

But the tax burden, which is located in an intermediate range in Latin America (if social security is included as it should), may increase thanks to the strengthening of the new regulations governing the tax administration. After two years of discussion, the Legislative Assembly approved fundamental changes in the provisions governing the international taxation as well as the internal taxation and customs-.

Chinchilla´s government proposed the modernization of the tax legislation to create the appropriate framework for the country not to be used as a tax haven, as a territory in which capitals may hide to avoid taxation in their home countries. The reform included a law on Fiscal Transparency which guarantees the access of the tax administration to the financial information of taxpayers, makes possible the exchange of information with other countries and takes a step forward in the elimination of bearer shares. Costa Rica also joined the multilateral Convention on mutual administrative assistance in tax matters (which was developed by the Council of Europe and the OECD since 1988 and which recently was opened to adhesion by other countries) and for several years it actively participates in the OECD Global Forum on transparency and exchange of information for tax matters. The approval of specific agreements for the exchange of tax information with twenty countries completes the framework.

A controversial issue is the Elimination of bearer shares. This is the case in almost all countries. The Government proposed to establish an official registry (even if not public) of shares ownership. The solution approved by the Legislative Assembly is weaker, because it is only mandatory to maintain records updated in the company’s´ private books and establishes minor sanctions for those not keeping such records. However this is a step forward to effectively eliminate bearer shares.

The decision to sign exchange of information agreements and not double taxation treaties (which is the strategy followed by Panama for example) is also noteworthy. Costa Rica justified that decision because only income generated in the national territory is taxed; it is not a world income system. With this legal framework, the signing of double taxation treaties can only lead to a loss of tax base. The case of Spain, which is the only country which has a double taxation treaty, is a clear example of this problem.

In terms of domestic legislation, the strengthening of tax and customs management Law covers the main proposals that taxation and customs specialists had been accumulating since the adoption of the tax Justice Law and the General Customs Law in 1995. Noteworthy elements are the introduction of a section on the taxpayers’ rights, the approval of customs tax penalties, and the strengthening of administrative sanctions as an alternative to criminal sanctions, which are reserved for extreme cases. The last issue is the most controversial element, but arises from the admission that, although the penalty was adopted since 1995, only one person has been condemned this way while more than 70 complaints have been presented: the issue has not been a priority for the Public Prosecutor’s Office and the tax administration has had great difficulties to comply with the evidentiary standards of criminal proceedings which are much more restrictive than the administrative processes.

For further information, the reader can access the new laws here:

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