THE Association of Costa Rican Free-Zone Businesses (AZOFRAS) and the Foreign Trade Ministry (COMEX) are recommending that the corporate income tax under the proposed Permanent Fiscal Reform Package being studied by the Legislative Assembly not exceed 15% per year.
A higher tax rate, they claim, could cause the country to lose the comparative advantages it has over other countries.
Free zones are areas within a country designated as “outside customs territory.” Importers are allowed to bring foreign goods into free zones without having to pay import duties or taxes, pending the goods will be processed, shipped or reexported (TT, Feb. 27).
Approximately 190 businesses are located in the country’s free zones, and they employ more than 35,000 Costa Ricans, according to AZOFRAS.
FREE zones benefit from tax exemptions, including exemption from income tax during the first four years of operations here. During the next four years, the rate is 15% (half the current annual tax rate for corporations), and thereafter the rate is the same as it is for other companies (30%).
However, these tax breaks and other benefits will expire in 2009 once the World Trade Organization’s (WTO) agreement on subsidies and countervailing measures goes into effect.
AZOFRAS president Jorge Brenes on Monday warned that an annual tax rate higher than 15% could prompt investors to leave the country in search of more attractive destinations.
Costa Rica, in addition to lacking “the optimum infrastructure required to support foreign investment,” has relatively high labor costs, Brenes said.
“If a high taxation rate is added to these two factors, the country would definitely lose international competitiveness,” he added.
THE 15% tax rate was recommended in 2001 following a comparative study by the World Bank’s Foreign Investment Advisory Service (FIAS). The rate was formally proposed in 2002 by a commission of former finance ministers charged with offering solutions to the country’s fiscal deficit.
The original version of the fiscal reform package unveiled last December by a mixed legislative commission included an 18% corporate income tax. It remains unclear if that figure will be changed in the coming weeks as legislators debate and modify the plan (see separate story).
“As the institution in charge of defining the country’s investment attraction policies, we have expressed the need to take into account the tax rates of countries we compete with in terms of attracting foreign investment,” explained Gabriela Llobet, Vice-Minister of Foreign Trade. “We also consider it important to make sure free-zone businesses receive additional incentives that do not violate WTO agreements.”
THE proposed tax package includes a series of incentives and deductions for companies that provide their employees with valuable skills, operate in zones with relatively low development levels, use pioneering technologies and apply clean technologies.
“The only technical study conducted on the matter states 15% as the highest possible tax rate under which Costa Rica would remain competitive while generating additional revenues for the government,” AZOFRAS Executive Director Timothy Scott told The Tico Times.
“Other proposed tax rates lack the technical criteria of this study. We’re awaiting to see what will happen.”
Even though they consider the 15% tax rate optimum, AZOFRAS has said it would accept 18% as long as there are additional incentives that reduce the total tax burden.
IN related news, several government institutions last week unveiled a series of measures aimed at simplifying the requirements for free zones businesses to operate in Costa Rica.
The new measures, which have not yet gone into effect, simplify 20 of the procedures free zones are required to conduct, according to Manfred Kissling, Director of the Foreign Trade Promotion Office (PROCOMER). For example, businesses will be allowed to issue joint declarations for accumulated shipments of products they frequently import or export, instead of issuing separate ones for every shipment.
This measure in particular, Kissling said, will reduce the operating costs of businesses and the workload of customs officers.
THE measures aim to make filing paperwork faster and less cumbersome by allowing most of it to be filed electronically through PROCOMER’s Web site (www.procomer.com). Each business will be assigned a password to access the site and an electronic signature with which to conduct procedures electronically.
Kissling said he believes making procedures electronic provides government institutions with more tools to ensure freezone businesses are operating correctly and following the country’s laws. Information submitted on paper is difficult to access, store and use, he said.
Electronic information, on the other hand, is flexible and can be used in many ways, he explained.
GILBERTO Barrantes, Minister of Economy, Industry and Commerce, and the person in charge of overseeing procedure simplification programs, said the measures are a leap forward.
“In summary, these measures will create clearer rules, make procedures less discretionary and eliminate unnecessary requirements,” Barrantes explained. “Simplification benefits companies and the government. We will continue until the country offers fewer obstacles for investors and becomes a better place to invest.”
The measures are expected to be implemented through an executive decree reforming the regulation – an annex to a law that explains how that law is to be interpreted and applied – to the country’s Free Zone Law.
The reform does not require the approval of the Legislative Assembly and will go into effect after being published in La Gaceta, the government’s official publication, officials said.
SCOTT applauded the proposed measures.
“We could have tax rates of 0%, 2% or 3%, but if we continue to have a complicated web of paperwork and requirements, we won’t be competitive,” he explained.
Being able to file procedures electronically will save free-zone businesses a great deal of time, Scott said. Eliminating the audits they must conduct on their yearly reports, another of the proposed measures), might save free-zone companies anywhere between $5,000 and $20,000 a year.