Investment security for tourism-related business took a turn for the unsteady this week as the Costa Rican Tourism Institute (ICT) announced that not only will it cancel hotels’ import-tax incentives from here on out, but also that it will attempt to recover unpaid taxes from the past, in response to an order from the Comptroller’s Office.
Tourism-sector leaders say this could have disastrous effects for investment here. “What serious company… would want to invest in a country where the rules of play aren’t trustworthy?” Eduardo Villafranca, president of the National Tourism Chamber (CANATUR), told The Tico Times on Wednesday, adding that he and other leaders planned to hold a meeting yesterday to determine how they would respond. “We can’t let this happen. This would be fatal… not only for the tourism sector, but for the whole country.”
This is the latest development in a lengthy struggle between the tourism industry and the Comptroller’s Office, which last year ordered the ICT to suspend tourism tax breaks. The exemptions had been in place since the 1980s and allowed the tax-free import of products such as furniture, lamps and kitchen utensils for hotels.
At the time of the comptroller’s order in January 2005, Tourism Minister Rodrigo Castro said the decision could drive businesses to other countries with more favorable investment conditions. Nicaragua, for example, recently expanded its Tourism Incentives Law (Law 306) – already considered one of the most aggressive laws of its kind in Latin America – to extend benefits and tax exemptions to small and medium-sized businesses (NT, Dec. 23, 2005).
Castro also said changing the rules on investors mid-game could make Costa Rica less attractive for new investment; Ana Gabriela Alfaro, executive director of the Costa Rican Chamber of Hotels, told The Tico Times the comptroller’s ruling was “almost perverse” and could cause many hotels to close because of the increased cost of the products they need (TT, Jan. 28, 2005).
The Tico Times was not able to obtain a response from the Comptroller’s Office by press time.
At the heart of the conflict is doubt over whether the Tourism Incentives Law exempts companies from taxes indefinitely, or only for a defined initial period. The ICT argues the latter, but the Comptroller’s Office has remained firm in its position that the incentives are intended only for businesses in construction, despite appeals.
Because the Comptroller’s Office –along with the Government Attorney’s Office – refuses to budge, the ICT says it must now cancel incentives for 991 businesses from this point forward, and attempt to determine which exemptions were improperly granted from 1996-2003, according to the Comptroller’s criteria. The institute will then attempt to recover the unpaid taxes, according to the financial weekly El Financiero.
The Comptroller’s Office reports that ¢11 billion ($22 million) in exemptions were granted from 1996-2003, though the percentage of those exemptions that were improperly granted is not known, according to the weekly.
Walter Monge, head of the incentives department of the ICT, told El Financiero the institute is accepting the comptroller’s ruling “under protest.”
Controversy over tourism-sector incentives first erupted in the late 1990s regarding an article of 1985’s Tourism Incentives Law that allowed for partial income-tax exemption on investments in hotels. This type of incentive was cancelled in 1992, though enterprises established from 1985-1992 continued to receive tax breaks after the cancellation. Investigations of this program by the Legislative Assembly, an internal ICT auditor and the Comptroller’s Office showed poor accounting, irregularities and possible fraud.
In 2000, the Cabinet of President Miguel Angel Rodríguez (1998-2002) abolished the investment tax-break program (TT, May 19, 2000).
The section of the 1985 law granting import-tax exemptions for hotels was never cancelled, but controversy arose when the Comptroller’s Office reported the ICT was improperly renewing the tax.
Asked why the law appears to lack clarity on this point, Villafranca said, “It was so clear that it was working like that for more than 10 years. I don’t know why now there’s a different interpretation… and even if (it’s) different, it shouldn’t be retroactive.”