Costa Rica: A Tax Haven?
Perhaps it was no surprise when Costa Rica wound up on a tax haven “gray list” published almost a year ago by the Organization for Economic Co-operation and Development (OECD).
With 10.5 percent of its population coming from abroad, with a reputation as a mecca for online gambling, and with laws that often seem sluggish and ineffective, Costa Rica in many ways fits the bill as an attractive place for people looking to stash away a little cash.
The country made unwanted headlines again in February as a potential tax haven when it appeared on a list drawn up by the French government. The country was told then that if the laws aren’t changed soon it would face severe sanctions on interest and dividends earned by French firms in Costa Rica.
Yet, even as some in international circles charge that Costa Rica harbors tax evaders, the extent to which foreigners hide cash in bank accounts in Costa Rica hasn’t been determined.
“We don’t have those statistics,” said Finance Minister Jenny Phillips last Friday at the tail end of a conference where the principal discussion was about how to get Costa Rica off of the French government’s list.
Not even the OECD, which published the original list in April 2009, could provide an estimate of the amount of money domiciled in Costa Rica for tax evasion purposes.
“The problem with this kind of issue is because of bank secrecy,” said Pascal Saint-Amans, head of the international cooperation and tax competition division of OECD. “You cannot know. As long as there is this big bank secrecy, there is a risk.”
Seasoned legislators, financial officials and representatives of the administration of President Oscar Arias spent much of last Friday in a windowless meeting room of the InterContinental Hotel plotting how to change Costa Rica’s reputation as a tax haven.
They took a first look at proposed legislation, bounced questions off of an OECD official and made plans to sign tax information-sharing agreements with other countries.
“Costa Rica is recognized in the world as a haven for peace, a haven for ecological tourism, a haven for the respect of human rights,” said Rodrigo Arias, minister of the presidency, at the forum. “But under no circumstances can we or do we want to run the risk that Costa Rica is perceived as a tax haven.”
Costa Rica shares a spot on the OECD’s gray list with 18 other countries, including Panama, Guatemala, Uruguay, the Philippines and Liberia.
According to Saint-Amans, whose organization compiled the list, the countries on the gray list are not technically tax havens, but they have banking laws tough enough to make it prohibitive for any country seeking information about a potential tax evader.
“I am sure Costa Rica is a haven for many other things, but it’s not, and has never been, a tax haven,” he said. He added that, while Costa Rica has been mentioned as such a haven, it never has met the tax haven definition. The name has stuck, he said, because it’s been an eye-grabbing term for international journalists trying to plug stories.
Costa Rica has been targeted because its legislation establishes extensive and cumbersome procedures for the exchange of information on suspected tax evaders. It also has dragged its feet in adopting international standards on the subject, Saint-Amans said.
To make it off of the OECD gray list, Costa Rica must sign information-sharing agreements with at least 12 countries. And, while Costa Rica can choose any countries with whom to sign agreements, Saint-Amans recommended that these include countries with refined tax systems.
In the past 10 months, Costa Rica has signed an agreement only with Argentina, but, according to Phillips, nine additional agreements – including ones with Mexico, Colombia, Holland and Chile – are progressing quickly. To comply with the OECD, new legislation to facilitate information-sharing processes must be adoped, Saint-Amans said.
Phillips said that the legislation has been drafted and is now before the Legislative Assembly. Although she said she would push for passage before legislators leave office in May, she recognizes the tight time frame.
“Two months is a very short (period of time) in which to pass a reform like this one,” Phillips said. “But after hearing what was said today (that Costa Rica could face more sanctions) … Today it’s France, tomorrow it could be another country, and some of the sanctions could come from international organizations, such as the World Bank.”
Officials of the Costa Rican Chamber of Banking and Financial Institutions, which has pledged its support for tax reforms, said they think such reform is a way to retain investment coming into the country.
“We see this as a benefit to the country in the sense it not only brings better tax control, but it also improves protection of foreign investment,” said Guillermo Quesada, president of the chamber. “It protects us from big corporations deciding to leave the country.”
More transparent banking does not mean clients’ information will be passed from hand to hand indiscriminately, Saint-Amans stressed.
“All this needs to be done with safeguards to protect taxpayers’ confidentiality,” he said. “The rules require exchange of information on request, but information cannot be asked for randomly.”
Yet, international tax consultant Fernando Velayos mentioned many holes in OECD’s attempt to get every country signed onto one standard.
In some cases, reforms to a country’s tax-sharing information could “distance it from what is best for the country,” he said, adding that also it would involve applying equal treatment to countries that are clearly not equal.
For instance, he said, the systems and processes of a developed country, such as England, do not match the internal systems of a country in the developing world. Lastly, he said the requirement of signing an agreement with 12 countries seems arbitrary.
And even if Costa Rica were to successfully sign 12 agreements, “does that mean Costa Rica will effectively divulge information?” Velayos asked. “No.”
The consultant advised that everyone should “be flexible. (The process) is going to have some imperfections.”
The recent crackdown on so-called tax havens has been propelled by the international recession, as countries look for additional income to help balance cash-strapped budgets. With the participation of countries around the world, the OECD drafted an international standard for the exchange of tax information and got dozens of countries to sign on to it.
“We’ve made more progress in 10 months than we have in 10 years,” said Saint-Amans. “The standard for the exchange of tax information is now almost universally accepted. There are no more safe places to hide money to avoid paying taxes.”
During the meeting last week, Saint-Amans called Costa Rica an important actor in the OECD’s success in the region.
“For us, Costa Rica is a very important country,” he said. “It is a model country and that is why the OECD has been very keen to have Costa Rica (on our side).”
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