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Analysts predict fiscal reform approval in Costa Rica

October 27, 2011

While divided factions continue to lobby for and against a new fiscal reform plan, presented Sept. 27 in the Legislative Assembly, analysts are beginning to offer projections on whether or not the package will be passed.

On Monday, Heather Berkman and Adam Siegel, Latin American analysts from the international consulting firm the Eurasia Group, projected that the fiscal reform will be approved in the Legislative Assembly in December.

“Tax reform plan will get approved despite resistance,” the report stated. “A fiscal reform package negotiated between the Laura Chinchilla administration and the opposition Citizen Action Party (PAC) remains on track to be approved by mid-December despite growing opposition to the deal.”

On Monday, the Costa Rican Investment Promotion Agency (CINDE) voiced opposition to the tax overhaul before the assembly’s fiscal reform special commission, saying that a proposed 15 percent tax on free-zone businesses after 2015 could result in the loss of an estimated 5,000 jobs.

“There are already a dozen businesses that have notified us that they have postponed their final decision to expand operations, open new locations or invest in Costa Rica, which could result in the loss of the creation of almost 5,000 new jobs,” said José Rossi, CINDE’s general director.

CINDE’s presentation to the assembly was followed by a press statement from PAC saying “the fiscal reform will not affect the arrival of foreign direct investment.”

Berkman and Siegel alluded to the divisive positions of the two sides.

“Those opposed to this tax contend that it would cause businesses to spurn Costa Rica for other countries. The PAC has insisted that the free-zone tax remain in the legislation in order for it to approve the reform package.” 

The report added that Costa Rica’s fiscal deficit is expected to reach 5.5 percent of the gross domestic product by the end of the year, and that the reform could generate up to an additional $850 million in annual revenue. Berkman and Siegel concluded that concerns about the growing deficit paired with Chinchilla’s support of the reform will most likely result in its approval.

“Despite these pressures, Chinchilla and Solís remain publicly committed to their compromise bill and should be able to exercise enough party discipline to get the necessary votes,” the report said. “Warnings that the country is currently without the funds to address rising insecurity and the solvency of key social safety nets should grant the government the needed political space to approve the reform.”

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