Costa Rica presents major tax reform bill

The bill has been coined “Plan B” because it follows a bill proposed in January that failed to win the votes of the Congress

Costa Rica’s Secretary of the Treasury formally presented a tax reform bill to the National Congress on 21 June 2011 that contains major and aggressive changes to the Income Tax Law and the Value Added Tax Law, with a view to collecting more than CRC 2 billion per year.

The main proposals under the bill are as follows:
•A new general withholding tax rate of 15% would apply to dividends, interest and royalties paid to a nonresident company. However, payments made to a nonresident with respect to transportation, telecommunications and insurance premiums would be subject to a lower rate of 5.5%.
•Capital gains derived by Costa Rican residents would be subject to a 15% tax if the gains do not arise from the disposal of assets used in a normal trade or business.
•Formal transfer pricing rules that follow the OECD guidelines would be introduced for the first time.
•Formal thin capitalization rules that include a 3:1 debt-to-equity ratio would be introduced.
•The double taxation relief rule would be abolished. The rule currently allows companies in certain countries (including Mexico and the U.S.) to obtain a 100% exemption from withholding tax on dividends, interest, royalties, commissions and insurance premiums.
•The standard rate of VAT would increase from 13% to 14%.

Even though the government feels confident that Plan B will be discussed and approved by the National Congress during 2011, the bill is likely to be debated vigorously and may be subject to further changes.