SAN JOSE: When President Laura Chinchilla met with Legislative Assembly Leader Juan Carlos Mendoza earlier this week, she made something very clear: of all the legislative projects that must be discussed and voted on, the Fiscal Reform plan is one that she would really like to see passed.

Fiscal Reform isn’t the only item on the President’s mind. She also instructed Mendoza to get his people busy on other important items on her agenda, such as borrowing from the Inter-American Development Bank to finance the “Prevention of Violence” public safety initiative, finalizing the controversial Transit Law, and advancing the stalled Regulation of Gambling and Casinos Law. Of all the items on the legislative block, none is more important to the President than the Fiscal Reform plan, officially known as Ley de Solidaridad Tributaria, de Saneamiento Fiscal, Transparencia Fiscal y Fortalecimiento de la Gestion Tributaria.

The proposed Fiscal Reform has thus far been met with strong opposition, and to that extent President Chinchilla did not come empty-handed to her meeting with Mendoza. Central American and Caribbean financial magazine Estrategia y Negocios recently reported that the Chinchilla administration was able to shave off a full percentage point from the deficit thanks to improved revenue and tax collection measures employed in 2011. The deficit, which had previously been estimated at 5.5 percent of the country’s Gross Domestic Product, fell to 4.4 percent, still one of the highest in Latin America.

“We made a great effort to become more effective in our tax collection process explained Treasury Minister Fernando Herrero. The effort certainly paid off, as the collection was 11 percent greater than last year. Still, as reported by online news daily El Pais, Herrero asserted that 2012 will be very difficult. For her part, President Chinchilla explained that “the country needs all doubts and uncertainties surrounding the future of Fiscal Reform cleared up”, and that “postponing any decisions does not contribute in any way to our economic stability.”

The President’s declarations on the matter were reported by Chinese news agency Xinhua and posted on The People’s Daily, one of China’s most widely read digital publications. The People’s Republic of China has been closely following the Fiscal Reform proposal in Costa Rica, as it could affect the trade relations between the two countries.

Some of the items included within the Fiscal Reform package include:

– A 1 percent increase of the value-added tax, from 13% to 14%
– The establishment of a universal income tax for individuals and business entities
– A reduction of the tax breaks currently enjoyed by companies doing business within Free Trade Zones

The current Fiscal Reform plan has been halted by Constitutional Hall pending further review. Foreign retirees aren’t expected to be too greatly affected by this legislative effort, but others are concerned that the country could soon fall victim to overzealous taxation. Last year’s collection initiative spearheaded by Minister Herrero may have succeeded in bringing down the deficit, but it is already turning some people off due to the obstinate and inefficient bureaucracy that usually accompanies such efforts. Case in point is the example below, which one of our readers wrote in to tell us about after reading the article that The Costa Rica Star published on corporate business tax in Costa Rica:

“I bought some prescription contact lenses online using 1800Contacts.com. I had them sent to Costa Rica from North America via FedEx. The cost for 4 boxes of Focus Daily Contacts was US$130. They arrived in La Aduana (Customs) a couple of days later. Customs personnel, who are under the mandate and supervision of the Treasury, held the contacts for 2 months before contacting me. They then proceeded to tax the products imported at 80,000 colones -$30 more than the value of the contacts. In the end they were taxed at a rate higher than 100 percent of the product value.

The word tax implies a percentage of the value of a product that is given to the Government, but here in Costa Rica import taxes can be even higher then the value of the product itself! If I were a business here trying to resell these products, I would not even be able to make a profit, as no one will to want pay the amount of money it would cost to import prescription products. For Ticos who would like to purchase contacts from North America, the tax would be way too high to allow this to be an option. This is not only bad for the economy; it also ends up ratcheting up the amount of illegal imports hidden in suitcases in and out of the country.

The Government Officials in Costa Rica are “shooting themselves in the foot” with this kind of taxation without basis or economic sense. The taxation on prescription contact lenses is higher than taxes for importing vehicles, which is fine to an extent; but common sense dictates that you tax a product as a percentage of its value, not an outright expropriation of the product at La Aduana.

In the end I told the Customs people to keep the contacts, as I wasn’t interested in paying more than 100% importation tax. It was an out-of-pocket loss for me, a learning experience, and lost revenue for the country.”