OECD Proposes Seven Fiscal Reforms to Strengthen Costa Rica's Government Revenue
Recommendations aimed at enhancing tax collection and reducing public debt have been outlined in the OECD's Economic Studies report.
The Organisation for Economic Co-operation and Development (OECD) has recommended a series of fiscal adjustments for Costa Rica to bolster government revenues.
In its report, _OECD Economic Studies: Costa Rica 20_25_, published recently, the organization noted that state revenue, which had been boosted by a tax reform in 2018, has since slowed.
To remedy this, Costa Rica could implement seven key reforms.
The proposed reforms include eliminating reduced Value Added Tax (VAT) rates for private education and health services, abolishing income tax exemptions for cooperatives, and transferring the responsibility of employer contributions for entities such as the National Learning Institute (INA) and the Social Development and Family Allowance Fund (FODESAF) to the state to promote job creation.
Additional recommendations involve modifications to property tax (Impuesto sobre Bienes Inmuebles) laws to enhance revenue collection, reduce fragmentation in tax payments and the collection system, and eliminate exceptions to income tax for individuals.
The OECD also suggests the introduction of a carbon pricing scheme as part of the taxation system.
The OECD estimates that if these reforms are enacted, tax revenues could increase by 2.1% of Gross Domestic Product (GDP).
Mathias Cormann, OECD Secretary-General, emphasized that Costa Rica faces significant challenges, such as reducing its public debt, which was reported at 59.8% of GDP last year, according to the Ministry of Finance.
Cormann highlighted the importance of ongoing cooperation with Costa Rica to support its sustainable fiscal reforms and enhance equity within the country.
The OECD report pointed out considerable infrastructure deficits that contribute to increased trade costs, including poor road conditions and congested ports.
Among the suggested reforms, eliminating the income tax exemption for cooperatives is a priority.
The report notes that some cooperatives, despite being large multinational corporations enjoying commercial protections and monopolistic conditions, currently benefit from tax exemptions, potentially allowing for additional tax income if these exemptions are removed.
The OECD also assesses that increasing existing tax revenues, particularly from property taxes, is feasible.
These taxes provide significant redistributive benefits and are efficient, yet they currently contribute only 0.4% to Costa Rica’s GDP, compared to 1% in other OECD countries.
The organization recommends centralizing property valuation standards across municipalities to address discrepancies.
Fragmentation in tax payment collection is another noted issue, with 99 taxes being managed across 93 different technological platforms.
The OECD advises migrating to a centralized digital system, which could improve efficiency and potentially save up to 1% of GDP.
Additionally, the introduction of a carbon pricing scheme is suggested to make the tax system greener.
The OECD proposes a modest tax on carbon emissions that could be gradually increased, predicting that a rate of €120 per ton of carbon dioxide could yield approximately 0.3% of GDP by 2030.
The report also indicates that reduced VAT rates represent fiscal expenditures amounting to 2.2% of GDP, with specific exemptions for private education and health services considered regressive as they predominantly benefit higher-income households.
Current legislation provides complete exemption for various levels of private education services, while healthcare services also enjoy reduced rates.
Removing these benefits would shift the tax burden onto consumers.
Further, the OECD identifies opportunities to expand the personal income tax base, which currently contributes less than in other OECD countries.
Suggestions for broadening this base include eliminating tax exemptions for public sector bonuses and reducing the income threshold for taxable profits.
Noguí Acosta, Minister of Finance, acknowledged the report's insights, affirming that Costa Rica’s tax burden is relatively low compared to other nations in the OECD.
Acosta emphasized the importance of avoiding the passage of new tax exemptions in Congress.
The OECD also highlighted that payroll taxes, currently making up 37% of salary costs, pose a barrier to employment.
To alleviate this, it recommends that the state finance these contributions for relevant institutions, allowing employers to allocate more resources for hiring and job creation.
In its report, _OECD Economic Studies: Costa Rica 20_25_, published recently, the organization noted that state revenue, which had been boosted by a tax reform in 2018, has since slowed.
To remedy this, Costa Rica could implement seven key reforms.
The proposed reforms include eliminating reduced Value Added Tax (VAT) rates for private education and health services, abolishing income tax exemptions for cooperatives, and transferring the responsibility of employer contributions for entities such as the National Learning Institute (INA) and the Social Development and Family Allowance Fund (FODESAF) to the state to promote job creation.
Additional recommendations involve modifications to property tax (Impuesto sobre Bienes Inmuebles) laws to enhance revenue collection, reduce fragmentation in tax payments and the collection system, and eliminate exceptions to income tax for individuals.
The OECD also suggests the introduction of a carbon pricing scheme as part of the taxation system.
The OECD estimates that if these reforms are enacted, tax revenues could increase by 2.1% of Gross Domestic Product (GDP).
Mathias Cormann, OECD Secretary-General, emphasized that Costa Rica faces significant challenges, such as reducing its public debt, which was reported at 59.8% of GDP last year, according to the Ministry of Finance.
Cormann highlighted the importance of ongoing cooperation with Costa Rica to support its sustainable fiscal reforms and enhance equity within the country.
The OECD report pointed out considerable infrastructure deficits that contribute to increased trade costs, including poor road conditions and congested ports.
Among the suggested reforms, eliminating the income tax exemption for cooperatives is a priority.
The report notes that some cooperatives, despite being large multinational corporations enjoying commercial protections and monopolistic conditions, currently benefit from tax exemptions, potentially allowing for additional tax income if these exemptions are removed.
The OECD also assesses that increasing existing tax revenues, particularly from property taxes, is feasible.
These taxes provide significant redistributive benefits and are efficient, yet they currently contribute only 0.4% to Costa Rica’s GDP, compared to 1% in other OECD countries.
The organization recommends centralizing property valuation standards across municipalities to address discrepancies.
Fragmentation in tax payment collection is another noted issue, with 99 taxes being managed across 93 different technological platforms.
The OECD advises migrating to a centralized digital system, which could improve efficiency and potentially save up to 1% of GDP.
Additionally, the introduction of a carbon pricing scheme is suggested to make the tax system greener.
The OECD proposes a modest tax on carbon emissions that could be gradually increased, predicting that a rate of €120 per ton of carbon dioxide could yield approximately 0.3% of GDP by 2030.
The report also indicates that reduced VAT rates represent fiscal expenditures amounting to 2.2% of GDP, with specific exemptions for private education and health services considered regressive as they predominantly benefit higher-income households.
Current legislation provides complete exemption for various levels of private education services, while healthcare services also enjoy reduced rates.
Removing these benefits would shift the tax burden onto consumers.
Further, the OECD identifies opportunities to expand the personal income tax base, which currently contributes less than in other OECD countries.
Suggestions for broadening this base include eliminating tax exemptions for public sector bonuses and reducing the income threshold for taxable profits.
Noguí Acosta, Minister of Finance, acknowledged the report's insights, affirming that Costa Rica’s tax burden is relatively low compared to other nations in the OECD.
Acosta emphasized the importance of avoiding the passage of new tax exemptions in Congress.
The OECD also highlighted that payroll taxes, currently making up 37% of salary costs, pose a barrier to employment.
To alleviate this, it recommends that the state finance these contributions for relevant institutions, allowing employers to allocate more resources for hiring and job creation.