Costa Rican 2022 Election Update: Free Economic Zone Tax Proposals Stir the Campaign
Free Economic Zones (“zonas francas”) have been an important part of the Costa Rican economy for the last 40 years. This is a program that gives companies benefits like tax cuts to encourage economic activity. The latest data shows that there are 546 companies that operate in the six special economic zones in the country, and Azofras, the association that represents them, asserts that they employ 187.000 people, foster 11.000 productive chains, and buy more than $2,3 billion to local businesses.
Despite numbers showing that companies in “zonas francas” give back to the country $8 for every dollar exempted from taxes, the special economic regime has always been questioned by some political and economic sectors. And sooner or later, during election time, it becomes an incredibly polarizing subject in debates and the conversation about politics in general. The campaign for the upcoming election has not been an exception.
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Last week, a proposal from the Broad Front party (FA, in Spanish) to establish a 15% tax on the dividends of the companies in Free Economic Zones, became part of the electoral news cycle, since there’s opposition to these taxes from almost every other party. The FA presidential candidate, José María Villalta, had to explain that the proposal is inspired by a debate happening right now about a global minimum corporate tax rate.
Considered the “most important international tax agreement in a century” by the French finance minister Bruno Le Maire, the proposal has been signed by more than 130 countries, including Costa Rica, the United States, China, and all European Union members. The talks are still going at the G20 and Organization for Economic Co-operation and Development (OECD) level, but it seems that there is consensus about the need to have a global tax for big companies that have operations in several countries.
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“The global minimum tax rate and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment,” the World Economic Forum stated in November 2021. “Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could ‘top up’ their taxes to the 15% minimum, eliminating the advantage of shifting profits. A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue”.
Considering this international debate about taxing big companies, Villalta said last week that the timing is right to open a discussion in Costa Rica about a “fairer tax system” and have a national conversation about “a 15% tax for multinationals for the distribution of dividends, which are the profits that companies take out of the country.” “The policy of tax exemptions for the richest does not help create jobs. There is a global debate accelerated by the pandemic on the need for multinationals to contribute by paying at least 15% of independent income from the country where they are located,” he added.
What the candidates say and propose
We asked the communication officers of the top five presidential candidates about this subject, but none of them answered our inquiries. Some of them have talked about this in debates or interviews, and the FA is the only one of those parties that mentions taxes on companies on Free Economic Zones in its government plan. The FA also pushes for a solidarity tax on these companies without damaging their productivity.
José María Figueres, the National Liberation Party (PLN) nominee and the candidate that’s leading the polls, agrees with the OECD proposal of a minimum 15% global tax for corporations. “I am in favor of it and I hope that it will not take long to be implemented because many countries could ensure a better situation in terms of their public finances,” he told local newspaper El Financiero last year.
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Nevertheless, Figueres said that while the tax is not implemented internationally, “we are not going to change the tax regimes, for example, in Free Economic Zones.” In a more recent interview with the same newspaper, the PLN nominee said that the only thing to do now is to wait for more advances regarding the OECD plan to see how it will affect Costa Rica, but that independent from that, the country must bet on its competitiveness.
Fabricio Alvarado, the New Republic (PNR) candidate, aims to extend Free Economic Regimes in the coastal and rural zones of the country, but he has not said what he thinks about the minimum global tax. The same goes for the Social Christian Unity Party (PUSC) nominee, Lineth Saborío, who proposes the migration of smaller companies with great potential to this special economic regime. Rodrigo Chaves, the Social Democratic Progress party (PSD) candidate, has not said anything about taxing these companies either.
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Of the 546 companies that operate in Costa Rican “zonas francas”, 173 got in the regime in the last four years, coinciding with current President Carlos Alvarado’s government. Azofras has said that the minimum global tax proposal from the OECD will not affect Free Economic Zones in the country, but the Executive has noted that it’s too early to know.
Figueres, Villalta, Alvarado, Saborío, and Chaves are the top five presidential candidates in the polls leading to the February 6 election. There are 25 candidates for head of state.