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Published Monday, February 17,
2020
Costa Rica being transformedby rules from Paris By Jay Brodell Editor emeritus of A.M. Costa Rica A little-known international organization is a driving force behind the many changes expats have seen in Costa Rica during the last six years. These changes include the new value-added tax that has inflamed broad sectors of the public. Less known are the many other decisions that may not make headlines yet will be significant in the long run. For example, Costa Rica just approved allowing foreign banks to do business here. Periodically a news story appears reporting that some aspect of the government administration has been approved by a committee of the Organisation for Economic Co-operation and Development, known as the OECD for short. That is because in 2015 the central government agreed to seek membership in this Paris-based international organization. To do so, the country is following what is called a roadmap that the organization has set up to evaluate 22 separate aspects of the way the nation operates. The organization says: “Becoming an OECD member country is a demanding task. Countries have to be ready for membership, which means not only adhering to our mission and values, but being able to take on the responsibilities and requirements of active membership. To become a member, countries may apply or be invited to open an accession process by the OECD Council. An accession roadmap is then developed to determine terms, conditions and processes. A technical review is carried out to evaluate the country’s policies and practices compared with OECD best practices and its ability to implement OECD standards. This phase often results in a series of measures a country must implement in order to align with OECD requirements. Each country must ratify membership domestically before becoming members.” Costa Rican political leaders told the country that the organization was an exclusive club of 36 developed nations and that Costa Rica would improve its image by joining. In fact, the OECD seems to be broadening its membership. Columbia also seeking to join, and México already is a full member. The organization grew out of the Marshall Plan, a U.S. program to rebuild Europe after World War II. The United States still provides 20 percent of the annual base budget, which was $219 million in 2019. Costa Rica will be expected to make an annual contribution, too, when it becomes a member. The amount is based on both a proportion that is shared equally among member countries and a scale that is proportional to the relative size of their economies, the organization said. A handful of countries pay just 1% of the base budget, according to the organization. The organization got into the headlines in 2009 when it placed Costa Rica on its so-called blacklist of non-cooperative tax havens. Also branded were Malaysia, The Philippines and Uruguay. That was the jolt that eventually resulted in changing the country's sales tax to the current value added tax. The organization's black mark also was partly responsible for the forms that residents now have to file listing shareholders of their corporations. The goal was to reduce tax evasion. In 2017 the organization still was encouraging the country to broaden its tax bases, strengthen its efforts to tackle tax avoidance and evasion and bring more informal taxpayers into the formal economy. Informal employees are those who work off the books and are not enrolled in the country's Social Security system. About every aspect of Costa Rica life has been touched by the OECD evaluations, including the health care system, education, taxes, insurance, public procurement and immigration. The organization said that the government needs to find other sources of revenue to support the health care and Social Security system in addition to the payments that are made now by workers and employers. That would suggest that an additional tax will be proposed. The organization noted that there are now 12 private insurance companies working in Costa Rica in addition to the state insurance institute. It noted that 63% of the investment assets of the state company was in government bonds. Education received mixed recommendations. The evaluation in 2017 said: The education sector now faces the challenge of providing quality education for all. The expansion of access to education in recent decades has been impressive. However, Costa Rica's 15-year-olds performed on average two years below their peers in OECD countries on international standards and 33% of them lack core competencies in science, reading and mathematics, it added. The OECD strongly urged the adoption of a value added tax to replace the sales tax, and the secretary general, Ángel Gurría, praised the country in June 2019, when the tax bill passed. The organization members have value-added taxes that range from 27 percent in Hungary to just 5 percent in Canada. It also has an international academy for tax crime investigation. Costa Rica received the 19th approval from the organization this month in the area of competition. A key factor was passage of a law that regulates mergers and acquisitions, Law No. 9736, entitled Strengthening of Competition Authorities of Costa Rica, Currently the organization is promoting taxing digital material. A report on this topic came Thursday. Next weekend Gurría will meet with G-20 finance ministers and central bank governors in Riyadh, Saudi Arabia, on the topic. The goal is to levy taxes on corporation even in countries in which they do not have a physical presence. Costa Rica already is considering some type of action in this area. The organization also is working for taxation related to greenhouse gases. “Human activity is the main cause of climate change. It is also the source of the solution,” the organization says on its website. The solutions it proposes include regulation, energy-related taxes, carbon pricing and government incentives for green technology, to public and private investment in low-carbon resilient infrastructure, corporate responsibility and individual lifestyle choices. Among the targets the organization identifies are air travel and shipping, both topics important to Costa Rican businesses. The organization also has expanded its interest from governmental administration and finances to gender equality, poverty, population growth and even culture. Although the organization's proposals and policies have impact in Costa Rica, the topics usually are too detailed and complex to be captured in news stories. The insurance review alone is 72 pages with 17 tables. The study of public procurement is 130 pages with 25 figures and 23 tables. All the documents are available on the organization's website. As overwhelming are the reports of the organization, they also have a strong impact on government policy here. In fact, the OECD appears to be second only to the Central American-Dominican Republic Free Trade Agreement with the U.S. in changing the status quo in Costa Rica. That 2004 trade treaty was responsible for opening up the insurance and telecom markets to private firms as well as boosting exports. The OECD is not without criticism. The sprawling, unelected bureaucracy's 2,500 employees are involved with the governance of some 100 countries generally with a European attitude on high tax rates. Ironically, its employees do not pay taxes to France, where the organization is based, and many are exempted from taxation by their own countries. However, little or no criticisms have been raised by Costa Rican officials as they struggle to meet benchmarks set by the organization. ------------------------ Editor's note: Mr. Brodell, founder and long-time editor of A.M. Costa Rica, can be reached at: jay@amcostarica.com |
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