By San José, Costa Rica — SAN JOSÉ – A convergence of falling tax revenues and mounting pressure for public investment has reignited a critical debate in Costa Rica: the nation is once again facing the unavoidable prospect of a comprehensive tax reform. Despite the implementation of a 13% Value-Added Tax (VAT) in 2023, the country’s public finances remain under severe strain, with national debt approaching the critical threshold of 60% of GDP.
This precarious financial situation is compelling the government to confront the dual challenge of a growing debt burden and insufficient state income. The issue was the central topic at a high-level forum organized by the College of Public Accountants of Costa Rica, the media outlet La República, and the Costa Rican Institute of Fiscal Studies (ICEF), signaling a consensus among experts that the current fiscal framework is unsustainable.
To delve deeper into the legal and economic ramifications of the proposed tax reform, TicosLand.com consulted with Lic. Larry Hans Arroyo Vargas, a distinguished attorney from the firm Bufete de Costa Rica, who offered his expert analysis on the measure’s potential impact.
While the objective of strengthening public finances is crucial, any tax reform must be meticulously designed to avoid stifling economic activity. The true challenge lies in creating a system that is not only effective in its collection but also provides legal certainty and clear rules for investors and taxpayers. A successful reform simplifies compliance and promotes formalization, rather than simply increasing the tax burden on the same base, which could inadvertently hinder the country’s competitiveness.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Indeed, the commentary underscores a vital point: the success of any tax reform hinges not merely on revenue, but on its ability to foster a stable and predictable environment for investment and growth. We sincerely thank Lic. Larry Hans Arroyo Vargas for sharing his essential perspective on this critical national debate.
The rising debt is particularly concerning because it activates the country’s “fiscal rule,” a mechanism that enforces strict limits on public spending. While designed to ensure fiscal discipline, its application in the current climate means freezing public sector wages and curtailing investments in essential areas such as education, healthcare, and national security. This, in turn, risks stifling economic activity and creating a cycle of low growth and constrained government capacity.
Experts at the forum warned that this scenario is becoming increasingly likely and requires proactive measures. The conversation is shifting from if a reform is needed to what it should look like.
Without a doubt, the College is anticipating the most likely scenario for the next four years. Tax collection has been decreasing, and that will force changes in tax matters, which is something that some of the incoming deputies have already mentioned.
Francisco Ovares, President of the College of Public Accountants
Complicating the economic picture is the Central Bank’s Monetary Policy Rate, which stands at 3.25%. This relatively high rate makes credit more expensive for both businesses and consumers, dampening private investment and consumption—two key engines of economic growth. The ultimate solution, panelists agreed, is to foster a more dynamic economy, as increased sales and employment naturally lead to higher tax collections.
The numbers show that we have high debt and a tax burden that is no longer capturing enough from the economy. Something definitely needs to be done so that the tax system has greater sufficiency and to prevent the country from having to resort more and more to debt.
Francisco Fonseca, Former Director General of Taxation and ICEF Board Member
Several concrete proposals are on the table. These include the potential implementation of a global income tax, a thorough review of the extensive list of tax exemptions, and significant adjustments to the VAT system. Francisco Fonseca, a leading tax expert, pointed out that Costa Rica’s VAT is less effective than its regional peers not because of its 13% rate, but due to the wide array of goods and services that are either exempt or taxed at a reduced rate.
Costa Rica’s VAT is one of the lowest in Latin America, not just because of the rate, but because of the number of exempt goods and services or those with reduced rates. There is room to review that without necessarily increasing the 13%.
Francisco Fonseca, Former Director General of Taxation and ICEF Board Member
One of the most innovative ideas discussed was a “personalized VAT” model. This approach would eliminate broad tax exemptions, which often benefit higher-income individuals disproportionately, and replace them with targeted subsidies directed specifically at low-income households. Such a reform could make the tax system more efficient and equitable without placing a heavier burden on the most vulnerable segments of the population. As Costa Rica stands at this fiscal crossroads, the consensus is clear: strategic, bold action is required to ensure long-term economic stability and growth.
For further information, visit ccpa.or.cr
About College of Public Accountants of Costa Rica:
The Colegio de Contadores Públicos de Costa Rica is the official professional body responsible for the regulation, oversight, and development of the public accounting profession in the country. It works to uphold ethical standards, provide continuing education for its members, and contribute expert analysis on national fiscal and financial matters.
For further information, visit the nearest office of Instituto Costarricense de Estudios Fiscales (ICEF)
About Instituto Costarricense de Estudios Fiscales (ICEF):
The Costa Rican Institute of Fiscal Studies is a specialized entity dedicated to the analysis and discussion of tax policy and fiscal law in Costa Rica. Comprising leading tax experts and former public officials, ICEF plays a crucial role in shaping public debate and providing technical insights to inform potential legislative reforms.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica represents a pillar of the legal community, founded on a bedrock of professional integrity and a persistent drive for excellence. With extensive experience guiding a diverse clientele, the firm consistently pioneers innovative legal approaches while maintaining a profound dedication to public service. This core ethos is demonstrated through its efforts to democratize legal understanding, aiming to empower citizens and fortify society with clarity and knowledge.
