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Citizen Lives Will Be Transparent Under Tax Law

by Garland M Baker on February 27, 2006

An analysis of the fiscal plan (4)

Transparency and Justice are teaming up and, using the synergy of information technologies and law, will surely prevail in collecting more taxes from everyone.

Transparency sits alongside Accountability, implying an openness and willingness to accept public scrutiny, decreasing the capacity for deception, as in hiding money from the tax people. Typically, transparency is used when discussing oversight of public officials. Now it is the individual citizen whose holdings and life is transparent. The concept has been referred to as the Transparency Phantom in a previous article.

In practice, Transparency means a free exchange of information, access to facilities, and cooperative arrangements to provide ready observation and verification of all kinds of information, especially personal financial information.

The new fiscal plan of Costa Rica, if passed on second reading, will create a new authority, The National Council of Transparency and Accountability. The new office, an organ of the legislature, will have functional and administrative independence from the rest of government.

The law also creates a national network of information. The red, Spanish for net, will operate under the authority of the ministry of planning.

The network is to gather information for the transparency council. Its objective is to catch tax dodgers and public officials using the government for enrichment. Some politicians opposing the fiscal plan refer to these entities as the gestapo.

The old tax entity, Dirección General de Tributación, the headquarters of taxation, will be eliminated, replaced by La Dirección Nacional de Tributos.

No one will be out of the grips of this team. Countries that do not cooperate with Costa Rica in reporting any and all information it requests in the name of international cooperation (transparency) will be labeled paraísos fiscales or tax haven countries.

Chapter 3, Section 1, Article 41 of the pending law requires indoctrinating the young, early, in school that paying taxes is a civic duty. This is very different from the culture of today because many Costa Ricans work hard to find ways around paying taxes.

Very few Costa Ricans, even professionals like economists, accountants and lawyers understand that the new fiscal plan would introduce a 10 percent capital gains tax to the country.

Most foreigners come to Costa Rica to invest in land because there is no capital gains tax and by hiding under an umbrella of a local corporation, they never report earnings to their home country either.

Investors will be caught in a dilemma, a “catch-22″, under the new fiscal plan. The old ploy of undervaluing the deed registered at the Registro Nacional when selling property can backfire and end in a big fine or worse. Most banks are now required, under the code name KYC (Know Your Customer), to request the source of any funds over $10,000. They are required in many cases to get a copy of the deed as verification of funds in a property transaction.

In the past, when the deposit did not balance with the amount in the deed, tax authorities could not do much because there was no tax. Lying is punishable under Costa Rican law but there needs to be dolo, deceit, and daño, damage, for conviction. Under the old system no tax means no damage, thus no convictable offense.

Under the new fiscal plan there will be a tax, so understating a value on a deed and depositing a different amount in the bank will set off judicial flares of tax fraud.

This is only one real example of the far-reaching claws transparency will have on Costa Rica and the investors who come here.

Now here is the scary part. In the pending fiscal plan, Section C, Article 7 of Chapter 1, of the Income Tax Law, the government wants foreigners residing in the country on a permanent basis to tell the tax people how much money they have outside of Costa Rica. Anyone who stays in Costa Rica more than 183 days a year will be considered “habitual or permanent” residents.

Those who fess up will not be taxed on bringing assets or money to Costa Rica. Those who do not will be taxed.

Costa Rica has a history of shooting itself in the foot. With the aid of Justice and Transparency the country may just do it again.

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