Nearshore Americas

Costa Rica’s Dilemma: Tax Big Business or Keep Corporate Benefits Flowing

Throughout its history, Costa Rica has taken paths of public policy that could be described as unorthodox by Latin American standards. 

At the start of the Cold War, many Latin American countries were swamped in civil unrest and under dictatorial rule. Costa Rica, in contrast, had abolished its armed forces by 1949, after a short-lived civil war in 1948 and a brief period of military rule. The funds that were previously intended for the army were funneled to public education and health care, allowing Costa Rica to achieve some of the highest life expectancy and literacy standards in the region.

In the late 1990s, following decades of expanding deforestation in the region, Costa Rica’s government launched a plan to pay landowners willing to protect their forests.  Large portions of land that were once dedicated to cattle ranching or depleted of trees for lumber were turned into tropical forests again. Presently, a fifth of Costa Rican territory is covered by forests once more. 

Now Costa Rica faces a new dilemma, this time with regards to its tax system

In 2021, 135 countries –Costa Rica amongst them– decided to implement a 15% “Global Minimum Tax” (GMT) on multinational enterprises (MNE) that generate gross annual revenues of EUR750 million (US$812 million) or more. The GMT came into effect starting 2024, and 55 jurisdictions have already taken steps to comply. 

The GMT is designed to make it desirable for each jurisdiction to implement the tax. If the tax is not collected in one jurisdiction where the MNEs operate, it will be collected by the rest of the jurisdictions where the GMT is in place and where those same MNEs do business. Jurisdictions that provide tax exemptions for MNEs are compelled to review their strategy to attract foreign investment.  

For the past few decades, the country’s economic growth has increasingly relied on the FTZ regime […] Many of the largest MNEs in Costa Rica operate in this regime.

Should you continue to offer tax exemptions to MNEs to do business in your country when these same companies will ultimately pay the GMT elsewhere for the business they conducted in your territory? 

Costa Rica does not have a simple answer to this question.  For the past few decades, the country’s economic growth has increasingly relied on the free trade zone (FTZ) regime. This regime provides an array of tax exemptions and other benefits for companies that apply. The benefits remain in place for eight years and can be renewed for half that time provided certain reinvestment thresholds are met. For at least the first 14 years of operation, companies may enjoy 100% and later 50% exemption of corporate income tax, dividend tax, value added tax and withholding taxes. The regime was initially structured to boost exports, but an update to comply with international commitments expanded the operations to the local market. 

Can Costa Rica find a midpoint between its international commitments and its long-term development strategy?

Currently, there are around 500 companies operating under the FTZ regime in Costa Rica.  These companies provide 248,000 jobs for a population that barely surpasses 5 million.  Over half of the direct foreign investment that Costa Rica received last year was bound to companies in this regime. In 2023, 60% of the country’s exports were produced by companies under the FTZ.  For 2023, analysts attribute 15% of the country’s Gross Internal Product to FTZ companies.

Many of the largest MNEs in Costa Rica operate in the FTZ regime.  Intel, Amazon, Microsoft, Coca Cola, Abbott, Pfizer, AT&T, CMA-CGM, AstraZeneca, Boston Scientific, Chiquita, Kimberly Clark and Roche are but a few. 

Costa Rica is at a crossroad. The country joined the Organization for Economic Development and Cooperation (OECD) in 2021, and, as a member, is expected to implement the GMT. But the GMT fundamentally goes against the tax exemptions granted by the FTZ regime. 

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So, should Costa Rica implement the GMT? Or should the country continue to offer tax exemptions to companies that will pay the global tax regardless, though in the other jurisdictions that actually enforce it?

Will Costa Rica budge? Or can it find a midpoint between its international commitments and its long-term development strategy?

Costa Rican authorities wish this decision didn’t fall on them. But, regardless of their wishes, they will eventually have to solve this dilemma.

Mariela Hernandez

Mariela is a Partner at ECIJA Costa Rica’s fiscal, dispute resolution practice.

She began her career as a legal counsel at Costa Rica’s Ministry of Economy, Industry and Commerce, where she participated in numerous local and international forums on regional economic integration, industry regulation and consumer rights.

Mariel has provided her services as a legal counsel to businesses in the hotel, construction, electric, agroindustrial, chemical and food industries.

She has a masters in law from Georgetown University and graduated with honors from law school in the University of Costa Rica. She’s also a member of Costa Rica’s School for Attorneys, of the Worldwide Association of Notable Alumni and the International Fiscal Association.

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