This report provides a comprehensive tax policy assessment of Costa Rica's current tax system as well as tax policy reform recommendations. The report is divided into five chapters, starting with a general chapter providing an overview of key macroeconomic and tax revenue trends (Chapter 1), followed by an assessment of the main types of taxes of the Costa Rican tax system, including corporate income taxes (Chapter 2), personal income taxes and social security contributions (Chapter 3), the general sales tax (Chapter 4) and environmentally-related taxes (Chapter 5).

Costa Rica's tax revenues are close to the Latin American and Caribbean (LAC) average but, notwithstanding recent efforts to reduce expenditure, they are insufficient to finance the country's current spending needs. Higher tax revenues should primarily come from broadening tax bases as well as from enhanced efforts to tackle tax avoidance and evasion and to bring in more informal taxpayers within the formal economy.

This chapter discusses the level and composition of the tax revenue raised by Costa Rica. The chapter focuses on key macro-level indicators of the Costa Rican economy, including the country's level of economic growth, the unemployment rate, the level of inequality, the budget deficit and the country's debt level. Specific institutional design characteristics are discussed, including the earmarking of tax revenues. The chapter focuses on the level of tax avoidance and evasion in the country. The chapter also lists the country's tax reform plans. This chapter sets the scene for the in-depth tax policy discussion in the rest of the report.

This chapter discusses the corporate income tax (CIT) in Costa Rica, focusing on CIT rates and the main CIT base provisions including tax depreciation allowances. Corporate effective tax rate (ETR) calculations show the combined impact of CIT provisions on the effective tax burden on investment in Costa Rica. The chapter discusses the debt-equity bias, the taxation of foreign-source passive income and the country's narrow tax treaty network. The chapter analyses whether the tax system creates a tax-induced incentive for foreign direct investment (FDI) in Costa Rica and analyses the impact on the ETRs of the CIT incentives for companies located in the Free Trade Zones (FTZ); the analysis distinguishes between parent companies which are tax resident in a country with a worldwide or a territorial tax system.

This chapter discusses the design of the personal income tax (PIT) in Costa Rica, including the tax rate schedule and the income threshold where taxpayers start paying tax, the progressivity of the PIT, the PIT withholding system, the schedular PIT design under which different types of labour income are taxed separately and the PIT evasion by liberal professions. The chapter also discusses the design of the social security contributions (SSCs), focusing on the level of the rates and the minimum contribution threshold, as well as their impact on the incentives to work in the formal economy. The chapter discusses the impact of the lack of integration between the PIT and SSC systems. Average and marginal labour income tax wedges show the combined impact of PITs and SSCs on work incentives.

This chapter discusses the sales tax in Costa Rica, which has a narrow tax base and does not apply to services in general. The impact on domestic and international trade of the sales tax is discussed. The chapter also focuses on the regressivity of the sales tax at the top of the income distribution as a result of sales tax exemptions which primarily benefit the wealthy. Costa Rica is planning to introduce a welldesigned and broad-based valued added tax (VAT) system, covering both goods and services, to be able to generate additional revenues and remove existing sales tax distortions. Costa Rica's plans to mitigate the distributional effects of a broadbased VAT through well-targeted transfers are also discussed.

This chapter discusses environmentally related taxes in Costa Rica, and some broader tax provisions that influence environmental outcomes. The chapter discusses how the environmental effectiveness of taxation can be improved while tax revenues can be increased. The chapter analyses the design of the fuel tax and discusses whether its rates could be better aligned with the external costs of fuel use. The sales and import tax exemptions for fuels translate into a de facto preferential treatment of fuels compared to other products. Costa Rica's vehicle taxes are discussed, and the chapter suggests how they could be modified to better align with environmental policy objectives. In addition, the chapter comments on the differential taxation of private and public electricity producers, the recent initiative for a tax on non-reusable plastic containers, and the cost-effectiveness of the country's Payments for Environmental Services Programme.