Costa Rica - Network Policy

Network Policy

Telecommunications Regulation | ICT Trade Policy

Using the Framework, Policy Costa Rica would barely be in stage three, but under Telecommunications Regulations, they are bouncing between stage one and two. Costa Rica has free trade policies, low tariffs and many incentives for trade and foreign investment, while on the other hand; they have a very tight control on the telecommunication sector. In addition, the low tariffs will be eliminated by 2005 for IT and telecom equipment (Office of Telecommunication Technology).

Although there are restrictions placed on foreign investments in the state owned monopolies of insurance, telecommunications, electricity and petroleum refining, there are few significant barriers for other sectors. Furthermore, there are no restrictions on repatriation of profits other than withholding tax deductions, which may be abolished shortly.

Telecommunications Regulation

Even though the Telecommunication industry is state owned and run, they actively tried to keep the telecommunication infrastructure modernized. They have imported millions of dollars worth of telecommunication equipment from the US.

(Office of Telecommunication Technology)

In March of 2000, after a bill was passed to privatize state owned power and telecommunication services, a four-day protest with over 100,000 people ensued (Anti-Imperialist News Service). In April 2000, the Constitutional Chamber of Costa Rica’s Supreme Court ruled the initiative unconstitutional. The Costa Rican Constitution makes it illegal to sell any state-owned enterprise, but it does allow privatization provided there is an amendment to the Constitution (Office of Telecommunication Technology). With the problems Costa Rica has encountered in the past and the problems they know will occur if another privatization law is proposed, privatization in the near term future is doubtful.

The Costa Rican government has created an E-Readiness Program, aimed at the evaluation and permanent monitoring of Costa Rica’s degree of preparedness to overcome challenges and take advantage of opportunities related to the Networked World (Programa Costa Rica E-Readiness). One of its main goals is to Create awareness of the importance of follow-up studies on Costa Rica’s e-Readiness, and promote its improvement to benefit the country’s residents (Programa Costa Rica E-Readiness).

In March of 2001, the Costa Rican President set forth, a five point, “Digital Agenda”. The plan set forth to make Internet access faster, cheaper and readily accessible to all Costa Ricans (Pratt). Also, in an effort to improve the countries computer access, the government has granted free access to an e-mail box to handle transactions with any local or national authority (Bissio, 2).

ICT Trade Policy

Many foreign investment incentives have been created to facilitate trade. The “Drawback” law was created to allow enterprises that assembled products in Costa Rica for export to other markets, import all their capital machines and raw materials used in the exported product, free of import duties (Lowtax.Net-1). In addition, the final product if exported is NOT assessed any business income tax on profits.

Free Export Zones have been created within Costa Rica. These zones allow tax-free privileges are offered to industrial and agricultural business as well as certain processing and service activities. The incentives are (Lowtax.Net-1):

· Full exemption from income tax on profits for a period of 8 to 12 years from the commencement of trading and 50% exemption for a further period of 4 to 6 years;

· Exemption for the same period from customs duties on raw materials, machinery and equipment;

· Exemption for the same period from VAT and other sales taxes including consumption tax;

· Exemption from withholding tax on payments to non-residents;

· A 4-year extension of the 12-year 100% tax exception to companies that have operated in a free zone for more than 4 years and that have reinvested profits in Costa Rica.

To qualify for these incentives, an entity must locate in one of the eight tax free zones; which have easy access to ocean ports and have excellent infrastructure to support exports; obtain a license, which takes about two months to process; pay the $5,000 license deposit and in some cases meet a minimum capital requirement. Approximately 50% of the companies operating in these zones are from the US. Two such big names are Hewlett Packard and Intel.

When running an offshore business in Costa Rica, one must be fully aware of the different taxes. The main taxes are business income tax, withholding tax, employer’s social insurance and Value Added Tax.

Costa Rica’s income tax could be considered business friendly. The following rates apply to income in which its source is generated within the country of Costa Rica. Of course if an operation is set-up in one of the free trade zones and it qualifies, the tax rate is 0%. If the business has gross income less than 13.2m colones, the tax rate is 10%; if between 13.2m and 26.86m colones, the tax rate is 20%; if the gross income is greater than 26.86m colones, the tax rate is 30% (Lowtax.Net-2). There also are business friendly accounting methods allowed under the tax code; accelerated depreciation on certain types of assets, allowed to value inventories using the LIFO method, trading losses could be carried forward 5 years, interest payments are deductible, dividends received by resident corporation are not taxable.

Because of Costa Rica’s withholding tax, I don’t see the entire tax structure as very business friendly. A bill has been presented to Congress in which it will eliminate the withholding tax, but it currently is still intact. The general rule requires a 15% withholding tax is levied on dividends remitted to shareholders, loan interest repayments, commissions paid to third parties and distributions to trust funds, partnerships & sole proprietorships.

The employer’s portion of social taxes is up to 22% of gross salary. This is required for all employees, no matter if you are self-employed or a foreigner. Employer accident insurance fluctuates based on the risk and the monthly salary of the employee. Premiums vary between .5% and 22% (Lowtax.Net-2). Therefore, it is possible for employer contributions to reach 44%!

No foreigner is allowed to work in Costa Rica without first obtaining a work permit, which is valid for one year. Permits cannot be obtained until a residence permit is granted. Costa Rica is very strict on expatriates; they require 90% of the employees must be indigenous and that 85% of the salaries must be paid to Costa Ricans. This means a US expatriates VP working in Costa Rica cannot have a large salary that consumes more than 15% of total salaries, or even a smaller percentage if there are other expatriates.

Costa Rica has signed all the major international agreements regarding intellectual property and their National Assembly approved seven laws to bring the country’s legal framework in line with the WTO’s TRIPS agreement. In 2000 legislation was passed criminalizing commercial scale trademark and copyright violations. Even with these laws and agreements, it is estimated that these violations cost US firms $20.1 million in 2000, and Costa Rica is still on the Special 301 Watch List for country’s that are severe violators of intellectual property (International Intellectual Property Alliance, 90).

While Costa Rica’s copyright laws are fairly adequate, they are not uniformly enforced, and their Patent laws are deficient. Patents that are deemed to be in the “public interest” are available for only one year (Office of the US Trade Representative, 80). Trademark infringement is widespread in Costa Rica. Legal recourse is available, but it is often a long drawn out process that is very expensive. Costa Rica’s estimated business software piracy dropped from 71% of all software in 1999 to 68% in 2000, but increased to 69% in 2001. The 2001 number equates to approximately $15.6 million of losses, which means 7 in 10 business related software programs are illegally installed (International Intellectual Property Alliance, 80). It is clear that the policies and laws that were initiated are not solving the problem, so something further will need to be done.

The US and other Central American countries are discussing the Central American Free Trade Agreement. This participants plan to complete the negotiating by December 2003 (Office of the United States Trade Representative). Some of the negotiations will include liberalization in market access for e-commerce; increased transparency in government regulation and procurement; and strong protections for intellectual property.