Retire To Costa Rica

Why Costa Rica May Become One Of The Least Attractive Retirement Choices In The World

Dec. 19, 2011, San Jose, Costa Rica: If proposed tax changes in Costa Rica are passed, Costa Rica will become one of the least appealing overseas retirement choices in the world.

Dear Live and Invest Overseas Reader,

The Costa Rica legislature is trying to fast-track new tax legislation...and the opposition has filed a suit with the Supreme Court to stop the fast-tracking. Not the legislation itself, just the fast-tracking.

Politics aside, the proposed tax changes show that a government (any government) can shift policies at a moment's notice. Among the more disturbing changes in the proposed law include allowances for taxing residents on worldwide income and for taxing income in the free trade zones (whose names, I guess, would need to be changed).

The breadth and depth of these proposed new taxes is easily explained. Costa Rica, like so many countries right now, is broke. They have too much government and welfare and too little income. So they are looking for ways to increase their revenues.

These proposed new taxes are not the answer, and, likely, the only result if they are passed is that productive residents and businesses will move themselves and their assets out of Costa Rica to somewhere more tax-friendly.

An expat friend six years resident in Costa Rica says he does not believe the proposed tax on residents' worldwide income or the proposed tax on revenue generated in the "free trade" zones will pass...as they'd be suicide for the current administration. If Costa Rica does start taxing residents on worldwide income, my friend will be among the first on the next plane out of the country.

Originally from the United Kingdom, my friend has been living outside his home country for nearly three decades, in Asia and now Costa Rica. He's a successful investor and businessman. The kind of guy I mean when I talk about a global citizen. He chose to live in Costa Rica for several reasons including the country's jurisdictional taxation system. If they change that, he'll fast-track changing his country of residency.

I've never recommended Costa Rica for any aspect of internationalizing your life, because I've never much liked Costa Rica. However, this current situation offers a good case study.

If a country raises taxes on productive citizens, some percentage of them will take their productivity elsewhere. If a country raises taxes on productive residents who aren't citizens as Costa Rica is considering doing, they're all going to leave. Those like my friend who are set up as global citizens, with other options at the ready, will leave immediately.

The backlash from all of the tax changes in Costa Rica, if they're made law, could be huge. Firms have established themselves in this country's free trade zones because they wanted to operate their trades free of tax. If suddenly they must pay a tax that they never figured into their budgets, many will move on. Every country in Central America has free trade zones, and most businesses operating in these zones are renting their space. So unless they are doing some kind of added value manufacturing that requires specific equipment that is difficult to move or expensive to reproduce, you could see a mass exodus of businesses from Costa Rica within a few months of the new taxes becoming law.

A tax on worldwide income will push out non-Costa Ricans who have no ties to the country other than the fact that they like living there...people like my friend. This would include many of the retirees who have moved to this country over the past three decades. And it would immediately make Costa Rica one of the most unappealing retirement choices in the world...along with every other country that taxes the worldwide income of its residents.

Free trade zone businesses may not currently pay income taxes, but they employ thousands of people, and those people pay taxes (and the businesses pay social taxes). Residents not earning an income in Costa Rica currently pay no income taxes to Costa Rica, but they pay sales tax (slated to go from 13% to 14% and to be broadened to include services) and property tax, and many employ maids and gardeners.

The negative impact of the proposed tax changes likely outweighs any perceived benefits of additional tax income. The more soberly you think through the consequences, the clearer it becomes that passing these two new taxes would be just about the dumbest thing the Costa Rican government could do right now.

But governments are known for doing dumb things.

Here's my free advice for anyone involved with the Costa Rican government and looking for a strategy for reversing the country's current fiscal dilemma:

First, reduce the number of government employees.

Second, become more efficient at collecting the taxes that are already on the books.

Meantime, what should the resident retiree in Costa Rica make of all this?

The same thing both the resident and the would-be retiree anywhere should make of it:

You need options.

My friend living in San Jose has lived in a half-dozen countries over the past three decades, and he has flags planted many places. For him, making a quick exit from Costa Rica, should it become the overly onerous tax jurisdiction it's toying with becoming, won't be that big a deal. So, whatever happens in Costa Rica, he's not too worried.

As I said, this current situation in Costa Rica is a good case study. The thing to take away from it is that the situation wherever you're living or doing business could change quickly. New taxes can be levied. Security can become an issue. Or politics. Or inflation.

What do you do if the country where you've chosen to restart your life becomes less appealing sometime down the line? You exercise another option.

Lief Simon

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• Receiving Social Security Overseas