The impact of taxing free trade zones in Costa Rica

Eric Scharf

Our partner Eric Scharf was interviewed by the Costa Rican newspaper La República. Read the original article here.

Erich Scharf, partner and founder of Sfera and president of CINDE, indicates that the governments’ initiative of taxing free trade zones would be like shooting ourselves in the foot.

His analogy emphasizes that the economy is currently seriously undermined, therefore taxing one of the few sectors that are employing personnel, even during Covid-19 times, would be an economic suicide for the country. 

Scharf spoke with the Costa Rican newspaper La República regarding the free trade zones’ situation amidst of the crisis.

What is the contribution of free trade zones to the country's economy?

The pandemic has exposed the great contribution that CINDE´s companies or free trade zones give to the country. Although there have been losses and layoffs, most companies have managed to keep their staff despite the drop in sales. Employment in free trade zones has been growing at an average rate of 10% per year since 2015 and we are talking about 120 thousand jobs and 12% employment in the private sector. They provide quality employment, progress outside the Great Metropolitan Area and important contributions to the Costa Rican Social Security close to $508 million, only in 2019.

How much has the pandemic affected the regime?

We are talking about 25 thousand jobs affected, including layoffs, suspensions and reductions in working hours. These are not jobs that will be lost in the short term, but there is a possibility that they will be lost completely if the economy does not recover soon.

In contrast, the free trade zones have generated 3,200 jobs during the pandemic and 3,000 more are expected for the second half of the year, thanks to the Cinde JobLink recruitment fair.

What has been the key to sustaining employment?

The pandemic has had more impact on some industries than others, such as mining, textiles, oil and vehicles, which is not the usual type of foreign investment that Costa Rica attracts.

In this sense, industries such as life sciences, information technologies and technology applied to the agricultural and food industry, have rather found opportunities in the country during the pandemic.

On the other hand, in the services sector it has been possible to maintain employment due to the possibility that its collaborators can work from home.

Did the Covid-19 stop any planned investment in Costa Rica?

It is difficult to say since multinationals usually take one to three years to take any formal decisions regarding their investment plans.

However, closure of borders has made it difficult for investors to get in touch with CINDE and follow up on the country's situation.

What do you think of the calls that have been made to tax-free zones as an alternative to generate new tax revenues in the face of the economic crisis?

For every dollar of exemption to free trade zones the country receives $2.5 in earnings, that is, it receives more than double the profit.

It is a counter-argument to what other economies, such as Panama, Colombia and even Ireland, have been incorporating. They are trying to avoid the exit of multinationals from their countries, considering the current difficult environments for investments.

I wonder, why shoot us in our healthy foot? If free trade zones are maintaining employment at the moment, I see no reason to affect them.

What consequences could a decision of this type bring?

The first is of legal certainty since it would mean a change in the investment conditions for companies with which the country has already negotiated under certain terms, including exemptions.

There could also be legal and economic consequences in the sense of contract violations for which the country would have to pay a lot of money as indemnification.

Another big problem is competitiveness, since, despite being an expensive country, foreign companies come here because of free trade zones’ tax exemptions.