tax reform for market development stock

Abstract

For many people, the high interest rates charged in Costa Rica on credit, banking or non-bank, are a disincentive to investment and a brake on economic revival. But, the problem is more complicated than it appears to be with the naked eye.
Costa Rican tax legislation contains provisions that allow companies to deduct from the taxable basis of income tax (ISR), the total interest expense they incur to generate their production.
In times of inflation and when interest rates are adjustable, this provision makes companies taxed at the highest rates on the ISR scale have a low cost of credit, in some cases less than the inflation rate. That is, net of tax, the actual interest they pay on their liabilities can become so small, that it even becomes negative, as explained in detail below.
This introduces distortions in the efficient allocation of productive resources. The effect on investment in physical assets is unclear, because high tax rates tend to decrease it, while the deduction of total interest expense encourages it. But, it is possible to conclude that when credit is artificially lowered, capital accumulation in Costa Rica is done inefficiently. Companies wishing to take advantage of the deduction of total interest expenditure are intended to be financed almost exclusively through indebtedness, without a healthy combination with the issuance of shares.