Caribbean & Central America - April 2012 (ISSN 1741-4458)

If a tax evasion scandal served as the fiscal reform’s coffin, the constitutional court’s ruling that declared the process “unconstitutional” became its tombstone. Since taking office in May 2010, President Laura Chinchilla’s top legislative goal has been to secure the approval of a fiscal reform in order to arrest the country’s soaring deficit. However, after 18 months of negotiations in the national assembly (AL), which allowed the bill to receive its first debate approval – which has effectively been rendered void by the constitutional court – the law came under attack as its main proponent and defender took centre stage in a tax evasion media exposé. The scandal forced the minister of finance, Fernando Herrero, his wife and top political advisor to President Chinchilla, Flor Isabel Rodríguez, and the head of the tax authority, Francisco Villalobos, to submit their resignations within hours of each other.

The alleged evasion was first reported by the national daily La Nación. This newspaper has already cost President Chinchilla other ministers, not least her first minister of public security, José María Tijerino Pacheco, who quit amid influence trafficking allegations. If La Nación’s initial report is anything to go by, other members of the administration could also be forced to step down. According to the daily, a dozen ministers in Chinchilla’s cabinet have been paying lower property tax than they should be. Losing three political collaborators in a 24-hour period clearly poses a challenge for the president, who wasn’t even in the country when the scandal broke and had to announce the resignation of her tax man from the landing strip as she returned from New York.

Herrero’s role as the face of the recent fiscal reform promoted by the Chinchilla administration put him in a particularly vulnerable position. Even as he endorsed tax increases and stricter controls to raise an additional US$600m per year to address the soaring fiscal deficit (which should come in at 5% of GDP in 2012), he was manipulating the system. “He [Herrero] presents his resignation because he feels that the moment has come in which the efforts that we have been putting forward for a fiscal reform and also for fighting evasion, which have been very brave, could be undermined”, President Chinchilla said in an interview with La Nación just hours after her minister had left office. But this was only the beginning.

While the local pRess lambasted the tax agency for opening an investigation into the tax return filed by a company jointly owned by Herrero and Rodríguez only after the press had reportedly found irregularities, Villalobos stole the following day’s headlines by having to quit himself. The head of the tax authority had been listed as a “doubtful debtor” since 2008 - Villalobos was included in this list in relation to his failure to pay capital gains tax in 2008.

However the government’s stumble became a fall when the IV chamber of the supreme court, generally known as the constitutional court, ruled on 10 April that the reform was “unconstitutional”. The court’s ruling was based on procedural mistakes and “substantial” errors. The first relates to a decision to extend the special period in which the 2,500 motions submitted against the reform had to be discussed, without securing the approval of the national assembly’s plenary; the second problem relates to the deputies’ failure to make public the 53 motions that were approved, and therefore changed the contents of the reform by lowering the taxes to be paid by certain sectors, before voting on the final document. According to the court, the assembly’s failure to communicate considerable changes to the bill constituted a “substantial error”. It is highly unlikely that the ruling Partido Liberación Nacional (PLN) will be able to rescue the bill because it would have to go back to the committee stage and all motions would have to be debated again before another (first) vote can take place.

• The Church to pay up?

After a series of meetings with Holy See representatives in relation to the fiscal reform negotiations, Costa Rican authorities had secured the agreement to levy income tax on Catholic Church priests in the country. Talks also yielded the agreement that clerics would make social security contributions – currently priests have access to the state’s healthcare service but are not eligible to receive state pensions. These proposals, as well as the possibility of declaring Costa Rica a lay nation in which the Roman Catholic faith would no longer be the official religion, form part of the agenda that President Laura Chinchilla will discuss with Pope Benedict XVI during a scheduled visit to the Holy See in May. Chinchilla and the Pope are expected to sign a new concordat.