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Costa Rica – The Tax Reform and Labor Law
Publications || 2018 || Costa Rica – The Tax Reform and Labor Law

Costa Rica – The Tax Reform and Labor Law

by charbds, 10 December, 2018

December 10, 2018
Cindy Sabat / csabat@bdsasesores.com
Attorney at Law BDS Asesores

The Law on the Strengthening of Public Finances (#9635) was published in the Official Gazette last Tuesday December 4, which aside from one of the most notorious changes consisting in the replacement of the sales tax by the value added tax (VAT), covers several issues in connection with labor law, both public and private, namely: ceilings for income tax on salaries, reduction of tax rates for small and mid-sized companies, and increased tax on surplus of solidarist associations and cooperatives; this piece, however, will especially address the contents of Title III which amends the Law on Salaries of Public Administration Workers (Act 2166).

As for the new ceilings for income tax on salaries, it should be noted that an income up to ¢817,000 per month will not be subject to income tax; on the excess of said amount, up to ¢1,226,000, the employee should pay 10%; over ¢1,226,000 – and up to ¢2,103,000, the employee should pay 15%; over ¢2,103,000 per month and up to ¢4,205,000, the employee should pay 20%; and finally, over ¢4,205,000 per month, the employee should pay 25%. These tax caps will become effective as from July 1, 2019.

The provisions of Title III, which are effective since December 04, have amended certain aspects of the Law on Salaries of Public Administration Workers, indicating in its Article 26 its scope of application: Central Administration (Executive, Legislative, Judiciary, and the Supreme Electoral Court (TSE), as well as their dependent entities) and Decentralized Administration (Autonomous and semi-autonomous entities, and municipalities).

The Law has broadly defined what should be understood as full-time job, the term for this concept (not less than 1 year but no longer than 5), as well as the compensation requirements and percentages in order to qualify for this full-time job incentive (Article 27 et seq.).

As for the unemployment pay, it sets forth that in case of Central and Decentralized Administration employees, the provisions of the Labor Code will apply: an 8-year cap, with a 12-year exception for employees covered by collective bargaining agreements currently in force (Articles 26, 39 and transitory provision 27).

It limits the remuneration for discretion and confidentiality, as well as for accumulation of years of service for this sector. It also provides for caps to the remuneration of public servants with elected offices, board members, officers and directors of institutions serving under a competition regime (Article 40 et seq.).

It changes the frequency of payment of salaries to the aforementioned officers to a monthly payment modality with a fortnightly advance payment, establishing a 3-month term to adjust said modality (Article 52 and Transitory provision 29).

It further elaborates on the mechanism to assess employee performance in the public administration, which applicable guidelines will be defined by the MIDEPLAN, subjecting the annual bonus or any other incentive, job promotion or recognition to the results of the annual performance assessment. Following the entry into force of this Law, the annual bonus incentive (Article 26 officials) will consist of a fixed amount for each salary level, and said amount will not vary according to the Law.  As for the performance assessment, a 6-month term has been granted for its application (Transitory provision 33).

The contents of Transitory provision 36 is also a relevant topic, which forces public entity leaders to denounce collective bargaining agreements upon their expiration, which should be adapted to this Reform in case of being renegotiated.

Finally, and with respect to the above referred public servants, it sets forth that the salary effective upon entry into force of the Law (December 4, 2018) may not be reduced and any vested rights of said employees should be honored. Also, and in accordance with Transitory provision 32, the Regulation to the Law should be enacted within a 6-month period, which is why the analysis of this Law has only started and it would be advisable to stay alert on any future expansions and more concrete details in connection with the application thereof as a result of the enactment of its Regulation.

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