Ley 8683, or commonly known as the Impuesto Solidario para el Fortalecimiento de Programas de Vivienda, is now the law in Costa Rica.  What does all that mean?  It means that if you own a home with a value greater than around $175,000, you have a new tax to pay.  In English you would call it a tax on luxury homes.  In Spanish, impuesto a casas de lujo.  In the aforementioned case of a home “valued” at $175,000, the tax would be .0025%.  That is the case up to around $440,000, using current exchange rates to convert colones, the local currency, to dollars.  The scale is graduated and tops out at .0055% for homes valued over $1,500,000 (again, using today’s exchange rate).  The rub comes in calculating value.  Up until now home owners could pretty much declare any darn value they wanted to.  Not any more.  The Ministro de Hacienda is getting downright scientific about all this, even to the point of developing a computer program that owners can use to calculate the value of the home.  The report of value must be filed within three months of the law going into effect, which was October 1, 2009.  The tax must be paid within the first 15 days of January, 2010.  The calculation of value is very complicated and goes strictly by the guidelines of value for various types of structures (and that includes the home and other improvements such as pools, jacuzzis, garages, etc.).  All of it is laid out in a manual, or you can just download the computer program, which happens to be in Spanish of course.  I downloaded it today and began to play around with it.  Just do not change the suggested “directory” when going through the download instructions, or it won’t work.  Couple of things to note here.  First, this tax is in addition to the normal quaterly property tax, up until now which was based on the declared value.  Not any more, because in the future even that old tax will be based on what you report under the guidelines of the new “additional luxury tax.”  So if you report a $200,000 value under the new tax, you could end up paying $500 for the old tax (previously based on the “declared value” of probably close to nothing), plus another $500 for the new luxury tax, for a total of $1,000 annually.  You have to reevaluate every three years, or in any year when an improvement was made to the property.  The money collected from this new tax is supposed to be exclusively earmarked to eliminate “tugurios,” or shacks, and provide adequate housing for the folks that live in them.  That is a good thing.  My only fear is what the implementation of this tax might mean for the Costa Rica real estate market.  It is one thing to help the poor, but if in so doing you greatly discourage foreign investment, are you not cutting off your nose to spite your face?  Only time will tell.

You Can Download the Tax Evaluator Here (zip file)

The tourism sector in Costa Rica attracted $223 million foreign direct investment (FDI) in the first six months of 2009.  That is less than in 2007 and 2008, but not nearly as drastic a decrease as many had predicted.  Prime reasons supporting the continued strong demand are the many marina projects that are now underway, such as the Marina Papagayo in Guanacaste.  Direct investment in tourism represented about 38% of the total FDI.  IN 2008, investment in tourism represented only 14% of the 2 billion in total FDI that year.  Gonzalo Vargas, president of CANATUR (the Costa Rican Tourism Chamber), commented in an article in El Financiero, that while tourist arrival numbers are down, investors are thinking more in the long term.  Overall, however, FDI this year is way down, 50% less than in 2008.  The first six months of this year recorded a total FDI of around $592 million compared with over $1 billion last year.  The Central Bank predicts that FDI will be down 30% for the full year and will recuperate at a slow pace next year.  The sectors that have suffered the most are real estate and industry, which enjoyed strong showings in previous years.  The industrial sector’s share of total FDI was 17.2% for the first six months.  Its share of total FDI has been falling since 2004 as other sectors, principally tourism and real estate, have been on the steady rise. 

Link to Article in El Financiero

Once more this is the case as the U.S. fast food chain Wendy’s will open another restaurant in Costa Rica.  The franchise owner in Costa Rica, Comidas Rápidas Wentica, will open its newest location in the mall Paseo de las Flores in Heredia.  This will be its fourth restaurant, adding to others in Santa Ana, San Pedro and Desamparados. This newest restaurant will measure 400 square meters and have the capacity to feed 150 persons.  This installation will feature a playground, auto-service and ample parking.  The mall is located directly across the highway from Universidad Interamericana, which adds to the appeal of the location for Wentica.  The new operation at Paseo las Flores will employ 35 to 40 ticos.  The Wendy’s chain first arrived to Costa Rica in 2006 with a restaurant in the center of San Jose, in the same location that previously was occupied by the defunct chain, Hardees.  An executive with the franchisee told La Nación that the company plans to continue its expansion in the GAM (Gran Area Metropolitana).  Specifically he mentioned the possibility of future sites in Curridabat, Paseo Colón, La Sabana, Escazu and the Juan Santamaría International airport.  It all depends on the attractiveness of the location and the price, said the exec, who added that the chains experience in Costa Rica has been very favorable.  The investment in this new location is around $1 million.

Link to Article in La Nación

The “crisis economica” apparently is not interfering with the appetites of the ticos for U.S.-style fast food.  Two major franchise operators in the country are expanding their locations with an investment of $6.5 million.  Quick Service Restaurants (QSR) operates Kentucky Fried Chicken (KFC), Quiznos and Teriyaki restaurants.  It will open a new location for each of its three restaurants in the Milla Platino commercial center in Santa Ana.  All together QSR operates 45 sites around the country (24 of KFC, 16 of Quiznos and 5 of Teriyaki) and employs some 1,000 persons.  The total investment in the new stores will be $3.5 million.  Arcos Dorados is an operator of McDonalds restaurants and will add three locations to its existing 30 with an investment of $3 million.  Other franchise operators that will be expanding in the near future include Aguaceros de Esperanza, which in the next four years will open four Applebee’s restaurants.  The Guatemalan company, Campero, operator of fried chicken restaurants, has plans to open three new locations in Escazú, Nicoya and Pérez Zeledon, which will boost their total number to 17.  In addition to new locations, many of the Costa Rican operators are promoting new menu items and price points geared towards tough economic times.

Link to Aricle in La Nación

The past six months, from December of 2008 until the end of May 2009, the cost of living in Costa Rica did not even rise by 1%.  This is the smallest increase in a 6-month period since inflation began to be monitored in Costa Rica. To put this into perspective, during the last 27 years, Costa Rica has experienced an average annual inflation rate of 10%.  The Banco Central had previously predicted inflation this year to be between 7% and 9%.  Inflation is tracked in Costa Rica by the Instituto Nacional de Estadistica y Census (INEC) and is based on price changes within a basket of 292 goods and services.  In the month of May, about half of the goods and services contained in the “basket” sustained a price increase, 38% decreased in price and 10% remained at the same level.  However, those that are considered most key in the index were included among those that decreased.  For instance, the price of tomatoes fell 40% with respect to April, the price of gasoline fell by 2.3% and the price of potatoes by 11%.  Prices of food and transportation cost are leading the way to lower inflation it seems, and this is in large part due to the impact of the worldwide economic crisis.  There is simply far less demand and this is translating into price deflation.  One area that did sustain a significant increase is the category of expenses related to the maintaining a home (in Spanish, “alquiler y servicios de la vivienda”) due to the rise in electricity costs. For the coming months, increases are expected in many groceries as well as gasoline, however, the regulatory authorities are studying the potential impact of lowering the electric tariff charged by ICE, which would have an important impact on the price indicator.

Link to Article in La Nación

The Banco Central of Costa Rica has revised its forecast of economic performance for the country in 2009, down from 2.2% to -1.8%.  The reason being that the crisis that has hit the U.S. hard and now spread globally is having a greater impact than earlier predicted.  On a brighter note, performance for the coming year, 2010, is expected to turn back to the black, with growth forecast at 2.2%.  In 2008, the economy grew at 2.6%.  Banco Central estimated that the year will close with inflation at 8%, which is a tad less that what had been previously predicted.  The sectors of the economy that will be most affected are manufacturing and agriculture, predicted to sustain falls of -9.3% and -4.2% respectively.  Other sectors that will suffer are retailers, restaurants, hotels and construction.  Banco Central will make another revision in June.

Link to Article in La Nación

The IMF (International Monetary Fund) says that Costa Rica, as well as other countries of Latin America, will recover faster from the economic crisis than more developed countries.  Specifically speaking of Costa Rica on invitation from the Central Bank, IMF sub-director Miguel Savastano, stated that Costa Rica is in good position to recuperate because its financial system remains solid.  Savastano praised the government’s contra-cyclical fiscal policies such as the increase in infrastructure spending and programs to ease the impact of the crisis on the poor.  In his report Savastano predicted GDP growth of 0.5% this year and 1.5% in 2010.  For Latin America as a whole the prediction is for deceleration of growth by -1.5% in 2009 and a rebound to 1.6% in 2010.  However, Central America is predicted to fare better, with growth this year of 0.9% and 1.9% in 2010.  Savastano did point out that this year the effects of the global economic crisis would be felt in Costa Rica with reductions in both imports and exports, less internal demand and tighter credit conditions.  Savastano also praised the Central Bank’s monetary policy, including a system of flexible exchange rates and goals to decrease inflation.

Link to IMF Costa Rica Report

It is official, according to President Oscar Arias and the director of the Costa Rican Central Bank, Francisco de Paula Gutiérrez, Costa Rica is in “recession.”  Defined as two trimesters, or six consecutive months, of negative growth compared to the year prior, Costa Rica entered into recession as of the end of March.  However, Arias pointed out that news that the country is in recession should be of no surprise to anyone.  Some of Costa Rica’s most important trading partners, including the U.S., Mexico and Brazil, have already declared their economies to be in recession.  Monday the Central Bank announced that in March of this year the Imae (or monthly indicator of economic activity) showed that the economy contracted 6.2% as compared with the same period a year earlier….thus completing six consecutive months of negative growth.  Gutiérrez highlighted that the sectors most affected by the slowdown are those most tied with the international economy, including agriculture, manufacturing, hotels, and construction directly related to foreign investment.  The last time Costa Rica experienced recession was in 2000-2001, but Gutiérrez said that the slowdown this time is worse.  The Caja (or Costa Rica Social Security Organization) stated that during the period between October 2008 (when the slowdown in the U.S. reached “crisis” proportions) and March 2009, there have been a total of 24,000 jobs lost in the private sector.

Link to Article in La Nación

The Yankees are coming, the Yankees are coming!  There are parts of Costa Rica, specifically areas such as Escazu and Santa Ana, that look more like suburban neighborhoods of the U.S. than they do of Costa Rica.  Nevertheless the trend doesn’t seem to be reversing.  The latest news is that the Costa Rican corporation known as Aguaceros de Esperanza has acquired the franchises to open four Applebee’s restaurants in the country.  Each restaurant has a price tag of around $5 million.  Plans are to inaugurate the first restaurant towards the end of this year in Santa Ana.  Others locations will be Escazu, Sabanilla de Montes de Oca and a fourth location yet to be identified.  Each restaurant will be between 400 and 500 square meters and host 250 patrons.  Each restaurant will employ about 80 persons. Cristian Villegas, president of the Aguaceros group, assured that prices will be lower than other chains in Costa Rica such as Friday’s (which I can attest is much pricier than in the U.S.).  Villegas also stated that the design of each restaurant will be quite different than what is the norm for Applebee’s in the U.S.  The group also has the franchise for Panama and plans to open its first restaurant there in 2010.  The head office at Applebee’s offered the Costa Rican group first right of refusal for franchise rights in Nicaragua and Argentina as well, but for now the group decided to focus its efforts in Costa Rica and Panama.

Link to Article in La Nación

Is the question we get frequently from our customers arriving on Costa Rica vacation packages.  According to a recent article El Financiero that details a decline in flights into the two international airports of 4%, not so good is the answer.  However, according to Carlos Benavides, our Tourism Minister, Costa Rica is fairing much better than other countries, such as the U.S. and Europe.  Here are the facts as reported in the article.  The fall in flights was from 395 weekly flights in February of 2008 to 378 in 2009, a decline of 17 flights per week, or -4%.  The decrease seems to be accelerating since in January 2009 compared to January 2008, the decline was -.52%.  The number of airlines with flights in and out of the country has been declining, from 20 in December of 2007 to 16 in December 2008.  Those that have left the country include Martinair, AirComet, and Cubana de Aviación.  Another that could leave the market soon is the Colombian airline, Sociedad Aeronáutica de Medellín.  However, on the brighter side, Continental has actually been increasing flights, adding a third flight between Liberia and Houstan and also a third between San José and Newark.  Continental has enjoyed strong growth in passengers in recent years, having carried a total of 400,002 in 2006 and 499,854 in 2007 (these figures are for flights into and out of the Juan Santamaría airport in Alajuela).  Angélica Solano, director of the group known as Asociación de Líneas Aéreas, stated that while the U.S. market has decreased, the South American market, where the economic crisis is being felt to a lesser degree, still shows promise.  The U.S. airlines that count with the strongest volume are Continental and American.  No figures were provided in the article for American.  For the entire year 2008, 3,341,917 passengers were carried into and out of the Juan Santamaría airport.  In 2007, 3,982,004 were carried from all three of Costa Rica’s airports (Juan Santamaría in Alajuela, Daniel Oduber in Liberia and Tobías Bolaños in Pavas).