Tax Evasion and Avoidance: Challenges for Tax Collection and Tax Equity

By Jason Brenes.

In Costa Rica, as in many countries, tax evasion and avoidance are problems that have affected tax collection, limiting the State's ability to finance projects in areas such as health, education and infrastructure. These practices generate inequity in the tax system, since they disproportionately burden compliant taxpayers and deepen economic inequalities.

Tax evasion refers to the deliberate failure to declare income, inflating deductions or avoiding paying taxes using illegal methods. This problem represents a loss for the country, affecting the national budget. In this country, the most common areas where evasion is found are: Value Added Tax (VAT), Income Tax (ISR) and customs evasion. Informality in the Costa Rican economy, which affects approximately 40% of the workforce, contributes to tax evasion, since many transactions are not reported to the Ministry of Finance (General Customs Law and Code of Tax Norms and Procedures).

On the other hand, tax avoidance, although technically legal, represents an ethical and fiscal challenge. Large companies and corporations often employ strategies to minimize their tax burden, using tax incentives designed to encourage investments in certain areas or economic sectors. Examples of this in our country are: the use of exemptions, transfer pricing and aggressive deductions (Income Tax Law No. 7092 and its Regulations, Chapter on Transfer Pricing) .

According to the Ministry of Finance, VAT and ISR evasion represents around 6-8% of the Gross Domestic Product (GDP). These losses limit the Government's ability to reduce public debt, which by early 2025 exceeds 60% of GDP; in addition, it makes it difficult to finance important social programs and improve critical infrastructure. These practices generate distrust in the tax system, encouraging a vicious circle in which more taxpayers seek to evade or avoid taxes.

Despite progress, Costa Rica faces significant challenges in the fight against tax evasion and avoidance, including: reducing informality, simplifying the tax system, pursuing large evaders and tax education (Law to Improve the Fight against Tax Fraud and OECD commitments) .

Conclusion

Tax evasion and avoidance represent significant challenges for the Costa Rican tax system, affecting both tax collection and the perception of equity. Although the country has made progress in implementing measures to strengthen tax compliance, significant challenges remain.

Reducing informality, simplifying processes and more effective oversight are key steps to closing gaps and improving trust in institutions. With a coordinated and transparent approach, Costa Rica will be able to secure the resources necessary for its development, thus strengthening economic stability and social well-being.