UPDATE 3-Costa Rica takes aim at foreign investors with tax

Mon Jan 21, 2013 9:01pm EST

* Foreign investors to pay up to 38 pct tax on profits

* Finance minister says Eurobonds exempt from change

By Isabella Cota

SAN JOSE, Jan 21 (Reuters) - Costa Rica will increase the tax on foreign investors in a bid to stem potentially destabilizing capital inflows, levying a rate of up to 38 percent if investors seek to transfer profits from local share and bond investments overseas.

Low interest rates in developed economies have encouraged investors to seek higher returns in Costa Rica, where the benchmark interest rate is currently at 8.9 percent.

A new law presented to Congress on Monday will raise the current 8 percent tax on foreign investments by up to 30 percentage points. The exact amount will depend on the currency of the investment, the yield and maturity.

The measures make Costa Rica the latest emerging market to erect barriers to investment inflows, which can pressure currencies. The country's gross domestic product of $45 billion matches that of the U.S. state of Maine.

But Finance Minister Edgar Ayales told Congress that Eurobonds would be exempt. Costa Rica issued $1 billion in Eurobonds late last year in its first foray into international debt markets in nearly a decade, and the country plans to issue $4 billion in Eurobonds in the next 10 years.

The new law would mean banks with foreign clients will also have to deposit up to 25 percent of the value of any investment they make with the central bank, earning no interest. Ayales said the central bank could keep the deposit for up to 12 months, even if the term of the investment was less than that.

"We are taking these measures now. We will see what the reaction is to those measures and their impact on the problem and if necessary we will take other measures," Ayales told Congress.

Brazil also slapped taxes on foreign investments - including on short positions in foreign exchange derivatives, on foreign purchases of local debt and on credit card purchases abroad - to stem the overheating real currency.

Costa Rica, a Central American country of 4.5 million known for its beaches and high-quality coffee exports, has been struggling to keep its currency in check after a spike in the colon at the end of 2012.

Costa Rica's interest rates rose due to the country's fiscal deficit. A measure meant to shrink the deficit was rejected by a panel of judges in the supreme court last April, arguing that amendments made to the bill amounted to short cuts that were in breach of the constitution.

But on Monday, Ayales hinted at a fresh fiscal proposal.

"Because the fiscal deficit is not going to go away anytime soon, we will make an additional attempt before the end of this administration," he told congress.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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