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Tax law changes in Costa Rica

One of the main topics that is being discussed currently in the country, and that still many don´t have clear, is the implementation of the new Value Added Tax (VAT), and the changes made to the Income Tax.

It is important to be aware of these changes to know in which way it will affect each one of us, and make necessary changes to adapt to it in our best interests, personally as well as how it effects our profession.

About the Income Tax

These are the main variations in the new law of the Income Tax:

• Salaries with an excess of ¢ 793,000 and up to ¢ 2,103,000 will pay between 10% and 15%, the same amount of tax they pay today. Between ¢ 2.103.000 to ¢ 4.205.000 will pay 20% and above that amount will be taxed 25%, these are new aliquots so from these amounts a little more income tax will be paid.

• The deduction for individuals and employees from their payments to the Caja Costarricense del Seguro Social Sickness and Maternity Insurance, is recognized.

• With this measure, 97% of wage earners will not feel any change with the new law.

• The new Income Tax is taxed at 15% on capital income, as is the case, for example, with the earnings obtained from the transfer of real estate (except in the case of the habitual residence).

Another change will affect non-domiciled individuals or legal entities that own real estate in Costa Rica. When selling the asset, they will be subject to a 2.5% withholding tax.

• Investments from abroad are taxed at 15%, that is, those originated, among others, in bank deposits abroad, when they are directly or indirectly brought into the country.

• The fiscal year is modified to the calendar year, instead of the current tax year ending on September 30th, it will be now from January 1 to December 31.

About the Value Added Tax (VAT)

What is it?

It is a tax that replaces the current General Sales Tax (IGV), and it taxes all sales of goods and the provision of services.

The system that applies the VAT taxes each of the stages of production of goods or services, in such a way that the producer can deduct the tax paid in each of the stages where he adds value to the goods or services that sells or lends.

Main differences of the VAT with respect to the current Sales Tax:

•        The VAT levies, by rule, all sales of goods and the rendering of services, unlike the VAT that taxes sales and, by exception, some services. This is what is known as the extension of the base.

•        The VAT introduces a system of full financial deduction unlike the IGV that has a partial financial deduction.

•        The VAT will be returned to people with lower incomes and in a situation of poverty or vulnerability, equivalent to 40% of national households. The maximum term will begin to be applied 24 months after the law enters into force.

•        Currently the Sales Tax is 13% and it is applied to products and some services. The VAT will be applied to all goods and services (except some that are exempt). Unlike what happens with the Sales Tax, which is paid equally by all consumers, with VAT will be returned the full tax to people with lower incomes and in vulnerable condition.

This is how the VAT will be charged:

– 13% to all product and services (there are some goods and services that are extent which are also listed in the VAT Law.

– 4% tax on airlines tickets and private healthcare services.

– 2% tax on medical products, raw materials and machinery used for production, insurance premiums, purchase and sale of university issued products and service, and private education.

– 1% Basic food, and the machinery, services and supplies for its production. Food for animals, veterinary products and agricultural and fishing inputs are pending in regulation.

The following are some of the exceptions to the VAT, but are not limited to:

– Electricity consumption of less than 280 kW / h

– Water consumption less than 30 cubic meters

– Exports of goods and sales of goods or services for free trade zones

– Commissions paid to complementary pension operators

– Rental of housing where the rental amount is less than the equivalent of 1.5 base salaries (646,000 Colones)

– Orthopedic equipment, rehabilitation and wheelchairs

– The goods and services provided or acquired by the Red Cross, the Costa Rican Fire Department, the Association Works of the Holy Spirit, the Earth University, the Boards of Education, the Community Development Associations and the Asadas

– Enrollment in public universities and private education

– Internal advertising space of radio and television programs

– Interest and fees for loans and credits;

– Books in any of their formats

– The fees and monthly payments of professional associations

– Premiums for labor, agricultural and social interest housing

– Services of livestock auctions

– Care and elderly care networks, etc.


It should be noted that the official document with respect to changes in these issues has not been finalized or presented, but with the information that it is already out there we can prepare properly for the upcoming changes.

These are some of the aspects to consider in regards to the new VAT for all business owners and service providers:

•        The VAT is a new law that starts on July 1, 2019, and is part of the new Costa Rica’s tax reform law called “The Law on Strengthening Public Finances” (Law #20.580). You must ensure that you are registered in the VAT tax before that date.

•        The sale of goods was already taxed and maintained; therefore, the sale price is maintained.

•        In terms of services, with the current law are not taxed, but with the new law will be taxed. Therefore, the sale price should be increased or amortized to its customers when it provides services as of July 1, adding in most cases 13%.

•        You must review the activities that you have registered that are correct; otherwise, they must be varied and recorded correctly.

•        You must issue electronic invoice for each sale, except if it is of the simplified regime, and you must request electronic invoice for each purchase.

•        Be clear that you must accumulate the VAT collected from sales and VAT paid for purchases month after month. The difference is the tax payable to the Treasury on the 15th of the following month.

•        At 15 days of the following month, you must submit the VAT return with the details:

1.       VAT charged on sales, less VAT paid on purchases.

2.       The balance payable is the difference. If the balance is the opposite, you have a balance in favor, for the following month.

3.       Every month you must declare without distinction the balance you have to avoid a fine for not presenting the declaration.

4.       It must also be registered in the Income Tax and present the respective declaration at least on December 15, 2019.

References:

https://webcache.googleusercontent.com/search?q=cache:FRC58K1F_AQJ:https://www.hacienda.go.cr/docs/55c8fc6e0b4fa_Preguntas%2520y%2520respuestas%2520sobre%2520IVA%2520y%2520Renta.docx+&cd=1&hl=es&ct=clnk&gl=cr

https://www.larepublica.net/noticia/varias-cosas-que-debe-saber-del-iva-y-que-de-seguro-desconocia

http://www.mondaq.com/x/770546/sales+taxes+VAT+GST/How+tax+reform+in+Costa+Rica+will+affect+your+business

https://www.larepublica.net/noticia/varias-cosas-que-debe-saber-del-iva-y-que-de-seguro-desconocia

Photo reference:

https://www.estrategiaynegocios.net/centroamericaymundo/1292502-330/costa-rica-estudian-impuesto-a-turistas-que-ingresen-por-tierra-o-mar

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