Wednesday 5 October 2022

Construction sector concerned about the impact that VAT adjustment in effect starting today

Tax goes from 4% to 8% starting today, September 1, for engineering, architecture, topography and civil works construction services

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05 October 2022 - At The Banks - BCCR

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QCOSTARICA – The Value Added Tax (VAT) – Impuesto al Valor Agregado (IVA) in Spanish – for engineering, architecture, surveying, and civil engineering services will go from 4% to 8% starting today, September 1, which is causing concern on the part of representatives of the sector, due to the impact that the increase would have on the economic reactivation of the country.

Image for illustrative purposes

The data from the Monthly Index of Economic Activity (IMAE) as of June 2022 showed a decrease of 20.7% in the construction sector, the largest decrease since September 2019, with a drop in building niches, both offices such as apartments, middle and low class housing, industrial buildings, commercial premises and public infrastructure.

Despite the fact that, during the first quarter of 2022, private construction grew by an average of 17.9%, for the months of April, May, and June there was a slowdown in activity when compared to the same months of 2021.

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According to the Chamber of Construction, on average, in those three months, the behavior reflected a drop of -13%, essentially driven by the significant slowdown that occurred in June.

Carlos Trejos, President of the Chamber pointed out that this VAT adjustment will have a severe impact on the economic reactivation of the sector, affected by the current situation in the country and the pressures on costs, as a result of the increase in international prices of raw materials.

“The construction sector is going through a critical moment. The most recent IMAE data published by the Central Bank of Costa Rica shows a decrease in the levels of economic activity in our sector below those of February 2020, before the pandemic,” said Trejos.

From his perspective, there are variables that have influenced this slowdown, such as the intense growth in costs and the general uncertainty regarding economic stability, which have made recovery difficult, so the entry into force of this VAT adjustment, undoubtedly, it will have a negative effect, not only for the sector but also for families and companies with plans to build.

This adjustment corresponds to the application of Law No. 9635, Law to Strengthen Public Finances (Ley de Fortalecimiento de las Finanzas Públicas), for the promotion of economic reactivation, which established that the construction sector would have a 100% exemption up to August 31, 2021, then it would go to 4% up to August 31, 2022, and from September 1, 2022, will be 8%.

As of September 1, 2023, the tax will go back to 13% .

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“Given the difficult situation that the sector is going through, from the Chamber of Construction we consider it a priority for the Government to attend to a series of key issues for the country that would be a complement to the measures in terms of business facilitation – recently announced – since they need clear and forceful actions to promote economic reactivation,” said Trejos.

He pointed out that it is urgent to address the deterioration of the national infrastructure and make decisive progress in achieving a real change in the management of public works, based on better planning and carrying out the pre-engineering processes that are required.

Also, it is necessary to use mechanisms that guarantee competition in equal conditions, as well as the best use of public resources; promote public investment, as a mechanism to achieve economic growth and to improve national competitiveness.

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