Sunday 25 July 2021

Costa Rica is on the verge of adopting one of its biggest changes in taxes

On July 1, the country will launch the Value Added Tax (VAT) and face strong reforms to income tax, an adjustment that will touch the lives of thousands of Costa Rican households and businesses

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Starting July 1, 2019, the economic life of Costa Rican households and businesses will face changes. On this day, Costa Rica launches the Value Added Tax (VAT) – Impuesto al Valor Agregado (IVA) in Spanish.

On this day important tax reforms will go into effect, established by the Ley de Fortalecimiento de las Finanzas Públicas (Law on Strengthening Public Finances) or Plan Fiscal (Tax Reform) published in La Gaceta on December 4, 2018.

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On this day, new taxes will begin to govern, others will increase; the exemptions will be different, a new fiscal period will begin, forms will be renewed, the list of taxpayers will increase and, possibly, the prices of some goods and those of many services will change.

The VAT is a tax that the country has discussed for almost 16 years, from the administration of former president Abel Pacheco (2002-2006), when the first tax reform was introduced.

Currently, what exists is a sales tax of 13% on goods. The VAT, on July 1, will apply to both goods and services. The 13% tax rate will be maintained, with some exceptions.

Meanwhile, with respect to income tax, one of the most important reforms is the chapter on income and capital gains or losses, such as interest on term certificates of deposit, or selling a property, for example. Or losses incurred.

Most of these incomes and profits will be taxed at 15%, although there are exceptions; in other cases the rate will be applied in a staggered manner.

Long process

The road to get to pass this law was long, its implementation is a complicated task and its fruits (benefits) will take several years to see.

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The legislation is the result of the third attempt at a fiscal reform; te first was during the Pacheco presidency and the second during the mandate Laura Chinchilla (2010 – 2014).

Both attempts were shot down by decisions of the Constitutional Court or Sala IV.

In the opinion of the ex-directors of Taxation, Adrián Torrealba and Alan Saborío, the country has never had a fiscal reform like the current one. There were projects and tax laws before, but not until now measures of income and expenditure in a single law.

The approval of the new law was carried out in the middle of a three-month strike by public sector workers, the majority employees of the Ministry of Education, dubbed “the teacher’s strike” and after the country faced, in 2017, the largest fiscal deficit (excess of expenses over government revenues) in 34 years, when it reached 6.2% of Gross Domestic Product (GDP), one of the primary indicators used to gauge the health of a country’s economy.

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In 2018 the shortfall decreased slightly, to 6% of the GDP, helped by the income from the tax amnesty included in the newly approved legislation.

The implementation of the Law has had the Dirección General de Tributación (Directorate General of Taxation) working at full throttle in the publication of regulations and resolutions, the adaptation of computer systems, the creation of forms and the clarification of public doubts, but there are still aspects that are not completely clear.

One of those is whether the exemptions related to the sales tax, not expressly established in the Law of Strengthening Public Finances, are repealed or not with this law.

According to Francisco Villalobos, Tax and Legal partner of Deloitte, in a column published in La Nacion, on Monday, June 3, he makes the point that, “If they were repealed, exonerations to electric vehicles, among others, would be eliminated”. Clarity on this and others by the General Tax Office is expected, but not yet given.

The General Director of Taxation, Carlos Vargas, assures that they will try to have all the regulations and final resolutions (that are so far in ‘consultation’) that are required before the July 1.

Even so, after that, there is a still long way to go. The total implementation of the Law will take nine years, it will end up being applied in 2028 when the tax on the Banco Popular securities reaches 15%.

The benefits of the Law will also come slowly.

According to the International Monetary Fund (IMF), it estimates that, with this reform, the debt burden of the Central Government (the amount of the debt with respect to production) will reach 61.3% by 2023 and from then on it will begin to fall to an expected 50% of production by 2040.

High levels of indebtedness, like the current, consume the resources to produce, push up interest rates and undermine investor confidence, which affects a fall in economic activity and aggravates unemployment.

The Ministerio de Hacienda has prepared the following cards posted on the social networks to educate the public on the changes that go into effect on July 1. More information (in Spanish) is at Hacienda.go.cr.

 

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"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

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