The Costa Rican government enacted law 9635/2019 which introduces a new value added tax (VAT) system effective July 1, 2019. The new VAT replaces the current hybrid General Sales Tax (locally known as IGV) which existed for almost four decades. The new VAT is markedly different from the IGV, with some of the key differences detailed below. In these details, we see Costa Rica embracing some modern mechanisms directed at ensuring every penny of VAT due is actually remitted and paid.
Costa Rica tax rate
The new VAT will be applied at a rate of 13% which matches the existing IGV rate. However, there will be 3 new reduced rates:
· 1% for basic food staples and equipment used in agriculture,
· 2% for medicines, personal insurance and private education services, and
· 4% for sales of air tickets, health services provided by private suppliers and chartered professionals.
Similar to other VAT systems, there is also a zero-rate applicable to exports and certain domestic sales to tax-free zones.
Costa Rica VAT exemptions and exclusions
The new VAT also provides a limited set of exemptions for certain products and services including electricity, real property rentals (up to certain threshold), the national lottery, and books. The law also introduces a number of entity-based exemptions triggered based on whom acquires the good or service.
Costa Rica business VAT input credits
As is the case in most VAT systems, the new VAT allows for the full deduction for the VAT paid on business inputs, but with certain clear limitations. For example, VAT paid on purchases made by municipalities, the Social Security Administration, goods transferred as part of a corporate reorganization, the distribution of free samples, among others, are not reclaimable. In order for a purchase to be eligible for credits, the purchase must be directly and exclusively related to the trade or business of the taxpayer.
Costa Rica VAT base
The VAT base is defined by the price of the good or services sold (in the case of imports by the cost + insurance + freight value, plus import duties and excise taxes). However, it’s important to understand that the application of the new Costa Rica VAT system will be fairly broad, applying to virtually all transfers of goods or services unless specifically excluded by law.
Costa Rican taxpayers
Any individuals or entities (public or private) producing, distributing or selling goods or services in Costa Rica with a commercial purpose will be responsible for collecting and remitting VAT. The new VAT immediately recognizes the challenge associated with collecting tax on intangible goods and services from sellers located outside Costa Rica by deeming the supplier to be the taxpayer for all sales to individual private consumers. Conversely, for sales to VAT registered businesses, the Costa Rican purchaser will be deemed the taxpayer.
Cota Rica VAT compliance and e-invoicing
VAT will be paid on a monthly basis, by the 15th of each month. Stated simply, total VAT due is determined by subtracting VAT paid on eligible inputs from total VAT collected. However, in order for a deduction to be fully legitimate, the purchases must have been properly invoiced according to Costa Rica’s e-invoicing requirement. Any unused credits can be carried forward and deducted in future periods, or in limited cases, the taxpayer can apply for a refund. (More on Costa Rica e-invoicing compliance in Part 2 of this blog).
Costa Rica VAT withholding
The new tax law establishes that payment processors (e.g. credit and debit card companies) must withhold 6% of the net amount paid and remit that amount to the tax administration. The amount withheld and paid will be considered an advanced payment of VAT due and will be held by the tax administration on credit for the seller until such time as the VAT becomes due and payable. In some cases, the tax administration may adjust the required withholdings for a given taxpayer based on whether they engage in some reduced rated or exempt sales.
If the transaction occurs over an electronic marketplace or platform that exists outside of Costa Rica, the financial institution or payment processor facilitating payment will be deemed the “Agent of Perception.” Pursuant to that designation, they will be required to withhold and remit 100% of the VAT due.
Fundamental obligations to avoid sanction
The new Costa Rica VAT law describes two basic requirements that businesses must meet to avoid any immediate penalties for non-compliance:
1. Register with tax administration before starting to carry out commercial transactions. If an organization is already registered to collect the existing sales tax, this registration will carry over. However, service providers not currently registered based on the fact that services are not generally subject to the sales tax, must affirmatively register.
2. Issue compliant invoices when selling goods and services.
Existing taxpayers that currently are subject to the sales tax of that country, will be automatically registered as taxpayers of the new VAT. However, they will be required to update some of their records as provided by the regulations.
Noncompliance will result in penalties and interest. In addition, the Tax Administration is empowered to temporarily close a business for non-compliance. In the worst case scenario of tax fraud, criminal prosecutions are a distinct possibility.
In Part 2 of this blog, we will provide additional details on how the new VAT interacts and impacts their relatively new e-invoicing requirements.