Overview: The days when suppliers of digital content or services were considered out of reach of local tax authorities because they supplied products and services remotely are quickly fading. The exponential growth that the digital economy has experienced in the last several years has made it impossible to ignore countries looking for new sources of revenue. One of the last countries that decided to tax foreign supplied services is Costa Rica.
Since the introduction of new VAT laws back in July 2019, the supply of digital services and products were subject to the standard rate of that tax. However, that legislation suspended the application of the tax to such services until the Costa Rican tax administration (MHCR) issued the regulations that would detail the way such tax would be collected.
Collection of VAT on digital services finally began on October 1, 2020 with the enactment of the Executive Decree N° 41779-H that was later supplemented with the provisions of Resolution DGT-R-13-2020. Those regulations, along with the VAT law, define the collection of the VAT on foreign supplies of digital services.
What is a digital service or product in Costa Rica? Digital services are considered to be services provided through the internet or a network or digital or technology platforms. By nature, they are automated and require minimal human intervention, such as sales of digital content (music downloads, electronic books, videos, applications, games), the provision of access to subscription-based content (news, music, online games), or provision of software and maintenance services, such as antivirus software or digital data storage. This list is not limitative but is designed to target the main suppliers of digital products and services.
Place of Supply Rules for Digital Services: To make possible the collection of VAT on digital services, VAT laws and regulations redefined the place of supply rules for those services. Accordingly, a digital service is considered consumed in that country when:
a) The address in which the digital service provided (full or partial) is in Costa Rica.
b) In the case of services provided via intermediaries, the final provider of the service or intangible good is domiciled in the country.
c) The location of the client’s fixed landline through which the digital service is provided, is in Costa Rica.
d) The Internet Protocol (IP) address of the electronic device through which the product, digital service or intangible good is acquired or downloaded, corresponds to a location in the territory of the country.
e) The country code (MCC) stored in the SIM card of the cell phone or similar device used by the consumer, corresponds to Costa Rica.
f) The address that the consumer provides corresponds to Costa Rica.
g) The bank account that the taxpayer uses to pay for his services is in Costa Rica.
h) Any other information that identifies the consumer as situated in Costa Rica.
In cases where two or more of these criteria contradict each other, the current regulations provide that the location will be determined by giving preference to the criteria listed above in the order that they are listed.
Parties Intervening in the System:
To apply VAT to digital supplies in Costa Rica, the regulation defines four different elements with different roles and responsibilities in the system:
A. Direct suppliers of digital products and services: These are the foreign providers that sell digital services over the internet to consumers located in the country.
B. Suppliers of intermediation services related to digital services and products: This covers services provided by individuals or entities located in Costa Rica or abroad, that act as retailers or facilitators for the digital services supplied to consumers located in Costa Rica via a digital platform.
C. Perceiver: This covers the public or private entities that process credit or debit card transactions when their cardholders make purchases of digital services from foreign suppliers via the internet or a similar platform to be consumed in Costa Rica.
D. Issuer: These are all the entities that issue or commercialize credit and debit cards for use inside or outside the country.
How the system works:
According to current regulations, both B2B and B2C supplies of digital products and services become subject to VAT in Costa Rica. When such tax applies, there are three different ways to collect VAT to digital services and products supplied from abroad:
Collection of VAT by the foreign supplier or intermediary: Foreign suppliers of digital services are given the option to collect the applicable VAT to their sales to local consumers. For this to be possible, they must register at the tax administration and designate a local, legal representative by supplying the documentation and information required and following the procedure established in those regulations. Once registered at the MHCR, the supplier will be allowed to apply an additional 13% (standard rate of the VAT in Costa Rica) to the amount charged to their customers if these digital supplies are considered taxable.
Withholding of the VAT by the Intermediaries: When providers of digital products and services located in Costa Rica directly apply VAT for their services or products, but at the same time use a registered foreign intermediary to make their sales, such intermediary will be required to apply a 6% withholding on the amount paid to the local supplier and pay that VAT directly to the tax administration. If no VAT has been collected by the supplier, then the intermediary will be required to apply the full 13% VAT to the transaction. Both the intermediaries and/or the suppliers of the digital services will be required to file a monthly VAT return and pay the collected and/or withheld VAT for transactions. Such payments can be made in local currency or American dollars via electronic transfers to the account set by the tax administration for that purpose.
Collection of the VAT by the Issuers of Credit and Debit Cards: As of now, the system to collect the VAT on digital services and products supplied by foreign providers to consumers located in Costa Rica is designed to rely primarily on the financial entities that issue the credit and debit cards used for the payment of the service. This means that when a digital service or product is determined to be consumed in Costa Rica, the issuer of the credit or credit card used by the consumer to pay for it, will be required to apply VAT to the transaction and submit the payment to the tax administration.
For that purpose, the regulations mandate that the MHCR publish a list of foreign suppliers of digital services that will be subject to the collection of VAT. Once the VAT is collected from the cardholder, these financial institutions will have three days to submit VAT collected to the tax administration. In addition to this payment obligation, they will be required to file a monthly report by the fifteenth day following the month in with the tax was collected, where they will identify the suppliers of the services, the taxable amount of each transaction, along with other information required by these regulations.
Finally, these regulations establish that the debit and credit card companies should also keep an additional registry with details about the purchaser of the services (date, transaction amount, credit card number, supplier). Those additional records should not be submitted to the MHCR, but readily available upon request.
Additional Reporting Obligations for Intermediaries: In the case of foreign intermediaries of digital services and products that register and collect VAT in Costa Rica, there is an additional reporting obligation to comply with. They must provide a list of the supplier of the digital services for which they are intermediating, description of the service or digital product, price of the transaction, VAT applied, and other pertinent information.
Electronic Invoicing obligations: Foreign suppliers of digital services and products and the intermediaries that register in Costa Rica, are not required to comply with the electronic invoicing obligations established in that country. However, the invoices they issue to their customers should comply with minimum information requirements such as customer name, description of digital product or service supplied, transaction amount, and the segregation of VAT collected in the invoice.
Creditable VAT for Registered Taxpayers: Current regulations stipulate that when the consumers of digital services provided by a foreign supplier use those services or products in their normal course of business, they will be allowed to deduct the VAT applied to those purchases from the VAT they have applied on their own sales transactions. In absence of an electronic invoice, they will be allowed to use the credit card statement provided by the credit/debit card company issuing the card or, if the VAT was directly collected by the supplier, the invoice in whatever format such supplier has provided, accounted that the invoice complies with the information requirement mentioned before.
Refund of VAT: Current regulations provide that when a sales transaction is partially or completely annulled, the VAT will be refunded to the consumer. That refund should be made directly by the entity that originally collected the VAT (foreign supplier, intermediary or local credit card company). However, when the reason for the refund is because the digital product or service is consumed outside of Costa Rica, such refund should be requested by the consumer directly to the tax administration, following the procedure and forms provided for that purpose.
Due to a recurrent budget deficit, Costa Rica is in the middle of preparing a large-scale tax reform for the purpose of generating additional revenues. It remains to see if the system of collection of VAT described previously will remain intact or if it will be expanded to follow models applied in other Latin American countries.
In the meantime, we should mention that failure to pay the applicable VAT on those foreign supplies of digital services and products, creates a joint liability on the suppliers, the consumers, and the financial entities that intervene in the process of supply and payment of those services. There are economic penalties and sanctions described in the law for those determined to be out of compliance.