New Tax Bill – Any comments on this?

THIS WAS PRINTED ON AMCOSTARICA on March 13.

Foreigners will have to list assets to avoid tax
By Garland M. Baker
Special to A.M. Costa Rica

Instructions on how to kill the goose that lays golden eggs.

Step 1: Restrict the inflow of capital by taxing it 10 percent upon arrival in Costa Rica.

Step 2: Make bringing money into Costa Rica as difficult as possible.

Step 3: Tax the money heavily once it is here.

Article 7, Section 4 of the proposed fiscal plan assumes all passive income comes from capital of Costa Rican origin unless proven otherwise to the tax people. The burden of proof is on the taxpayer.

Passive income is income from activities in which the taxpayer does not materially participate, as in all rental activities, investment income like interest, dividends, and capital gains, and other forms of income like royalties and alimony, etc.

Under the new tax plan, all passive income will be taxed at a rate of 10 percent.

Foreigners moving to Costa Rica for the first time will have a grace period of one year to patriate or provide a detailed list of their assets outside of Costa Rica.

In other words, if one moves to Costa Rica under the new fiscal plan, the country wants to add a person’s worldwide assets to its tax base so it can tax the income derived from it every year if the money comes into Costa Rica.

Current residents, meaning anyone living in Costa Rica more than 183 days a year, will have six months after the passage of the fiscal plan to register their money outside of Costa Rica to avoid paying the 10 percent tax on funds brought into the country. It is possible to register money not declared during this grace period later as long as no funds come into Costa Rica before registering them.

Furthermore, the same article states any money coming to Costa Rica is assumed to be taxable except for three exceptions: The money has already been taxed under the law, the money is destined for investment in some money-making venture, or it was declared as described above as money to establish residency.

The tax department will reserve the right to evaluate, accept or reject, in whole or in part, the source and destination of the funds and have the final decision on any corresponding applicable taxes.

For those living on funds from countries considered tax havens, any money brought into Costa Rica will be taxed at 10 percent. The Organization for Economic Cooperation and Development is assisting Costa Rica with lists of tax haven countries. The list is lengthy and includes countries like Panamá and Belize.

This means any money determined taxable, money from tax haven countries and money not registered, will be taxed upon arrival in Costa Rica, implying upon deposit. The bank receiving the money is responsible for withholding the 10 percent tax and sending it to the tax authority within 10 days.

The free movement of money into Costa Rica by foreign investors is the reason the country has boomed over the past years causing tremendous growth and exponential increases in property values.

If the proposed new fiscal plan becomes law, and the forecast is that it will be soon, moving money in an out of the country probably will be so restrictive investor developers may look elsewhere.

Under the new fiscal plan, buyers who want to bring money into the country will have to declare the funds with the tax people. This means filling out forms and waiting for approval. Once here, the money will be traced and tracked to control the taxable outcomes.

For those who want to retire here for a simpler life, they will have to fill out forms anytime they want to use money from their lifelong savings outside of the country.

It is unclear if a cost-benefit (in this case tax-benefit) analysis, has been run on this tax plan.

The proposed tax procedures have broad implications for the country’s real estate market. For example, a buyer of real estate property can have the government grab 10 percent of the funds if the complex technicalities are not met or if tax officials disagree on the source of the funds.

In addition, a security issue emerges if wealthy foreigners must provide local tax officials with lists of their assets elsewhere.

Costa Rican officials are expected to trade detailed information with other countries, including the United States, to track down untaxed money.

The new fiscal plan passed its first round in the legislature. It is currently under study by the Constitutional Court.