The Costa Rican government will again be sending the tax bill to the Legislative Assembly.

As part of the follow up that we’ve been doing to the Costa Rican Tax situation; let’s go over one of the new taxes included in the bill: The Value Added Tax VAT.

What is the calculation basis?

The new VAT is not really new, it’s the current 13% Sales Taxe with new extensions and exclusions, so basically the main objective of this new tax is to increase the revenues of the Government by taxing some services and products that as of today were excluded from the traditional Sales Tax’s list of products and services.

In the list of new products and services are included the professional services of accountants, attorneys, doctors, engineers, etc and even rents over $400 per month, keep in mind that $400 is the exempted base.

What is the rate?

The Government will keep the same 13%, excluding the professional services and rents which will be 6%, that means that if you rent a house for $1,200 per month you would start paying $1,248 (1,200-400*1.06+400) if the bill becomes law.

In other case the annual resident fee charged by your attorney to represent your Costa Rican Corporation instead of the current $100 this will go up to $106.

There are exclusions?

There are more than 30 exclusions of products and services to the list of the VAT, some of the most important are:

1. Sale of Properties (Real Estate)
2. Internet Residential Service
3. Power and Water Residential Services (minimum consumption)
4. Sales of products and services to individuals or companies outside Costa Rica.
5. Medicines and Personal Care Products
6. Some products used on Farming Industry.

Can I use the VAT as a Credit?

If you include in the price of your services or products sold to your clients the VAT, then you can use the VAT that you paid to your suppliers as a credit when you have to file the monthly VAT tax return, since the VAT is not a cost but a withholding, can not be wrote off from your income tax return at the end of the year.

In another scenario, if you do not charge your clients with VAT you can add what you paid for this tax for any services or products as part of the cost of good sales of your services or products and then write it off at the end of the year.

The Second Objective of this Tax.

Besides the fact that the governments is looking for options to increase their revenues, is the fact that this new tax will work also as a tool for the Treasury to set up a whole cross control system, how? Simple, let’s look at an example:

Mr. Smith hired an Accountant to take care of his corporation’s accounting and taxes matters. The Accountant’s monthly fee is $500, this means $6,000 per year plus 6% VAT.

Mr. Smith is obliged by law to report, at the end of the year, that he paid to the accountant $6,360 (6000*1.06) in the last year, by using the form D151, this will be the first clue for the Treasury to start looking for that accountant, once that they find the tax return of the Accountant they will look for the monthly VAT returns, and then the Treasury ensures that the Accountant returned the VAT 6% every month, regardless of the income tax liabilities of the Accountant, the Treasury at least is sure that they got the proper amount for the VAT.

It is highly recommended to ensure that your business charges the VAT to your clients, so you can start making decisions about the new responsibility that you will have by filing and paying back to the Treasury what your business collected as VAT from its clients.

PS. If you would like to receive Randall’s Top Ten Costa Rica Tax Tips report, please use the form below:

Written by Randall Zamora who is the President and CEO of CostaRicaABC.com, former CFO and Head of Accounting Department of multinational companies like Four Seasons Resort Costa Rica, active member of the Interamerican Accounting Association, Pro Bono Local Partner of The World Bank and contributor to their yearly publication “Doing Business Report.”

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.