Costa Rica’s New Fiscal Plan – VAT (Value-Added Tax) and the cost of rents

Will the tax will hurt rentals?

Without a doubt, approval of the value-added tax has already irritated the construction sector, and now landlords and tenants of houses and commercial spaces even more so.

Why? Because this fiscal reform in its present framework will increase all rentals to the tune of 6 percent.

This means an increase for the majority of tenants including businesses. Although a motion to exonerate the lowest rentals has been approved, the president of the Chamber of Properties and Real Estate said the exemption does not go far enough and that the tax should not be applied to any rents.

The president of the Chamber of Costa Rican Real Estate Brokers agreed, saying: “its a barbarity and if approved, will damage investment in the country and real-estate transactions.”

Opinions against. According to the Home Survey of 2006 of the Census Bureau, 25.76 percent of occupied housing is not owned by the tenant. This is equal to 278,848 homes inhabited by 1,076,447 people.

One renter said “the situation is worrisome because many middle-class people will be the most affected. We dont have access to housing credit, we must rent. If this bill is passed, our incomes will be even more affected, when times are hard enough as it is.”

Another tenant said it was unfair to lay the burden on the working class when no options for housing credit exist.

He added that those people who rent space for a small business would also be affected. Micro businesses make up 97 percent of all business, amounting to 44,575 out of 45,575 businesses.

Since most micro businesses rent installations, they would have to pass the cost of the new tax onto the consumer.

Possible “reduction.” Nevertheless representatives of the Chamber of Owners of Real Estate qualified as an advance the reduction in the proposal from 13 to 6 percent and the exoneration for certain rentals.

The legal consultant for the Chamber said rents lower than a base salary (¢170,000) are exempt from this tax. But this is not a lot, he said. The majority of the population will be affected by this tax.

He added that the tax was illegal since rentals are neither a service nor a sale.

It will also distort the method of billing and collection, since in other businesses if the bill is not paid, the contract or service is cancelled.

In the case of rents, if the tenant does not pay (or refuses to pay) the tax, the matter will have to be taken to court and meanwhile the rent remains the same for all other effects.

Another chamber member said that the tax will adversely affect not only those who rent warehouses, offices and commercial locales, but also investors in real estate. Not to mention the effect on data bases where people will now have to report not only property taxes but also this new tax collection.

Positions regarding the VAT

1. Inmobiliario Funds (the equivalent of a real estate investment fund a REIT) have begun to make sense of renting in the country, but if the VAT passes, these funds could be harmed.
2. Property in the country has been a good investment but if the VAT passes, rents will be adversely affected.
3. The affect on rents may reduce construction of homes and commercial locales.
4. With this new tax, the ‘rentability’ in relation to investment is almost less than 1 percent.

Our thanks to Gloriana Gómez and our friends at La Nación – Costa Rica’s largest Spanish circulation newspaper for their permission use this article.

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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.