New Costa Rica tax laws went into effect on July 1, 2019. What is it, and how does it affect you? The law is officially known as law 9635 or the “Law to Strengthen Public Finances”. Many refer to it as the IVA (impuesto de valor agregado) for its initials in Spanish. This value added tax is the aspect of the new law that will have the greatest impact on the average person in Costa Rica.
Since 1982, Costa Rica has imposed a 13% sales tax on most goods and products. The new IVA replaces the general sales tax. Under the new regimen, not only goods but also more services will be taxed at the 13% rate. Any individual or commercial entity, whether public or private, is now responsible to collect and remit to the government 13% of the value of any goods or services they produce, sell, or distribute.
What do the changes mean for the average resident or even visitor to Costa Rica? The new tax law means that when you contract the services of a professional—for example, doctor, lawyer, engineer or realtor, you’ll be obligated to pay an additional 13% for their services. By the same token, anyone providing such services is required by law to withhold the IVA and remit it to the tax authorities (in Costa Rica, the Ministerio de Hacienda). Realtors, by the old law, were already required to do this. I have been filling out these forms for over 11 years now on a monthly basis, whether I collect the 13% or not.
Are there any exceptions to the new tax law? A few. Water and electricity consumption, if below the amount used by a small household (30 cubic meters and 280 kWh respectively) are exempt. So is housing rental if it’s less than $1000 per month. Certain organizations, including the Red Cross and the Fire Department, aren’t required to collect the new tax. Free trade zones, care for the elderly, and public university tuition are also tax free. So are public transportation and books. Livestock auction services will not be taxed, so that prize bull you’re planning to buy won’t cost you any extra. Other services will be taxed, but at a reduced rate. Some examples are: airline tickets and healthcare services 4%; medical products, insurance premiums, and machinery used for production 2%; basic food staples and equipment used in agriculture 1%.
I wanted to know to about cross border services, that is, services provided by an entity based outside Costa Rica, like the web hosting service that hosts this web page. They are also subject to the new IVA. Accordingly, Netflix, Amazon Prime and similar international services are required to pay the tax regardless of the medium or technological platform. I wonder if GoDaddy knows this??
Why we the tax laws in Costa Rica changed? Many have asked, and some Costa Ricans have protested its recent implementation. As indicated by its name, the Law to Strengthen Public Finances was designed to increase tax revenue and control costs. The law also includes lesser known modifications to the capital gains tax, (which will be a completely different blog) public administration salaries, and fiscal responsibility laws. The objective of all the aforementioned changes is to reduce the government’s deficit from 6% to 4%.
The new IVA law stipulates that the collected taxes be remitted monthly by the 15th. How will Costa Rica ensure compliance? Businesses and individuals who provide services must register with the government if they have not already done so. In 2018, a requirement to issue electronic invoices (facturas electronicas) and report them to the tax administration went into effect. Though the old tax law hadn’t changed yet, it provided the authorities with a means to track commercial transactions. In addition, credit and debit card processors and Costa Rican banks are tasked with cooperating with the new law.
Noncompliance can be punished with fines and/or interest. Authorities are also empowered to close a business found to be in violation. In extreme cases where tax fraud is suspected, criminal prosecution is a possibility.
So what’s the bottom line? Well, if you own a property in Costa Rica it will cost a bit more. If you only purchased in Costa Rica because it was less expensive than where you live, well then you purchased for only one reason and it is the wrong reason. Nice thing is property tax is still only 0.25% of the registered value. What are your property taxes back home? So as I have told many that have been freaking out “build a bridge and get over it”. Here the reality of life in Costa Rica will continue as usual with little change, it will just cost a bit more.