Costa Rica New Tax Changes For 2013
Costa Rica has passed two new laws, which will bring about significant changes to the tax structure currently in effect.
The two legislative bills The “Law of Compliance of Standards of Fiscal Transparency” (Ley para el Cumplimiento del Estandar de Transparencia Fiscal) is law project number 17.677 and is being passed according to the text of the law to comply with the standard of fiscal transparency required by the Organization for Economic Cooperation and Development [OECD].
The other law that has been approved is the Law Strengthening the Tax Administration Procedures(Fortalecimiento de la Gestion Tributaria) law project number 18.041. This law gives the Tax Administration more powers; it will increase the fines and penalties against taxpayers and impose new forms of assessing and collecting tax obligations.
In this article I will focus on the modifications that these two laws will bring to the current tax system in Costa Rica.
I.Law of Compliance of Standards of Fiscal Transparency
The Fiscal Transparency Law (17.677) provides more tools for the Costa Rican Tax department to gather information on taxpayers.The most significant change is that the Tax Department will be able to access the bank and financial accounts of the taxpayers, which brings an end to the long-standing principle of bank secrecy in Costa Rica.In addition the law allows countries that have signed tax information exchange agreements with Costa Rica to request and obtain the same banking and financial information, which is located in Costa Rica.The modified text of the law would be as follows:
Article 106 bis.Information Located in Financial Institutions
The financial institutions must provide to the Tax Administration information about their clients and users of their services including information about banking operations and balances.The financial institutions must provide all information related to transactions of any checking or savings accounts, deposits, certificates of deposit, loans, trusts, individual investments, joint investment accounts, stock transactions and any other operation or transaction either active or passive which is pertinent to the Tax Administration to:
(a) Establish, collect or verify any tax imposition, exemption, remittance, levy or lien.
(b) To comply with any request for information pursuant to any international tax agreement to avoid double taxation or treaty for the exchange of tax information or any other international agreement that provides for the exchange of tax information.
To obtain the information the Tax Administration would no longer require direct and concrete evidence of non-compliance of an either a criminal or administrative nature.Instead under the new standard all that would be required is the determination based upon rational principles of the relevance of the information requested as part of any ongoing investigation or audit process.
II.Law Strengthening the Tax Administration Procedures
The Law Strengthening the Tax Administration Procedures(Fortalecimiento de la Gestion Tributaria) law project number 18.041 is intended to give the Tax Administration more teeth in order to take a bigger bite into the taxpayer for violations of the tax law.It will do this by creating larger penalties and sanctions and make it easier for the Tax Administration to serve taxpayers with administrative procedures related to tax violations. It also modifies other tax laws to broaden their scope and bring more transactions into compliance.
A significant change that will affect real estate transactions is the modification of the current law on the transfer taxes of real property.Under the current system the transfer of real estate triggers a 1.5% transfer tax on the value of the transaction. Real Estate developers in Costa Rica began avoiding the real estate transfer tax by titling the real estate in the name of a Costa Rican corporation and then selling the shares of the corporation to the prospective buyer instead of transferring the underlying real estate.The new law will abolish that practice by creating the concept of “indirect transfer” in determining a taxable event.
Under the indirect transfer method any business transaction that results in the transfer of the dominion and control of the corporate entity that owns the real estate will be subject to the transfer tax.The transfer tax will be due and payable no later than 15 days after the taxable event is triggered.After that penalties and interest will begin to accrue.
Another modification is that the basis of the transfer tax may not be less then the highest value registered for that property under the Property Tax Law.The reason for this is that it became customary in Costa Rica to pay the tax based upon the recorded “fiscal” value of the property which in most cases is well below the actual market value of the property.Under this criterion the taxpayer will have to determine the local municipal property tax valuation and no longer rely on the “fiscal” value that appears on the title report.
Another significant procedural change in existing law is the modification of Article 116 of the Tax Procedural Code.This article will be modified to allow the Tax Administration a broader set of criteria to verify and establish the tax obligation of a taxpayer.The Tax Administration will be able to consider all of the following in determining the tax basis for a taxpayer:
(a) The financial and accounting records of any kind that will prove the transactions that have been carried out.
(b) In the absence of documentation the Administration may use any kind of evidence that will assist it in assessing the tax obligation and specifically may rely on the following evidence:The amount of capital invested, the volume of transactions, the income from previous tax years, the goods or products available, the number of sales or purchases made, the average return or yield for similar type of business enterprises, the wages paid to employees, the rentals that have been paid,the personal living expenses of the taxpayer and his family, the amount of assets owned by the taxpayer as well as any other elements which the Administration may receive or request from third parties.
The Tax Administration will also have more power to place a tax lien on property of the taxpayer.Articles 194 and 195 of the Tax Procedural code will be modified to allow the tax administration to place a lien on property owned by the taxpayer as precautionary measure prior to filing any formal suit or demand in order to preserve the assets for collection.The Administration can formalize the lien by obtaining an order of Administrative Embargo on any kind of asset owned by the taxpayer and recording the lien with all public or private entities necessary to preserve the assets.
Another area where this proposed law will impose severe penalties for violations is in the Customs Law.The Customs Law governs the import of goods into Costa Rica.The law increases the financial penalties significantly and imposes criminal penalties as well.
Under the proposed law contraband will carry a prison sentence of 5 to 10 years in addition to the monetary penalties. Likewise defrauding or deceiving the Customs Administration will carry a monetary penalty equal to 2 times the amount of the taxes evaded.If the amount defrauded exceeds the sum of 50,000 Central American pesos which is a uniform currency valuation then the sanction carries a 5 to 10 year prison sentence.
In order to prevent the under reporting of the value of imports shipped into Costa Rica the new law creates a whole section on “Customs Valuation of Imported Goods.”It will expand the directory of importers requiring mandatory registration and expand the current database of the value of imported goods into Costa Rica in order to cross reference import declarations with the valuation database established by the Customs Department.
The Customs Department will create a directory of importers and will also create databases to establish the value of goods imported into Costa Rica.Under this law the Customs Department is provided more tools to audit importers to verify the import declarations for products imported into Costa Rica.
Costa Rica has been trying for the last couple of years to overhaul the existing tax structure and completely reform the tax law of Costa Rica.The last attempt to pass a new tax law known locally as the “Plan Fiscal” failed as the tax plan came under judicial challenges by the Constitutional Court.Then the Ministry of the Treasury Fernando Herrero was forced to resign due to scandals involving invoices for consulting services and that was followed by the resignation of the Director of Taxation a few months later.
The approval of the two laws discussed in this article are the Costa Rican governments “plan B” to mitigate the growing deficit. Once these become law they may still be subject to Constitutional challenges by taxpayers.As with most things in Costa Rica things generally take a long time to be implemented. This will be no exception since the “Law of Compliance of Standards of Fiscal Transparency” (17.677 ) has been floating around the legislature for 2 years since April of 2010 and the Law Strengthening the Tax Administration Procedures(18.041) was introduced in March of 2012.
These laws are now in effect so plan accordingly.
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