The Tax Reform la has been approved by the legislature. The tax bill that was being discussed in the Costa Rican Legislature as bill number 20.580 has been approved in the first debate in the Legislature. The bill now moves on to a 2nd vote and constitutional review prior to being implemented into law.
The tax reform centers on the following three areas:
- Creation of a Value Added Tax (V.A.T.)
- Modification of the Income Tax provisions
- Containment of Public Expenditure
Let’s breakdown the specific provisions of the tax reform law so that you can determine how the changes will impact your life in Costa Rica.
The Value Added Tax (V.A.T.)
In Costa Rica we have a sales tax of 13% that only applies to a limited amount of products. The goal of the tax reform law is to change the sales tax into a Value Added Tax (VAT) that will be broader in scope by covering products and services. The following tax rates will apply:
- 13% is the general tax rate
- 4% for airline tickets and private healthcare services
- 2% for medical products, raw materials and machinery used for production, insurance premiums, purchase and sale of university issued products
- 1% the list of food consumption products that make up the basic necessities foodstuff list (canasta basica).
The V.A.T. would also apply to all service providers such as doctors, architects, engineers, lawyers, dentists, accountants etc.
The law includes several exemptions that will not be subject to the 13% tax rate as follows:
- Exports of goods
- Sales of goods or services for free trade zones
- Interest and fees for loans and credits
- Financial and operating leases
- The guarantees and guarantees of compliance
- The commissions paid to complementary pension operators
- The rental of housing where the rental amount is less then the equivalent of 1.5 base salaries (646,000 Colones).
- The electricity consumption of less than 280 kW / h
- Water consumption less than 30 cubic meters
- Orthopedic equipment, rehabilitation and wheelchairs
- The goods and services provided or acquired by the Red Cross
- The goods and services provided or acquired by the Costa Rican Fire Department
- Enrollment in public universities
- The goods and services provided or acquired by the Association Works of the Holy Spirit
- The acquisition of goods and services from the Earth University
- The internal advertising space of radio and television programs
- The self general of electricity
- Books in any of their formats
- The fees and monthly payments of professional associations
- Premiums for labor, agricultural and social interest housing
- The services of livestock auctions
- Care and elderly care networks
- The goods and services acquired by the Boards of Education
- The goods and services acquired by the Community Development Associations
- The goods and services acquired by the Asadas
- Private education (preschool, primary, secondary, university, para-university and technical)
2. Income Tax Reform
The Tax Reform Law would modify certain provisions of the existing income tax law as follows:
The Tax Year
Currently the Costa Rican tax year ends on September 30th. This would change to a calendar based tax year so that it would run from January to December.
The Tax Rates For Corporate Entities
The corporate tax rates would be as follows:
Corporate Tax rate is 30%
If Gross Income is less than 106 million colones during the fiscal year then the following tax rates apply:
- 5% on the first ¢ 5 million annual net income.
- 10% on the excess of ¢ 5 million and ¢ 7.5 million of annual net income.
- 15% on the excess of ¢ 7.5 million and up to 10 million annual net income.
- 20% on the excess of ¢ 10 million colones of annual net income.
Small businesses which are registered before the Ministry of Economy, Industry and Commerce, or before the Ministry of Agriculture , may apply the following scales:
- 0% of the tax on the profit tax in the first year of commercial activities;
- 25% of the tax on the profit tax in the second year of commercial activities;
- 50% tax on the profit tax in the third year of commercial activities.
The Tax Rate For Individuals
- Income of up to ¢ 3,339,000 per year, will not be subject to tax.
- On the excess of ¢ 3,339,000 per year and up to ¢ 4,986,000 per year is 10%
- On the excess of ¢ 4,986,000 per year and up to ¢ 8,317,000 per year is 15%
- On the excess of ¢ 8,317,000 per year and up to ¢ 16,667,000 per year is 20%
- On the excess of ¢ 16,667,000 annually is 25%
Once the tax has been calculated, the individuals who carry out lucrative activities will be entitled to the following tax credits:
- For each child the tax credit will be ¢ 16,920 per year
- For the spouse the tax credit will be ¢ 25,320 per year
The Tax Rate for Salaried Employees
- Income of up to ¢ 752,000 per month will not be subject to tax.
- On the excess of ¢ 752,000 monthly and up to ¢ 1,128,000 is 10%
- On the excess of ¢ 1,199,000 monthly and up to ¢ 2,103,000 is 15%
- On the excess of ¢ 2,103,000 monthly and up to ¢ 4,205,000 is 20%
- On the excess of ¢ 4,205,000 monthly is 25%
Implementation of a Capital Gains Tax
The Tax Reform law will create a Capital Gains Tax of 15% which will apply to investment income and real estate. For real estate the law provides a one time exemption for those property owners that own property before the law comes into effect. Those will pay 2.25%. Also the primary residence is exempt from capital gains.
3. Cost Containment
The final component of the tax reform law is to initiate cost containment measures on the public sector. It does affect existing labor and employment agreements in the public sector since it only applies for future hires.
Bonuses and Incentive Pay
The law would limit the amount of incentive pay and bonuses to 25-30% for those with masters degrees and 10-15% for bachelor degrees. Currently those incentives and bonuses can reach 60%.
Performance Based Pay Increases
Under the current system public employees have automatic annual pay increases. Under the new law any pay increase would be tied to performance based evaluations.
Cap on Severance Payments
In Costa Rica if you are terminated as an employee without cause you earn a right to a severance payment. In the public sector that was capped at 8 years worth of wages. In the Public sector that amount could go as high as 20 years. The new law caps severance for public sector employees at 8 years.
Future Incentives Must be Passed by Law
Currently government departments could pass pay increases by internal administrative rulings. The new law removes that discretion and requires any modification to incentive pay to be approved by law.
Allocation of Resources
The law creates a fiscal rule that would limit the growth of government expenditure. In the past it has been common for the legislature to approve laws that had no source of funding thus exacerbating the fiscal deficit. The purpose of this rule is to ensure that any future spending is tied to economic growth. If there is no growth then no spending.
This tax reform bill now moves for a 2nd vote in the legislature and for constitutional review. We will continue to monitor the progress and keep you posted.