Costa Rica’s value-added tax law (VATL) is characterized by a series of special regulations, reduced rates, and a gradual entry into force. it has proven to contain serious technical errors and poor legislative writing that has made its application challenging for certain sectors of the country’s economy, such as construction, international trade, education, and administrative contracting.
This situation has resulted in a considerable number of inquiries made by taxpayers to the Costa Rican Tax Authority (Dirección General de Tributación), who are trying to find solutions to the practical problems faced on a daily basis, and in several cases, the Ministry of Finance has not been able to respond in a coherent and efficient way.
Construction Services
Prior to the approval of the VATL, the General Sales Tax Law (GSTL) was in effect, which levied tax on imports and the sale of merchandise, as well as certain services expressly defined by the GSTL. At the same time, professional services were not subject to such tax.
With the comprehensive amendment of the GSTL, the value-added tax (VAT) was adopted, which levies tax on the provision of services and intangible property. However, the VATL provided that for certain economic activities, tax would be applied on a gradual basis.
Transitory Article V of the VATL established that services provided in the areas of engineering, architecture, topography, and civil work construction, for projects registered with the Costa Rican Association of Engineers and Architects before October 30, 2019, would be subject to the following rates:
- first year: Tax exemption
- second year: 4% rate
- third year: 8% rate
- fourth year: Standard rate of 13%
Within the first months of the law entering into force, the definition of “civil work construction” services has generated extensive discussion.
Due to the lack of definition in the regulations, the rent of specialized machinery to carry out civil work, the transportation of materials necessary for construction, insurance policies, and even the payment for security services, can be included within this definition.
The correct definition is relevant not only to determine to which services the gradual tax rate will be applicable but also the tax credit to be applied. If services related to the development of construction services are excluded from the scope of application of the transitory article, this will evidently have a negative effect on final costs since the taxpayer will have an obligation to replicate such costs through an increase in price.
We believe that the intention of the VATL is to avoid a higher cost on the construction service prices. However, the tax authorities have issued a restrictive interpretation of the scope of application for the norm, excluding services such as transportation of materials.
International Trade
Despite the importance of exports for the country’s gross domestic product, the VATL came short on its regulation, generating at first an environment of insecurity and lack of trust.
Article 8(1) of the VATL establishes that exports of goods, as well as the operations related to them established in sub-paragraph c) of Article 11 of regulations to the VATL, are exempted from such tax.
Due to the inadequacies of the list, the Costa Rican Tax Authority had to expand the list of services linked to exports.
In this regard, Resolutions No. DGT-R-35-2019 and No. DGT-R-38-2019 were issued, which added other essential services, such as those related to ports and airports, transportation of goods destined for export to the ports, airports, and land borders, vessel attention services (navigation aids for operation, towing services, piloting, mooring and unmooring of vessels, docking of vessels, movement of covers of vessels, handling of twistlocks, dock cleaning, additional time at dock, and waiting times of crew), services provided to take care of empty export/import containers under the temporary import regime (loading and unloading of containers, as well as ground transportation services of empty containers, including the route from port to-domicile where the load is located and vice versa.)
Such exemption is, without a doubt, of an objective nature. In other words, the tax benefit falls on exports or related operations, regardless of who is carrying them out or to whom the service is being provided.
However, the Costa Rican Tax Authority has caused confusion in the sector by issuing certain criteria that state that exemption is subject to the condition that the one receiving such services must be an exporter or an exporter vendor registered in a special registry with the Ministry of Finance.
In our view, such interpretation is illegal. The purpose of the registry of export vendors or exporters is to grant to those who meet certain objective requirements (for example, 75% of their operations correspond to exports, or they do not generate enough tax debit within a specific term) the right to acquire all goods and services related to their activity exempt of VAT, in order to avoid generating tax credits that cannot be offset with debits.
However, being registered is not a condition to enjoy the exemption regarding the export services or operations detailed in the list of regulations to the VATL and the mentioned resolutions.
It is important to mention that, in regard to the services related to imports, the VATL does not take into consideration any special norms.
Consequently, since the VATL has entered into force, importers have undergone a significant increase in costs. In order to mitigate this effect, the tax authority has defined that services related to imports that are already part of the tax base of the customs tax return will not be subject to VAT, thus avoiding double taxation.
However, the Ministry of Finance has not taken into consideration relevant matters in relation to topics such as the tax credit treatment, among others, so clarity is crucial in the current situation.
Education Services
Through the regulations to the VATL, the Ministry of Finance solved the dichotomy that existed between Articles 8 and 11, which, on the one hand, considered private education exempted, and on the other hand, taxed at a reduced rate of 2%.
The regulations clarified that education services provided by private education centers, from preschool to university, are exempted, subject to inspection by the Ministry of Public Education.
Also, the VATL established that such education services do not require authorization by the Ministry of Public Education (Consejo Nacional de Enseñanza Superior Universitaria Privada) and that implies a non-systematized process where people acquire and accumulate knowledge, skills, and abilities, are taxed at the reduced rate of 2%.
Therefore, for example, services whose purpose is the continuous education of the members of professional associations, as well as group or individual tutoring services, are subject to the reduced rate. The regulations expressly establish that the reduced rate does not include esoteric and sports activities, which are taxed at the standard 13% rate.
In addition, the tax authority has further defined the educational services that are exempted, being defined as those substantive services provided in classrooms, such as tuition and the cost of the course included in the respective academic program. So the standard 13% rate will be applied to, among others, exam appeals, graduation procedures, certifications, grade recognition procedures, proficiency tests, and degree exams, since the Ministry of Finance does not consider these as educational services.
This has been heavily criticized, critics arguing that both the practice of sports and education do not seem to be a priority within the government’s public policies.
Sales to the State
One of the characteristics of the VATL relates to the treatment applicable to sales of goods and services performed by the State. Transitory Article XIV of the VATL establishes that those public institutions which were exempted of general sales tax at the time the VATL entered into force benefited from this exemption during 2019. However, as of January 1, 2020 all purchases of goods and services made by the State and its institutions are subject to tax.
It is also important to note that the Attorney General’s Office defined in Resolution No. C 185-2019 of July 4, 2019 that exemptions granted before the publication of the VATL regarding the general sales tax remain in force. As a result, exemptions granted on behalf of public institutions will remain in force, even after the temporary deadline established by the transitory article has expired.
In the same way, thanks to the provisions set forth in Transitory Article II of the Regulations to the VATL, the Ministry of Finance has authorized keeping the current regime for the public transportation concession agreements that were being executed at the time the VATL entered into force, to make them more expensive with no justification whatsoever.
Regarding the public institutions that are legally subject to tax as of 2020, it is important to remember that, according to the VATL, both in the sale of goods as well as in the provision of services, tax is incurred the moment the goods are delivered, the services are provided, or billing is completed, whichever occurs first, and it must be settled and paid within the first 15 days of the month following the triggering event.
The VATL does not provide special regulations or allow tax deferral under the assumption of credit sales of goods or services.
In the case of purchases of services made by the State, the VATL effectively establishes that tax is incurred when the vendor has received the payment. This is in order to avoid the taxpayer having to assume the financial cost of the tax incurred and not paid by the State itself.
Nevertheless, due to a technical error in the VATL, such special regulation was not established for the assumption of sales of goods, implying that, from a restrictive interpretation of the regulation, the tax should be paid in the first 15 days of the month following the triggering event, that is to say, at the time of billing, regardless of the time in which the cash payment is received.
We believe that the intention of the VATL regarding deferral of the VAT payment until the timing of the payment, stems from the assumption of avoiding the transfer of the financial cost to the vendor, and that it was a material error not to include this same treatment to the sale of goods assumption. An opposing view contradicts the constitutional principles of equality and non-confiscatory taxes.
In February 2020, a bill of law was introduced to the Legislative Assembly, which seeks to defer VAT in credit sales, so VAT must be paid when the term of the credit granted expires.
Other Topics of Interest
Electronic Billing
The origin of the tax credit derived from the purchase of goods and services in the local market is subject to the issue of an electronic receipt. Previously, it was also required for the taxpayer to have accepted such electronic receipt within the first eight days of the month following the date of issue. Starting on February 20, the Regulations on electronic invoicing were amended, and this obligation was eliminated.
Cross-Border Services
Currently, the application of VAT to cross-border services is suspended, while waiting for the Ministry of Finance to issue the corresponding regulation defined in the VATL.
Payments Made Under Tax Amnesty Could be Reviewed in Court
Transitory Article VI of the VATL on the Strengthening of Public Finances allowed for taxpayers that had a defined tax debt at the time the VATL entered into force, or for those that acquired such condition within three months, to pay the tax amount adjusted by the Ministry of Finance, free of interest and at a reduction of the penalty.
Recently, the Administrative Contentious Court considered that the payments made under amnesty do not represent a limitation for the legal review of the audit processes under which such adjustments have been established, as interpreted by the Ministry of Finance.
Looking Ahead
Given the current scenario, it is of the utmost importance that taxpayers review the registration of their tax credits in a preventive manner and be informed of the resolutions and criteria issued on an ongoing basis by the tax authority.
Anayansi Mora and Cristina Sansonetti are Tax Partners at Consortium Legal, Costa Rica.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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