The government of Costa Rica has confirmed that the existing sales tax system will be replaced by a Value Added Tax (VAT) system, coming into effect on July 1st, 2019. The tax will apply to the majority of goods and services.
The standard rate of VAT will be 13% whilst reduced rates of 6%, 4%, 2%, and 1% will also apply to certain items.
Most restaurants already charge 13% Sales Tax and a 10% service charge, adding 23% to the overall tab. Considering the restaurant staff rely on tips as the major part of their earnings, diners should be adding another 10% to that final bill, provided the service is good.
The current 13% sales tax is also levied on imports and domestic sales of all goods. There are exemptions for basic foodstuffs, medicines and other essentials. Services are currently exempt.
As of July 1st, 2019 that all changes. The country needs to widen its tax base, to cover ever increasing social programs and basic services, which means subjecting services to the new VAT.
Although the full 13% on services may be phased in over a 4-year period, one should expect the majority of the tax increases to applied quickly. Services now accounts for almost half of the country’s economy. This includes the professional services of doctors, veterinarians, accountants, attorneys, engineers, etc and even rents over $400 per month.
The tourism sector will also be subject to the new taxes, but phased in over 4 years. The implementation of VAT will be done gradually, from 0% in the first year, 4% in the second year, 8% in the third year and 13% from the fourth year. The business needs to be registered with ICT to qualify for the graduated rate on services, otherwise they need to charge the full 13% the first year.
While certain basic food products are initially exempt, such as breads and tortillas, rice, flour, milk, meat, eggs, sausages, canned tuna, fruits, vegetables, beverages, personal hygiene items, school goods and other food products, they will be subject to a 1% VAT as of July 1st 2020.
Accountants will be working overtime to keep up with the added paperwork involved in keeping their client accounts up to date. If you charge the tax to your customers, you can claim a rebate on the tax you paid, provided you have a record of every purchase and the receipts are in the legal business name. And of course some charges are nonrecoverable, if one considers that even your lawyer and accountant will now charge the VAT, estimated to be 6%.
The concept of turning every business owner into a tax collector is not a new one. VAT charges exist in many countries and ideally apply to luxury items and not essentials like food, water, electricity and public transportation. In most countries the VAT charges end up affecting everyone, no matter their income level. In Canada the VAT is currently 5% whereas in Brazil it is 17% and Mexico it is 16% (Reference).
Considering the various rates involved in this new system, one should expect a complicated process that will result in the government having to hire more staff to manage the collections and processing, reducing the winfall expected from the taxes collected. Payments and associated paperwork are due monthly.
It is highly recommended that if you own a business in Costa Rica or you rent a property, you should seek out a reputable accountant, or legal office, preferably one who knows your business sector and how the new tax laws will be applied.
The full Decree with lists of products and services can be downloaded here.