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  • Service: Tax
  • Type: Business and industry issue, Video
  • Date: 10/15/2012
  • Length: 7:25 Minutes

Latest news on Tax in Costa Rica 

Alvaro Castro, Tax Partner, KPMG in Costa Rica:

What are the current trends and challenges?

The first issue that we are experiencing in Costa Rica is that tax authorities are becoming more and more aggressive. They failed to pass a substantial tax reform, so what they are doing now to solve the problem of the fiscal deficit is that they are auditing companies more aggressively. And in fact they approved recently a new tax legislation giving more powers to the tax authority. So that is one thing that companies are concerned about. Second one is transfer pricing. Transfer pricing of course is an issue in a lot of countries and in particular in Costa Rica there is no specific legislation. But the tax authority have found in the substance of reform principle the way to introduce transfer pricing in Costa Rica without any specific legislation. So currently there is some uncertainty in Costa Rica. Transfer pricing rules really apply in Costa Rica or not. Recently the Supreme Court supported the position of the tax authority so it seems that currently transfer pricing really exist in Costa Rica.


The third one is, well, we are seeing how companies are moving operations throughout the globe. We have seen how companies, previously established in Asia, for example in China, or in India, are more interested in near shoring. So companies are moving operations back to the Americas, for example, including manufacturing, and particularly services. So companies are moving operations globally and they are really concerned about what things they have to have in mind to establish operations in Costa Rica and if necessary to leave eventually. So, they want to know what are the rules that apply for indirect investment in Costa Rica.

How are companies dealing with these challenges?

First of all, with respect to the first one, the tax authority becoming more aggressive, companies are more focused and interested in obtaining proper documentation. They know or are aware that that tax audit could be really costly for the company and even more if the tax authority has obtained more powers due to a new legislation. So companies are really interested in obtaining proper documentation to analyze risks in advance and to be well prepared for the audit. And this is something relatively new because before companies just waited for the tax authority to see what may happen. But they now understand that it is better to be well prepared beforehand.


The situation is that companies are really uncertain about what to do with respect to transfer pricing, because on the one hand, there was support by the Supreme Court in respect on transfer pricing, but on the other hand there is no specific legislation. And in general terms the Supreme Courts said, “well, OECD rules apply in Costa Rica based on the substance of reform principle”, but even that is very general. It is not really specific. So companies are uncertain how to proceed with respect to this. But thinking forward, what we see is that the Supreme Court said that the substance of reform principle already instated in the tax code is the basis for transfer pricing in Costa Rica. And because the recent legislation established the possibility of the tax authorities issuing internal directives to specify certain things with respect to the application of the tax rules, we can think that the tax authority will issue these types of directives to further develop transfer pricing rules. So it is not a matter of approving new legislation but how the rules will be applied specifically in Costa Rica. So we can think that very soon the tax authority will have these internal directives and therefore companies will have to be ready to start applying transfer pricing rules. So it is very important for companies to understand what transfer pricing rules are, and what they should do in advance, specifically if this is combined with the first issue that is this greater aggressiveness by the tax authorities related to tax audits. So companies really shouldn’t want to wait for the tax audit to see what may happen with respect to transfer pricing. It is better to be well prepared in advance.


The thing is that because businesses are more complex now and because of all the globalization taking place, companies are not only interested in taxes. Of course taxes are an important part of the decision of moving operation to another country, and of course we are very interested in providing timely and good information with respect to tax incentives. But the thing is that companies are also interested in finding a good location. What happens with respect to human resources is it really feasible to establish an operation in Costa Rica? What are the financial aspects of that investment? So there are many aspects inter-related and linked into that decision. So this is the type of advice that companies are trying to obtain.

Alvaro Castro, a Tax Partner with KPMG in Costa Rica gives his insights on the latest developments in the country

 

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Iberoamerica Tax Summit 2012

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Videos and articles on views captured at the Iberoamerica Tax Summit 2012.