Scope and Rates
In accordance with the Sales Tax Law (the VAT Law), VAT is levied on the sale of all merchandise within the country and/or the import of merchandise into the country.
According to Article 1 of the Executive Regulation to the Sales Tax Law, the term merchandise must be understood as any material, product, article, manufacture, and in general, all movable goods produced or acquired for their processing or trade. According to this article, the term merchandise does not include intangible property such as stock or securities. Immovable property is also excluded from the term merchandise.
Only those goods specifically listed in the regulations as exempt are exempted from VAT.
Unlike goods, services are not subject to VAT except when expressly taxed by law. Article 1 of the VAT Law includes a list of services that are subject to the General Sales Tax.
Taxable services include:
- services provided by restaurants
- night, social, or recreational centers
- hotels, motels, pensions, and similar establishments
- repair shops of any kind of merchandise including motor vehicles
- parking facilities
- telephone, cable, or telex services.
Article 1 of the law also includes:
- photocopying and photographic developing services
- certain storage services
- laundry and ironing services
- public shows except sports, theater, and children's movies
- advertising services
- cable and satellite television services
- customs broker services
- removal services
- services rendered by real property brokers
- pagers and similar services
- washing, cleaning, and maintenance services for vehicles
- services rendered by printing houses and lithographers and
- insurance premiums (except for those insurances referred to work risks, crops, houses of social interest, and personal insurances).
All other services are not subject to VAT since the law does not expressly mention them.
The prevailing standard rate of VAT is 13 percent.
There are two reduced rates: wood is subject to a 10 percent rate and residential electricity is subject to a 5 percent rate.
The category of exempt items includes nearly 200 different basic products. Basic food and other basic necessities (this article provides a concept of basic basket or canasta basica) are zero-rated by the Sales Tax Law.
Exempt goods are defined in article 9 of the Sales Tax Law include: tires for agricultural equipment, veterinary supplies defined by the Ministry of Agriculture and the Ministry of Finance, medicines, kerosene; diesel for fishing activities (others than sport fishing), books, musical compositions, paintings created within Costa Rica by Costa Rican or non-Costa Rican painters, coffins, and the monthly consumption of electric energy when it does not exceed 250 kW/h. If the consumption exceeds this amount, the rate (5 percent for this case) applies to the complete charge. Exports of goods are also exempt, as well as the re-importation of merchandise of Costa Rican origin, occurring within the three years following their exportation.
Excise taxes and some specific taxes (e.g., on fuel, cement, and alcohol).
Costa Rican Entities
Under the value-added taxation system established by the VAT Law, taxpayers are those:
- individuals or entities that produce or sell goods or services subject to VAT. In such case, the final tax liability is calculated by subtracting total VAT paid on imports or local purchases from total VAT collected from taxable sales during a given period. These individuals or entities are known as VAT taxpayers, and have an obligation to register as such with the local tax authorities as per Article 5 of the VAT Law. Registration is a simple process and is accomplished by filing a registration form with the local tax authorities. It can usually be accomplished in a couple of days.
- Individuals or entities engaged importing or storage of merchandises are considered taxpayers for purposes of the VAT Law (they must register as such in order to obtain a credit on taxes paid on inputs).
- Individuals or entities engaged in export sales are considered as declarants of the VAT.
Non-Costa Rican Entities
The Costa Rican VAT law does not distinguish between Costa Rican and non-Costa Rican entities. Non-Costa Rican entities that fall under the description indicated above are required to register as VAT taxpayers.
There are penalties for not registering or late registration. This failure may cause a sanction equivalent to the payment of 50 percent of a minimum salary for each month or fraction thereof. For 2012, the minimum salary has been established at COC 360,600 (approximately USD 700).
An overseas company can register as a VAT taxpayer when it sells goods or provides services that are subject to VAT in the local market, on a habitual basis, or when the entity is an importer of merchandise subject to VAT. This activity should be performed through a branch, agency, or representative with general power of attorney or a subsidiary.
Only permanent establishment, local subsidiaries/ branches/ corporations of foreign companies engaged in regular trading of goods or the provision of services subject to VAT are allowed to register as such.
Registered businesses are required to submit VAT returns monthly in the first 15 days of each month.
Transactions in foreign currency must be recorded at the reference exchange rate determined by the Central Bank of Costa Rica.
Under Costa Rican legislation, VAT can only be recovered on raw materials, inputs, machinery, and equipment physically incorporated or directly used in the production of taxable goods or services. Use is defined as physical use, directly in the process of producing goods or services subject to VAT. Anything that does not fall within this definition would not generate a VAT credit.
International Supplies of Goods and Services
Exports are treated as zero-rated operations, and input VAT may be recovered as described in the VAT Recovery Section.
Services destined to be consumed outside of Costa Rica are exempt from VAT.
Imported goods are subject to VAT. The tax basis is the CIF value of the good, plus duty and any applicable excise tax.
Another option for VAT taxpayers is to request a special authorization to acquire or import high value machinery used directly in the productive process without paying VAT. The special authorization is granted only if the amount of VAT payable makes it difficult or impossible for the VAT taxpayer to recover through the regular credit and debit system.
The services brought from abroad into Costa Rica are not subject to VAT.
In accordance with the law, invoices have to be written in Spanish; have a duplicate, one for the buyer and the other for the seller. The invoices must have at least the following requirements:
- full name of the taxpayer
- register number
- consecutive number
- conditions of the sale (that is, credit or cash)
- name of the lithography and its impression identification data
- Transmission date
- full name of the buyer
- identification number of the buyer, if the buyer is a taxpayer registered for VAT
- detail of the merchandise transfer express in CRC
- discounts, if applicable, the nature and amounts
- excise Tax, when the seller is a taxpayer for this tax
- the value of the services rendered, divided between the value of the taxable services and the value of the exempted services
- gross price of the sale
- value-added tax amount
- total invoice value
Tax authorities have authorized the use of vouchers as a support of incomes and expenses that respond to designs and legible logos done by computer. These vouchers have to be authorized by the tax administration, and should contain the same information that an invoice includes.
Also, this support has to guarantee the confidentiality, authenticity and integrity of the information contained.
Yes, but the document must indicate the exchange rate used to determine the amount in the foreign currency and detail the amounts in the invoice.
Transfers of Business
A sale of the assets (fixed or intangibles) of a going concern is not subject to the sales tax because such goods are not acquired for the purpose of resale or industrialization within the country and hence are not considered taxable merchandise for VAT purposes. Inventories transferred as part of the sale of a going concern are not subject to VAT as long as the purchaser is also a VAT taxpayer (not a final consumer).
Options to Tax
Head Office and Branch transactions
The transactions between head office and branch are not treated differently from the transactions that occur between two non-related parties.
No. There is no general anti-avoidance provision under Costa Rican VAT Law. However, general anti-avoidance provisions are established on articles 8 and 12 of the Standards Procedures Tax Code, which establish the substance-over-form principle (known as economic reality principle) and the principle that states that agreements among private parties cannot be opposed to the tax administration. These principles can be applied to the application of VAT by the tax administration.
There is a penalty for late registration and also other penalties for failure to file a tax return, the taxpayer will have a fine of 50 percent of a base salary for each month or fraction thereof (USD 300). This penalty is limited to three base salaries (USD 1,800 approximately).
The penalty for late payment of VAT is a 1 percent fine for each month or fraction thereof. This amount is calculated on the underpaid amount. This late payment fine has a 20 percent cap.
A general penalty for inaccuracy of 25 percent of the shortfall could also be applied.
How often do tax audits take place?
Large taxpayers are subject by law to tax audits at least once every four years. Other taxpayers are not subject to regular tax audits.
Are there audits done electronically in your country (e-audit)? If so, what system is in use?
Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?
Are rulings and decisions issued by the tax authorities publicly available in your country?
Yes. Costa Rican VAT (known as Sales Tax) does not work as a classic VAT system in which the tax paid in the previous stage of the sale chain (or paid at customs when importing the goods) can be credited to partially offset the VAT liability of the reseller. Another case is when a company has to buy goods subject to VAT to produce an exempt good or service. In that case, the taxpayer would be unable to credit the VAT previously paid but may request an authorization from the tax authorities to purchase those inputs or acquire those services exempt from VAT.
Therefore expenses related to only partially taxable business can be deducted, only to the extent that these expenses relate to services and raw materials physically incorporated in the goods being manufactured or the service being furnished subject to VAT and provided that they are not excluded by article 11 of the VAT law. According to this article, the following should be excluded from the taxable base:
- discounts acceptable and normally used under ordinary trading practices if separately indicated in the purchase invoice
- the value of services rendered in connection with the sale of taxable goods, as long as they are furnished by third parties and are invoiced and recorded separately in the accounting registers.
- financial expenses invoiced and recorded separately in the accounting registers.
VAT legislation allows taxpayers under specific circumstances to request the Authorized Purchase System. Through this system the VAT liability on importation may be avoided.
The related regulation states that the tax administration might authorize free VAT purchases when it is not possible or it is difficult for taxpayers to offset the VAT credit that otherwise would have been generated against their pending VAT liabilities. This authorization is limited to specific cases.