VAT Law since 2019 – basics

Background

The VAT Law (VATL) came into force in Costa Rica on 1 July 2019, amending the prior Sales Tax Law.

Relevant changes: all services will be taxable, the concept of goods includes all transfers of tangible assets (fixed assets or inventories) and intangible assets (software, payment of royalties, etc.) which are also deemed as a service and taxable.

There are specific exemptions, including: interest on loans, assignment of shares, exports of goods or services, renting of houses (if a limit is provided for), printed books, private education services (primary and secondary school), reorganisation transactions (between related entities) and the transfer of the business through shares or the sale of the substantial assets.

The principle of the VATL is that all input taxes are credit and are deducted from the output (debit). Therefore, the taxpayer would pay the difference or, if the credit is higher than the debit, there would be a balance in favour of the taxpayer.

If the tax rates of the goods or services are lower than 13% (standard rate) whenever the VAT is collected, the input VAT paid by the taxpayer would be credited in the percentage of the ratio of sales at different rates to total sales. This mechanism is known as the ratio method.

According to the above, there are exceptions in the VATL. In order to not lose VAT credit, e.g. sales to the Social Security Institute, Local Governments, Red Cross and goods or services included in the database of the tax administration are deemed as necessities.

Exporters of goods or services can purchase, exempt from local suppliers, if they are included in the EXONET system and have a tax code. The taxpayer should disclose, in its electronic invoice, the tax code to justify the exemption.

Entities of the Free Trade Zone regime can also buy exempt. However, if they sell to customers located in Costa Rica, they would need to import goods by paying the VAT and using it as a credit in the local transaction collecting the output VAT.

In relation to reverse charge, entities that import services should calculate the VAT over the total of the purchase, using the invoice as support documentation and pay the VAT. They can use the VAT as a credit to calculate the debit for the month.

Relevant rulings

Due to the recent enforcement of the VATL, there are no tax audits or challenges concerning the tax treatment of the law, but there are some rulings in which the tax administration has responded to queries of the taxpayers:

Taxpayer offering outsourcing services: The tax administration stated that, if employees are working in the customer ́s office but are on the supplier ́s payroll, the costs of those salaries and social charges could be reimbursed without VAT.

Collecting services for the lending company: The Costa Rica entity (taxpayer) renders (collection) services to a foreign entity that grants loans to Costa Rica customers and the collecting company charges a commission for its services. The taxpayer asked whether those services are taxable with VAT, arguing that the customer is located outside of Costa Rica. Based on the territoriality principle, the tax administration said that if services are provided in Costa Rica they are deemed as Costa Rica source income and VAT has to be assessed.