Costa Rica - Indirect Tax Guide

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 is 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
bars
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
insurance premiums (except for insurance referring to work risks, crops, social housing and personal insurance).

All other services are not subject to VAT since the law does not expressly mention them.

What are the standard or other rates (i.e. reduced rate) for VAT/GST and other indirect taxes?

The standard rate for VAT is 13 percent, with reduced rates of 0, 5 and 10 percent. Excise taxes range typically between 10 and 50 percent. Reduced VAT rates are applicable on: wood - 10 percent; residential electricity - 5 percent; ‘basic basket’ of groceries and other basic goods - 0 percent; exports - 0 percent.

VAT/GST registration

Who is required to register for VAT/GST and other indirect taxes?

A legal entity should be registered as a VAT taxpayer when it sells goods or provides services that are subject to VAT in the local market on a regular basis. There are no thresholds for VAT registration. However, there are several methods providing for an exemption/suspension/reimbursement of VAT , usually in connection with re-export of the goods or with the production of goods sold locally under VAT exemption.

In order to register as a VAT taxpayer, it is necessary to have a local presence that conducts taxable transactions within Costa Rica. This implies either a permanent establishment or the incorporation of a subsidiary/branch/corporation in Costa Rica.

Regarding excise taxes, individuals or entities that assemble or manufacture goods above 2 million Costa Rican colons (CRC) in market value a year are required to register as taxpayers.

Is voluntary registration for VAT/GST and other indirect taxes possible for an overseas company (e.g. if the annual turnover is below the relevant VAT/GST and other indirect taxes registration threshold)?

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 regular basis or it is an importer of merchandise subject to VAT.

This activity should be performed through a branch, an agency or a representative with general power of attorney, or a subsidiary.

Are there any simplifications that could avoid the need for an overseas company to register for VAT?

No. 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.

Does an overseas company need to appoint a fiscal representative?

No. Foreign entities are not allowed to register for VAT in Costa Rica.

Only permanent establishments, local subsidiaries/branches/corporations engaged in the regular trading of goods or the provision of services subject to VAT, are allowed to register as such. Permanent establishments are treated as any other local taxpayer and subject to ordinary tax obligations. In order to comply with these obligations, it is expected that the permanent establishment will have a fiscal representative with authority to file income tax returns, respond to inquiries by the tax authorities and file the registration as a VAT taxpayer.

Which forms and supporting documentation does an overseas company need to submit for VAT/GST and other indirect tax registrations?

Not applicable.

Is grouping* for VAT/GST and other indirect taxes possible?

No.

VAT/GST compliance

How frequently are VAT/GST and other indirect tax returns submitted?

VAT and excise tax returns must be submitted monthly.

What are the exchange rate rules in your country?

In accordance with Resolution 26-2006 issued by the director of the tax administration, transactions in foreign currency must be recorded at the reference exchange rate determined by the Central Bank of Costa Rica. When debts are settled or receivables are recovered, the taxpayer may use the exchange rate determined by the entity it prefers.

International Supplies of Goods and Services

Exports – Goods

How are exports of goods treated?

Exports are treated as zero-rated operations, and input VAT may be recovered as described in the VAT Recovery Section.

Exports – Services

How are exports of services treated for VAT/GST purposes?

Services destined to be consumed outside of Costa Rica are exempt from VAT.

Imports – Goods

How are goods dealt with on importation?

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.

Imports – Services

How are services brought in from abroad treated for VAT purposes?

Services from abroad are not subject to VAT.

VAT/GST recovery

Can an overseas company recover VAT/GST and other indirect taxes if not registered for VAT/GST locally?

No.

Are there any exemptions with the right to recover or deduct input VAT?

Yes. The sale of exempt goods (the “basic basket” that includes groceries and other basic items) allows the right to recover input VAT incurred for the production, distribution or commercialization of said goods.

Are there any restrictions to the deduction of input VAT?

Input VAT incurred in relation to services not subject to VAT is not recoverable (i.e. exempt goods and services). The Costa Rican system is not a classic VAT system because most goods, and only certain services, are taxed. Furthermore, when manufacturing taxable goods and services, the taxpayer can only credit the VAT paid for inputs that are used in the production, distribution or commercialization of said taxable or exempt goods or taxable services. Otherwise, a VAT credit is not allowed for other costs incurred.

Tax points

When is VAT/GST due on a supply of goods or services?

GST is due once the service is rendered, the good is delivered or the invoice is issued, whichever occurs first. This transaction must be included the corresponding month’s GST return and the return must be filed no later than the fifteenth day of the following month. In the case of imports, GST is due upon acceptance of the import policy or customs form.

Invoices

Is a business required to issue tax invoices?

Yes.

Is it possible/mandatory to issue invoices electronically?

Yes, however, in order to issue electronic invoices, the taxpayer must comply with the requirements stated in Resolution of the Tax Administration Number 48-2016 dated 7 October 2016.

Tax authorities have authorized the use of vouchers under certain conditions.

Is it possible for the vendor to issue an invoice, i.e. is self-billing possible?

No.

Record-Keeping Requirements

How long must records and invoices be retained?

Invoices and records must be retained in Costa Rica for five years.

Can the invoices be stored abroad?

Invoices should be stored in the country to be available upon request of the tax administration.

Audits

Do tax audits take place on a regular basis?

Only large taxpayers are subject by law to tax audits at least once every 4 years. Other taxpayers are not (in principle) subject to regular tax audits. Tax audits for a particular taxpayer will depend on whether this taxpayer meets the “Objective Selection Criteria” set forth by the Tax Administration to determine which taxpayers will be audited during the fiscal year, plus whether the taxpayer shows signals of increased tax risk.

Are audits done electronically in your country (e-audit)? If so, what system is in use?

Audits are not done electronically in Costa Rica. Typically, a central team will analyze the taxpayer’s profile and available tax information and provide guidance to the auditor as to particular transactions or areas of risk where they should focus their attention.

What penalties can arise from non-compliance?

Penalties for non-compliance may range from fines (50 percent of the applicable tax) to imprisonment.

Special Indirect tax rules

Are there any special rules for the sale of a company by one taxpayer to another where VAT is not due on the sale?

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). In this case, any remaining VAT credits from the seller will be automatically transferred to the buyer of the business. VAT is not due on intangible assets, therefore the sale of companies under a share transfer structure is not subject to VAT. Used or second-hand goods where the owner did not recover the VAT paid upon purchase are not taxable upon sale.

Are there unique specific indirect tax rules that you would not expect to find in ‘standard’ VAT jurisdictions?

Yes, the 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, as Costa Rica has a non-classic VAT system, expenses related to only partially taxable business can be deducted:

only to the extent that these expenses relate to inputs that the taxpayers use for the production, distribution or commercialization of taxable services or taxable or exempt goods;
subject to VAT and provided that they are not listed in those excluded by Article 11 of the VAT law. According to Article 11 of the VAT law, 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 on 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.

Does a reverse charge mechanism apply for goods or services?

No.

Are there indirect tax incentives available (e.g. reduced rates, tax holidays)?

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.

The Free Trade zone incentive system provides that companies are not subject to VAT on their purchases or sales. This is also true in the case of the Inward Processing Relief incentive system.

Rulings

Are rulings and decisions issued by the tax authorities publicly available?

Yes, they can be accessed.

For further information please contact:

Sergio García
Partner
KPMG in Costa Rica
T: +506 2201 4292
E: sgarcia1@kpmg.com

Footnote

^*By ‘grouping’ we mean: either a consolidation mechanism between taxpayers belonging to the same group (payment and refund are compensated but taxpayers remain distinct) or a fiscal unity for VAT/GST purposes (several taxpayers are regarded as a single taxpayer).