Value Added Tax (VAT) in Costa Rica – How is really going to work

It was until June 11th, 2019, yes!, 20 days before the reinforcement of the new Value Added Tax (VAT) in Costa Rica, that the Tax Administration officially published the Final Version of the Rule to The Law, that is what I call planning ahead!, so now we can go over the basics of how VAT is going to work.

When is VAT going to be effective?

Now, VAT is not really new in Costa Rica, it is just and enhanced version of the already existing Sales Tax, by enhanced I mean that starting July 1^st, 2019 some services, in example accountants, attorneys, engineers, marketing consultants; and goods that weren’t previously taxed now they will.

Are there any exceptions to the Rule?

The only business activities which won’t be Taxed with VAT or will be taxed but a different levels are:

1. Buying or selling a house
2. Renting Residential space long term and as long as the monthly rent is under Ȼ669,300.00 (around $1,145.00)
3. Renting Commercial Space as long as the monthly rent is under Ȼ669,300.00 (around $1,145.00) and the tenant is registered as a PYME (Small and Mid Size Business) at the Ministry of Economy.
4. Private Healthcare services will be taxed at 4%
5. Airfares paid in Costa Rica, will be taxed also at 4%
6. Private Education will be taxed at 2%
7. Tourism related business and certified by the ICT (Costa Rican Tourism Board) and construction projects certified by the CFIA (Costa Rican Engineers and Architects’ Bar) won’t be taxed until 2020, then there will be a progressive tax, starting at 4% the first year, 8% starting on 2021 and 13% on 2022.
8. Also, products listed on the Canasta Básica (Basic Food Basket) won’t be taxed until 2020, then a 1% will apply.

What to do?

Well, don’t panic, if your business is already filing the D104 Monthly Form, then no major changes or adjustments need to be done, if your business was not filing the D104 Monthly Form, then you need to make some minor adjustments, let’s go over what needs to be done for the two scenarios:

If your company already files the Monthly D104 Form (Sales Tax Form), then all you have to do is:

1. Sign Up for a good Factura Electronica (Electronic Invoice) service, if you haven’t already, using a good platform to issue invoices to your customers and receive and validate bills from your vendors is the key, ever since a decent platform will actually keep track of the VAT you collect from your clients and the VAT you pay to on the bills from your vendors.
2. Keep filing as usual the monthly return as usual.

If your company was not filing the Monthly D104 Form (Sales Tax Form), then all you have to do is:

1. Sign Up for a good Factura Electronica (Electronic Invoice) service, using a good platform to issue invoices to your customers and receive and upload bills from your vendors is the key, ever since a decent platform will actually keep track of the VAT you collect from your clients and the VAT you pay to on the bills from your vendors,
2. Your books now should be adjusted, if they weren’t already, in such way that from July 1^st and on, there will be an account or accounts to keep track of the VAT, so you can offset the VAT you paid to your vendors towards the one you collect from your customers.

Do I have to register my business with Hacienda?

Either your company was filing or not the D104 Form, the Tax Administration, by default, will register all the corporations under the VAT system, so you don’t need to take any further action, unless yours is a none income producing entity, in which case you will actually have to de-register the entity.

What is the best VAT Strategy?

Simple, keep in mind that your business is just a vehicle to collect the VAT and forward it to the Costa Rican Government, after you offset the VAT you paid to your vendors, this basically means that the VAT is not a Tax on your business, so the best strategy is to properly keep track of the VAT.

So bottom line and despite of all the drama that has been created around VAT, as you can tell from above, the key is to sign up for a good Factura Electronica system, make sure that your accountant is keeping good track of the collected and paid VAT and you will be OK.