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The new tax law passed the legislature at the end of last year and came out in the judicial newspaper La Gaceta Dec. 4. The full effect begins six months from that date, or around June 4. Expats should brace for some expensive surprises. Here is a quick study guide to what they can expect.
Costa Rica just experienced the longest strike on record for the country. It lasted 90 days. President Carlos Alvarado insisted the country needed a new tax initiative to get it out of financial trouble. Most unions and many individuals opposed the plan for a myriad of reasons, so the strike went on and on.
That discourse is not of import now. The law is now a reality, called the Fortalecimiento de las Finanzas Públicas (Strengthening of Public Finances) Ley 9635. That's a fancy name for what it is: a tax law packing a big bite and severe consequences for tax cheaters.
The legislation is in four parts: The first and second parts rewrite the sales and income tax laws. The third and fourth deal more with government employees and fiscal procedures to save money.
How will the changes affect expats?
Most people already know there will be new sales taxes on everything, but not why that is the case. In the past, sales taxes had two targets: products and services. All products carried sale tax, except for the exceptions. All services did not, again, except for the exceptions. Under the new plan, everything will now generate a value-added tax, except for very few exclusions.
The old and new tax is 13 percent on most everything, including legal services, a significant expense for retired people in Costa Rica. Some goods and services will benefit from lower taxation: local air travel and private medical services will be assessed 4 percent. International air travel is being assessed 10 percent. Medication, private educations and personal insurance will be assessed 2 percent. Items in the basic food basket (canasta basica) will be assessed 1 percent.
Expats will pay more when they see their lawyer or doctor and buy rice and beans, to name a few items. Those renting where their monthly payment exceeds 1.5 times the current basic salary of 466,200 colons or a total of 669,300 colons (about $1,115) will have to fork out another $145 in sales taxes.
New calculation methods and thresholds will increase electricity and water bills too.
The examples above are mere nibbles at an expat’s pocketbook. Here is the big bite:
Those in Costa Rica over the years have enjoyed life without capital gains. Many retired people have invested their life savings in property here. In the past, properties were bought and sold by individuals not in the business of real estate without tax consequences.
That has all changed. The new capital gains tax is 15 percent according to Article 31 of the new law. There will be one exception, taxed a 2.25 percent.
Here is an example: Joe and Jane expat came to Costa Rica 10 years ago and bought two properties, both for $10,000 to make things simple. They want to go back to their home country to be closer to their grandkids. Before Dec. 4, they could have sold the properties free of tax and returned home happy retirees.
Again, for illustration purposes, they sell both properties in 2019 for $110,000 each. Their basis is their original investment of $20,000 for both. They will need to pay $2,250 on the first property and $15,000 in taxes on the second under the new tax law.
There are those who would say the amounts are fair. The country certainly can use the money. However, many expats came to Costa Rica over the years expecting to pay nothing, and $17,250 is sure a lot more than zero. They will be mad at the change.
The above is a simple example to make the tax amount clear, but most would say it is unrealistic, and it is of course. People owning real estate are continually pouring money into it for maintenance and improvements.
Almost everyone knows the meaning of the words cost basis as applied to real estate transactions. It is the original cost of a property, plus improvements and less depreciation, to arrive at a value to calculate capital gains.
Some people keep excellent records. Others do not. The trick under the new tax law will be to prove the total amount invested, so not to overpay capital gain taxes.
Lic. Kevin Chavarria, a certified public accountant, reached on the telephone, said the capital gains taxes should not surprise anyone. Officials have talked about it for years. Along with better tax collection, the new levy should help the country get back on its financial legs, that is if officials also improve the way they spend the money the government collects, he clarified.
There are few places in the world nowadays not trying to improve taxation policies. Developing countries help the under-developed, so they can make a market for their goods and loan them money for infrastructure.
Costa Rica is a perfect example of this fact. The country borrows more than it should, mostly for the benefit of its people, but also other reasons inconsistent with proper financial planning. Debt is projected to trend around 70 percent in 2020 according to some economic models.
One can only hope it will make better decisions under the new fiscal plan.
Article first published in A.M. Costa Rica on January 14, 2019.
