By Jay
Brodell,
Editor Emeritus of A.M. Costa Rica
There is something wrong about a
capital gains tax. A government is
being rewarded for the
depreciation of its currency.
The United States has done this
since the early 1900s. Just like
the United States, the United
Kingdom recently began to apply
capital gains on overseas
properties sold by their expats.
Now Costa Rica has joined the
parade.
The problem is that the asset on
which the tax is levied probably
has not improved in real
value. The big profit in a
real estate sale, for example, is
due to the devaluation of the
currency. A U.S. property worth
$80,000 in 2001 may sell for
$150,000 now, based on an online
calculator of present worth. That
$70,000 so-called profit is
subject to capital gains tax, but
the change in value is all a
result of the inflation of the
dollar, based on the consumer
price index.
In Costa Rica the situation is
more dramatic because the colon
depreciates more.
What all governments need to do is
apply an inflation adjustment to
the so-called profit. But
government officials will not
because they recognize the tax
take would be much lower.
In other words, governments are
rewarded for their excessive
spending that causes the currency
to depreciate. The tax people, in
the U.S., Costa Rica, the U.K. and
many other countries simply are
taking a bite out of assets that
for the most part have not
improved in real value.
The Costa Rica capital gains tax
that went into effect Monday
probably will have many days in
court. As Garland Baker reported
Monday, many expats have not saved
proof of improvements of their
real estate assets.
Therefore, they cannot show that
some of the profit on the sale of
an asset actually is offset by
additional investments they have
made.
They did not save this
documentation because the law
until Monday did not require
it. That raises an issue
with Article 34 of the Costa Rican
Constitution that says “no law
will be given retroactive effect
in prejudice to any person, or to
their acquired patrimonial rights
. . . .”
A reading favorable to property
owners would mean that the base
value used to determine capital
gains should be an asset's value
Monday and not the purchase price
paid years ago.
It might take years to litigate
this and many other challenges to
the law. Meanwhile, clever
lawyers, accountants and asset
owners will be finding many, many
ways to circumvent the law's
provisions.
