By Garland M. Baker
Special top A.M. Costa Rica
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.
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A.M. Costa Rica
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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 sure 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 spends 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 not
consistent 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.
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Editor's
note: Garland M. Baker
is a 46-year resident
and naturalized citizen
of Costa Rica. His team
solves problems for
expats. Reach him at
info@crexpertise.net.
Baker has undertaken the
research leading to his
articles in conjunction
with A.M. Costa Rica.
Find the collection at http://crexpertise.info.
A free reprint is
available at the end of
each piece. Copyright
2018, use without
permission prohibited.
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