On January 17th, 2011, the Costa Rica’s lawmaker resumed their activities after the year end holidays season, and at the very top of their to-do-list is the Tax Bill, and of course the main pilot of such Bill is the Value Added Tax (VAT) which overall will replace the current Sales Tax

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How would this tax works?

Once again, the Government claims to be on the poor people’s side, and they also claim that this tax is going to be more of a “luxury tax”, to tax the services and items bought by the upper class in Costa Rica, so in order to accomplish this the want to:

  • Reduce from 300 to 50 the current list of sales tax’s exempted items and services.
  • Include new items and services to the VAT’s list such as health and medical services, professional fees, private education, etc.
  • Increase from 13% to 15% the rate of the Sales Tax once it becomes VAT.

The filing and payment periods are probably going to be the same; on a monthly basis for regular companies and individuals commanded to collect this tax and on a quarterly basis for small companies (PYMES and MICROPYMES), so the changes are not going really to change the core of the current sales tax but the rate and taxable items and services.

But, why?

Simple, since 1986, starting on first Oscar Arias Sanchez’s Administration, the Costa Rica’s public finances have been managed poorly, as a result of this poor management, the government increased the expenses and the revenues are not enough to cover those expenses, basically because the last administrations, mainly the two administrations leaded by Oscar Arias Sanchez, were focused in other issues other than the country itself, therefore, they kept borrowing money from international organism while the taxes, the blood of the Government, where left at God’s willing.

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Bottom line, is that Laura Chinchilla, the current administration and the Treasury Ministry Fernando Herrero, believe that now we all have to pay for that lack of commitment and skills by increasing the rate and the taxable items and services in the way of Value Added Tax, but shouldn’t they wonder if a more efficient and tax payer friendly collections process will increase the government’s revenues?

To rent or buy this one hour video with Costa Rica Tax Expert Randall Zamora, please visit our Video On Demand page here.

If instead of the government’s auditors sitting at their desks, shouldn’t those auditors be knocking on the doors of those who never paid those taxes to begin with?

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My Approach.

If the Government wants this Tax Bill to be approved by the lawmakers, then Laura Chinchilla and Fernando Herrero should prove first that the Costa Rican Tax Administration is efficient at collecting the current existing taxes and serving those who are not paying taxes properly or not paying taxes at all.

A good example of this is the Luxury Property Tax where during the first year we can see that only 4 (and I am being generous) out of 10 paid this tax and the Tax Administration is not even capable to serve the 6 who did not pay.

So I would say that reducing the expenses and improving the current tax collection process will avoid to wasting time at the Costa Rican Congress as they argue about another new and poorly designed tax.

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Costa Rica Tax Expert Randall Zamora.

Written by Randall Zamora who is the President and CEO of CostaRicaABC.com, former CFO and Head of Accounting Department of multinational companies like Four Seasons Resort Costa Rica, active member of the Interamerican Accounting Association, Pro Bono Local Partner of The World Bank and contributor to their yearly publication “Doing Business Report.”

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