Costa Rica VAT, GST, and Sales Tax Guide

Costa Rica

San José GMT

EY

Centro Corporativo Epic, Piso 6 San Rafael Escazú, San José Costa Rica

Indirect tax contacts

Rafael Sayagués

+506 2208-9880

New York: +1 (212) 773-4761 rafael.sayagues@cr.ey.com

Guillermo Leandro +506 2208 9887 guillermo.leandro@cr.ey.com

Juan Carlos Chavarría +506 2208-9844

juan-carlos.chavarria@cr.ey.com

Antonio Ruiz +506 2208-9822 antonio.ruiz@cr.ey.com

A. At a glance

Name of the tax

Value-added tax (VAT)

Local name Value-added tax (VAT)

Date introduced 4 December 2018

Trading bloc membership Central American Integration System

Administered by Ministry of Finance (http://www.hacienda.go.cr/)

VAT rates

Standard 13% Reduced 1%, 2%, 4% Other Zero-rated (0%) and exempt

VAT number format

VAT return periods

Thresholds

Corporate (start with 3-101 or 3-102 followed by six more numbers) or individual identification number (nine numbers)

Monthly

Registration None

Recovery of VAT by non-established businesses No

B. Scope of the tax

VAT applies to the following transactions:

• All types of transfers of goods and the rendering of services in Costa Rica by taxable persons, unless a specific exemption is provided

• Self-consumption

• The importation of goods and services into Costa Rica, regardless of the status of the importer

• Lease of goods with purchase option

C. Who is liable

A VAT taxable person is any business entity or individual that sells taxable goods (including imports and exports of goods) or that provides taxable services on a regular basis. A permanent establishment of a foreign business in Costa Rica may be a VAT taxable person.

No turnover threshold applies to VAT registration. As soon as a taxable person begins a taxable activity, it must notify the VAT authorities of its obligation to register. A taxable person that does not notify the VAT authorities of its obligation to register may be automatically included in the registry of VAT taxable persons.

Exemption from registration. The VAT law in Costa Rica does not contain any provision for exemption from registration.

Voluntary registration and small businesses. The VAT law in Costa Rica does not contain any provision for voluntary VAT registration as there is no registration threshold (i.e., all entities or individuals that make taxable supplies are obliged to register for VAT).

A simplified VAT regime applies to small taxable persons. The simplified regime applies to individuals who carry out a limited range of activities, such as small retail activities, including operating a grocery store or minimarket. To qualify as a small taxable person, the entrepreneur’s annual purchases may not exceed CRC64.650 million (approx. USD103,628), and the entrepre neur may not have more than five employees. Under the simplified regime, presumed taxable turnover is calculated by applying an estimated profitability factor that is determined based on the taxable person’s business sector. The VAT rate is applied to the presumed taxable turnover and the small taxable person pays VAT on that base.

Group registration. Group VAT registration is not allowed in Costa Rica.

Non-established businesses. A “non-established business” is a business that has no fixed estab lishment in Costa Rica. In principle, a non-established business must register for VAT if it sup plies goods or services in Costa Rica.

Tax representatives. At the moment of registering an entity as VAT taxable person, a tax repre sentative must be appointed. The tax representative must be the legal representative of the entity.

Reverse charge. If a non-domiciled entity renders a service consumed and utilized within the Costa Rican territory, the local recipient should apply the reverse-charge mechanism to declare and pay the VAT within 15 days of the following month in which the service was rendered or the invoice was issued, whichever occurs first.

Domestic reverse charge. There are no domestic reverse charges in Costa Rica.

Digital economy. For business-to-consumer (B2C) supplies, the VAT law establishes that financial institutions responsible for processing credit or debit card payments should withhold VAT (at a rate of 13%) in payments made for services rendered to local customers through internet or digital platforms. As such, it should not be necessary for nonresidents providing electronically supplied services in Costa Rica to register and account for VAT.

However, foreign entities and individuals may voluntarily register as foreign suppliers or inter mediaries and register for VAT for local purposes to charge, collect and pay VAT to the tax authorities personally and not through third parties (i.e., financial entities).

Where a nonresident service provider or intermediary decides not to register and account for VAT, the financial entities are instead required to collect and account for the VAT due.

For business-to-business (B2B) supplies, the nonresident provider is not required to register and account for VAT in Costa Rica. Instead, the customer is required to self-account for the VAT due by way of the reverse-charge mechanism (see the Reverse-charge subsection above).

There are no other specific e-commerce rules for imported goods in Costa Rica.

Online marketplaces and platforms. The tax authorities are authorized to charge VAT to providers and intermediaries that sell services consumed within the Costa Rican territory through a digital platform. Moreover, financial institutions that process credit/debit cards should act as withhold ing agents for VAT derived from the purchase of services through the internet and any other digital platform if they are consumed within the Costa Rican territory.

Registration procedures. Taxable persons must register at the time they start selling goods or providing services subject to VAT. Registration is in person at the tax administration offices by completing the VAT registration form (D-140) or online if the tax representative is a Costa Rican individual or has a tax identification number.

Deregistration. To deregister, the taxable person must file form D-140 in person at the offices of the tax administration or online, and the last VAT return must be filed within 10 days after dereg istering. Note that the form D-140 is used for both registration and deregistration for VAT for taxable persons in Costa Rica (as well as changes to VAT registration details, see the Changes to VAT registration details subsection below.

Changes to VAT registration details. The taxable person has the obligation to inform the tax administration of any modification or change in its personal or legal data registered at the time of VAT registration. In this case, the taxable person must file the data modification return (D-140) within 10 working days from the date the change occurred.

The notification process can be carried out online or personally at the offices of the tax admin istration.

D. Rates

The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero rate.

The VAT rates are:

• Standard rate: 13%

• Reduced rates: 1%, 2%, 4%

• Zero-rate: 0%

The standard rate of VAT applies to all supplies of goods and services unless a specific measure provides for a reduced rate, the zero rate or an exemption.

Examples of goods and services taxable at 0%

• Goods and services destined for exports, goods and services sold to a beneficiary of Free Trade Zone Regime (FTZR)

• Books

• Services rendered for cultural radio stations

• Private education services when they are rendered by preschool, middle school, high school, college and any other education institution supervised by the Superior Education Counsel (in Spanish: “CONESUP”)

Examples of goods and services taxable at 1%

• Goods that form part of the “basic consumption basket” (a list of items essential for the traditional household).

• Veterinary products and agricultural and fishing supplies for consumption, defined between the Agriculture and Livestock Department (MAG) and the Department of Finance

Examples of goods and services taxable at 2%

• Medicines

• Private education services

• Personal insurance premiums

Examples of goods and services taxable at 4%

• Private health services

• Local flight tickets

The term “exempt supplies” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.

Examples of exempt supplies of goods and services

• Domestic monthly consumption of electricity not exceeding 280 kilowatts per hour

• Books

• Exported goods

• Re-importation of national goods within three years of their export

• Private education services, preschool, elementary, middle school, high school, university and technical education

• Sale or importation of wheelchairs, orthopedic equipment, prostheses in general, equipment used by persons with hearing problems, equipment used in rehabilitation and special education programs

Option to tax for exempt supplies. The option to tax exempt supplies is not available in Costa Rica.

E. Time of supply

The time when the taxable event is considered to have taken place and VAT becomes due is called the “tax point.”

For the sale of goods, the tax point is the earlier of the delivery of the goods or the issuance of an invoice. For services, the tax point is the earlier of when the services are performed, or an invoice is issued.

Deposits and prepayments. There are no special time of supply rules in Costa Rica for deposits and prepayments. As such, the general time of supply rules apply, and the tax point is the earlier of the invoicing or delivery/performance.

Continuous supplies of services. There are no special time of supply rules in Costa Rica for continuous supplies. As such, the general time of supply rules apply, and the tax point is the earlier of invoicing or delivery/performance.

Goods sent on approval for sale or return. If goods are sent on “approval” or for “sale or return” conditions, the tax is due when the goods are delivered. If the goods are ultimately returned, a credit note should be issued and VAT reversed.

Reverse-charge services. There are no special time of supply rules in Costa Rica for supplies of reverse-charge services. As such, the general time of supply rules apply (as outlined above).

Leased assets. The lease of goods with or without an option to purchase are subject to VAT. The tax point is the earlier of the delivery of the goods or the issuance of an invoice.

Imported goods. The time of supply for imported goods is when the bill of lading or the customs form for the goods is accepted.

F. Recovery of VAT by taxable persons

A taxable person may offset input tax, which is VAT paid on the purchase of goods and services used to generate other goods and services subject to tax. Input tax is generally credited against output tax, which is VAT charged or collected on the sale of goods or the rendering of services.

An input tax credit may be taken in the month of the import or the acquisition of goods and services. Taxable persons can receive a tax credit or deduction for tax paid with respect to the following:

• The purchase or importation of goods and services used in the production, trade and distribution of taxable merchandise or services, as long as such services are directly and exclusively linked to the taxable person activity

• The payment of insurance premiums for the protection of merchandise used or incorporated physically in the production of taxable merchandise or services, as long as such premiums are directly and exclusively linked to the taxable person activity

• The purchase of merchandise used during the production, trade and distribution of exempt merchandise or of goods for exportation (while these are exempt goods, when they are export ed, recovery is allowed)

The time limit for a taxable person to reclaim input tax in Costa Rica is four years.

A valid tax invoice or customs document must generally accompany a claim for an input tax credit.

Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used in the production, trade and distribution of the final goods and services supplied by the taxable person.

Examples of items for which input tax is nondeductible

• Overhead expenses of a business, generally

Examples of items for which input tax is deductible (if related to a taxable business use)

• Insurance premiums

• Wrapping, packaging, etc.

Partial exemption. Exempt activities do not give rise to a right of input tax recovery. The purchase of goods and services that are used for both exempt activities and taxable activities may give rise to the right of input tax proportionally based on the percentage of taxable activities in relation to the taxable person’s total activities.

Approval from the tax authorities is not required to use the partial exemption standard method in Cost Rica. Special methods are not allowed in Costa Rica.

Capital goods. Capital goods are defined as the goods used in the production and manufacture of other products and their purchase should exceed 15 base salaries (approx. USD11,500). When a taxable person purchases a capital good that is used exclusively on taxable activities, the tax paid should give rise to the right of tax credit in the same month of acquisition.

When a taxable person purchases a capital good used for exempt and taxable activities, it should give rise to the right of input tax proportionally on the percentage of taxable activities in relation to the total activities of the taxable person. However, for the following four years from the first December the capital goods were acquired, the proportionality should be adjusted considering the real figures that represented in each year the percentage of the exempted activities and tax able activities of the taxable person.

Refunds. If the amount of input tax recoverable in a month exceeds the amount of output tax payable, the taxable person obtains an input tax credit. The input tax credit may be carried forward to offset output tax in the following months. Under special circumstances, if the taxable person foresees that VAT credits will not be used within the following three months, the taxable person may request to use the credits to offset other tax liabilities.

Pre-registration costs. Taxable persons are not permitted to recover input tax paid on purchases made prior to VAT registration. Nevertheless, the VAT law provides that taxable persons may accrue tax credits generated after VAT registration for a maximum period of four years until the beginning of their economic activity, as long as they are directly and exclusively linked to the taxable person activity and are duly registered for VAT purposes.

Bad debts. Output tax accounted for on supplies that do not get paid by the recipient (i.e., bad debts) cannot be recovered in Costa Rica.

Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Costa Rica.

G. Recovery of VAT by non-established businesses

Input tax incurred by non-established businesses in Costa Rica is not recoverable.

H. Invoicing

VAT invoices. Tax authorities have set forth several resolutions to ensure that all invoices must be issued electronically following specific technological requirements. Therefore, VAT taxable per sons must generally provide an electronic VAT invoice for all taxable supplies made at the time when the service is rendered or the good is purchased.

Credit notes. An electronic VAT credit note may be used to reduce the VAT charged and reclaimed on the supply of goods and services.

Electronic invoicing. Electronic invoicing is mandatory in Costa Rica for all taxable persons. Invoices must be authorized by the tax authorities. The tax authorities may authorize the use of cash registers and other computerized systems to issue invoices. Electronic invoices must include an official invoice number and the taxable person’s identification number, and it must also show the VAT amount separately, among other requirements.

An electronic VAT invoice is generally necessary to support a claim for input tax credit.

Simplified VAT invoices. Simplified VAT invoicing is not allowed in Costa Rica. As such, full VAT invoices are required.

Self-billing. Purchase electronic invoices can be issued by the customer, in the event where a sup plier is not required to issue such invoices, (i.e., where the supplier is registered for the Simplified Tax Regime). In this case, the customer may issue a purchase electronic invoice on behalf of the supplier as documentation to support tax credits and deductible expenses.

Proof of exports. Costa Rican VAT is not imposed on the supply of exported goods. However, to qualify as VAT-free, exports must be supported by customs documents that prove the goods have

left Costa Rica. Suitable evidence includes export invoices and bills of lading. Exportation of services should not be levied with VAT.

Foreign currency invoices. In general, VAT invoices must be issued in the domestic currency, which is the Costa Rican colón (CRC). However, invoices may also be issued in US dollars (USD) if the amount in colóns is also stated. The applicable exchange rate is the exchange rate on the date of issuance of the invoice, as established by the Costa Rican Central Bank.

Supplies to nontaxable persons. Small taxable persons are not required to issue VAT invoices for sales under 5% of a base salary (approx. USD34) unless requested by the purchaser.

Unless requested by the purchaser, small taxable persons are not required to issue full VAT invoices. In practice, such taxable persons do not have the electronic platform to issue full VAT invoices, therefore the purchase electronic invoice is an alternative for the purchaser to have an invoice to support its input tax and deductible expenses.

Records. Taxable persons must hold records and other accounting information (i.e., contracts, invoices, etc.). Records can be held in or outside of Costa Rica. However, if records are held outside of Costa Rica, they must be made readily available if requested by the tax authorities.

Record retention period. The records and other accounting information must be kept for five years.

Electronic archiving. Records can be kept electronically or physically in Costa Rica. There are no specific requirements to be met regarding the records. They may be kept and archived elec tronically or physically.

I. Returns and payment

Periodic returns. VAT returns (D-104 return) are submitted monthly. Returns must be submitted by the 15th day of the month following the end of the return period. A return must be filed even if no VAT is due for the period.

Periodic payments. Payment in full is due by the same date as the return submission, i.e., the 15th day of the month following the end of the return period. Tax due must be paid in Costa Rican colóns (CRC).

Electronic filing. Electronic filing is mandatory in Costa Rica for all taxable persons. VAT returns must be filed online (at www.hacienda.go.cr/ATV/Login.aspx). Filing requires a Tax ID (Nite or Dimex) issued by the tax authorities.

Payments on account. Payments on account are not required in Costa Rica.

Special schemes. Simplified tax regime. VAT returns for small taxable persons must be submitted quarterly by the 15th day of the month following the end of the return period. The relevant months are October, January, April and July. Payment in full is due on the same date, and a return must be filed even if no VAT is due for the period.

The special tax regime is a voluntary regime set for small taxable persons to facilitate the control and compliance of these taxable persons. The tax authorities fix the parameters for which taxable persons can opt for this regime, based on the type of activity, annual sales, annual profits and number of employees, among others.

Taxable persons that voluntarily access this special tax regime are not required to issue elec tronic invoices and due to the nature of this regime should not be entitled for tax credits.

VAT is calculated based on a variable that would be assigned according to the taxable person’s activity.

Annual returns. Annual returns are not required in Costa Rica. Tax credits generated from the acquisition of goods and services used indistinctly for operations subject to tax credits and opera tions not subject to tax credits, must be offset proportionally. In this sense, in every December return, taxable persons should calculate the proportion of their annual operations subject to tax credits to determine the percentage of their tax credits to be offset.

Supplementary filings. No supplementary filings are required in Costa Rica.

Correcting errors in previous returns. A taxable person should correct any errors or omissions from prior periodic filings by filing a rectification of the tax return that should be corrected. This filing can be submitted online or personally at the offices of the tax authorities.

Digital tax administration. There are no transactional reporting requirements in Costa Rica.

J. Penalties

Penalties for late registration. A taxable person that fails to register for VAT on a timely basis cannot offset VAT credits generated from purchases that at the time of registration are included in inventory. Penalties and interest are also assessed for late registration for VAT.

Penalties for late payment and filings. Penalties apply to a range of VAT offenses in the following amounts:

• Late filing of a VAT return: a penalty of 50% of the average monthly Costa Rican wage (“base salary” as established by law is CRC431,000, approx. USD693). The amount of the penalty may be reduced up to 80%, depending on the time of payment.

• Late payment of VAT: a penalty of 1% of the unpaid amount for every month or fraction of a month. The maximum penalty is 20% of the unpaid amount.

Penalties for errors. A penalty of 50% of the unpaid amount (as determined by the tax authorities) is due for inaccuracies in the return. Such penalties may be increased to 100% or 150% if the inaccuracies qualify as severe or very severe. For this purpose, the unpaid amount must be higher than 500 times the value of the base salary and meet certain other requirements, such as deriving from the concealment of information or use of fraudulent means. These penalties may be reduced up to 80% depending on the time of payment.

In addition, interest applies to underpayments of VAT at the average interest rate charged by commercial banks to the commercial sector for the tax period.

Failure to notify or late notification to the tax administration of changes to a taxable person’s VAT registration details filed should be subject to penalties. For further details, please see the subsec tion above Changes to VAT registration details.

Penalties for fraud. Tax fraud occurs when the taxable person by any action or omission commits fraud against the tax authorities by incorrectly computing the amount of tax due. VAT fraud that results in an underpayment of VAT greater than 500 times the base salary is punishable by a term of imprisonment of 5 to 10 years.

A failure to file and satisfy reporting obligations in Costa Rica is subject to penalties ranging from half a base salary to two base salaries as follows:

• Not registering with the relevant tax authorities – penalty of half a base salary

• Failure to maintain accounting books or records required by law – penalty of one base salary

• Failure to maintain shareholder registry book – penalty of one base salary

• Failure to issue invoices as required by law – two base salaries

Personal liability for company officers. The directors of a company shall have no liability for any errors or omissions in the submitted VAT returns. They can only be liable where the local institutions consider that there was tax fraud carried out by the company.

Statute of limitations. The statute of limitations in Costa Rica is four years. The tax authorities have a four-year term to review the returns and identify errors to impose penalties for those who are duly registered with the tax administration, which corresponds to the statute of limitations.

The statute of limitations may be extended to 10 years in the event that a taxable entity or indi vidual is not duly registered before the tax authorities or in the case they are registered, they file tax returns that should be qualified as fraudulent or they had the omission of filing the tax return.

Finally, the taxable person has a four-year period to voluntarily correct errors in previous VAT returns by means of a rectification.