ACCOUNTING

Costa Rica 2018 | EXECUTIVE GUIDE | B2B

Costa Rica enjoys certain structural accounting advantages over other Central and Latin American countries, but further reforms are still needed.

Germán Morales
GERMÁN MORALES
Managing Partner
Grant Thornton
Francisco Ovares
FRANCISCO OVARES
Directing Partner
Moore Stephens

What is the general panorama of taxes for foreign investors in Costa Rica?

Germán Morales The most important thing is that investors find advice. Even though the countries in the region are small, regulation in each country is different. We have to understand that Costa Rica has done it right. It is a country that has a territorial regime, and income tax is only paid on what is produced in Costa Rica. Another particularity is that it has a general sales tax, whereas other countries have a VAT, which we do not. This means that the general sales tax only applies to some products, but professional services are not taxed. This makes a fundamental difference. Investors must understand the Costa Rican regulation so they can operate under the current legislation. If someone comes to produce here aiming to export the final product, we have a well-developed free zone regime with great structural strengths that complies with OECD guidelines.

Francisco Ovares No country in Latin America requires the tax reforms that are being proposed to raise the tax burden. What is required is to manage, collect, and monitor existing taxes in a more effective way. Unfortunately, in Costa Rica the treasury does not do this. Therefore, the easiest way out for the government is to increase taxes, which in turn reduces investments and the competitiveness of the country. The government wants to increases the sales tax from 15 to 16%. Potential investors—national and international—are worried since Costa Rica is already an expensive country with critical infrastructure and transportation problems. I have a 2015 report from the treasury detailing the failure to pay income and sales tax. The conclusion of this report is that almost 8% of GDP is lost due to tax evasion. Therefore, if the fiscal deficit is 5% and there is an 8% non-collection of taxes for contraband, then the solution of the state is to apply the pertinent measures to manage, collect, and supervise in a more effective way. We must also update and modify our code and tax law since it was created in the 1970s and is no longer valid for the current climate. The government must also reduce spending, not merely collect taxes better.

What will the general environment in Costa Rica be like in 2018?

GM The world has changed because we are in an era of transparency, and transparency in the subject of taxes is fundamental. We are set to have a regulation that will demand Costa Rican banks send information about the accounts of foreign clients to their country of origin, an agreement between 120 countries. This transparency means we have to be certain that everything we do in terms of taxes is done to perfection. In terms of taxes, there is no room for mistakes or gray areas. Another thing is that increasing competitiveness has made utility margins decrease. Since 2018 is also an election year, the current government cannot make decisions due to limited time and the next government will evaluate what needs to be done. We advise our clients to be transparent and cautious, but do not expect strong changes in the government that will change the path of the country. Approximately 56% of the national budget is from taxes; the rest comes from debt. Hence, there is a high deficit in the country, and we do not see a lot of decisions being made from the government. 2018 will not be a bad year, but investors need to be cautious and informed.

FO The construction sector will grow. While our housing development was always horizontal, growth is now in vertical housing developments. The clean energy sector will also grow, as will services in other sectors, with companies such as Amazon, HP, Intel, Firestone, and so on going strong. They all have their shared services centers in Costa Rica for Latin America and the world. On the Costa Rican front, the main element is the talent and capacity of human resources, which are excellent. 99% of the population is literate, and engineers, accountants, and business administrators are abundant. Costa Rica is developing a solid position in the technology sector, even with many small businesses. In other words, our human talent is excellent and still cheaper than its equivalent in the US.