Costa Rica along with other Central and South American countries now requires the use of electronic invoices. These are called facturas electronicas in Spanish, the buzzword everyone is talking about. The government wants everyone to use them by the end of the year. There are a few exceptions but not many.
Health professionals, accountants, and lawyers were the first required to use the new system starting in January, February, and March. These groups are the most significant tax cheaters, according to tax department studies. Each month that goes by includes another business type.
The concept behind electronic invoicing comes from e-billing used by corporations and trading partners for many years throughout the world. The term describes any method by which invoices are presented electronically to customers for payment. Countries like Costa Rica have elected to bastardize the concept to collect more taxes.
Hacienda, the finance ministry, and Tributacíon Directa, the tax department have spent much money promoting the system as easy to use. It is not. They also say people will love it. They do not.
Let the facts speak for themselves. Only 9 percent of big tax contributors and 28 percent of professionals are using electronic invoicing at this time, eight months into the program. Most people hate it. The tax department is surprised and is sending out thousands of emails reminding people the tax penalties for not getting with the program. Penalties range up to 43.1 million colons (around $76,000). The numbers are correct. They are not typos.
They primarily are looking for those businesses not collecting and paying sales taxes and for professionals declaring far less than they make. That is the reason they were the first required to use the system.
One of the significant flaws in the strategy is that it requires an email address. Many people do not use one, especially older people and those who live in rural areas. Even younger adults have strayed away from using email and prefer to chat and messaging. The government is building a system for the future based on the technologies of the past.
In a nutshell, this is how electronic invoicing works:
1. Purchasing a product or service starts the process.
2. The vendor asks the buyer for identification and an email address then uses an independent service or the tax department’s free interface to register the sale.
3. The customer receives an official tax invoice directly from the tax department in portable document format, known as PDF, and extensible markup language, XML.
4. If the purchase is a consumable and not deductible, the process stops here.
5. Expenses for businesses require an additional step for deductibility. The business customer needs to accept the electronic data interchange documents with the tax administration within eight business days to validate the expense for tax purposes.
The PDF file is for the human component. It is a file format developed in the 1990s to present documents across different media for people to read. XML is the machine language used so different computers can communicate with each other.
Hacienda’s notion is to control every sale and purchase digitally. One does not need to be very smart to figure out the implications of their plan.
The XML data goes into computers based on identification numbers. The machines crunch the data, comparing income and expense information, and spits out who is buying things beyond their means and not paying their fair share to the government.
Hacienda wants sellers to deny customers the right to buy something if they do not supply their personal information. One optometrist complained in an interview about her telephone consultation with the tax support line. “It’s tough to sell an expensive set of glasses and frames these days. The tax department wants me to tell an older farmer with little concept of computing he can’t buy glasses because he doesn’t have email. Are they crazy?”
Will expats be affected? Yes, they will. Expats along with Ticos, even tourists, must supply their data upon request to buy something.
Some may have already experienced the questions at PriceSmart and have had a special sticker put on the back of their card. It indicates PriceSmart collected purchase data on customers in compliance with the law.
All this Orwellian Big Brother tax policing is disconcerting to most. There are a couple of groups jumping for joy besides the tax people. Accountants and computer programmers are delighted.
Hacienda’s administración tributaria virtual system provides free invoicing for users. But its hard to understand and use. More than 20 groups are currently offering electronic invoicing services, some free as a hook to reel in accounting clients.
Most business people will need them. Recent tax laws and newer ones on the horizon are a maze of rules and compliance requirements. The eight-day regulation to accept invoices from vendors is a good example. Not adhering to the deadline means no expense deduction, resulting in higher income taxes.
That is the bottom line. All this gobbly goop with electronic invoicing means more tax revenue through increased collections of taxes and penalties. A tax official told an accountant at a seminar that the tax department is counting on them: the fines. They know many people will not comply with the new rules.
Hacienda is very active on social media, especially Twitter, with one theme over and over. “Denuncie Ya!” This Spanish phrase means “turn in tax cheats.” There is even an app to do so.
Do expats need to worry? Not really. But if they came to Costa Rica for increased privacy from peering eyes into their spending habits, Costa Rica is no longer the place to live. The problem is there is almost no place to go anymore in the world for privacy.
Expats in business should work with a good accountant. One who knows the ins and outs of the new rules and keeps their senses on high alert for changes to the tax system.
Will electronic invoicing based on old email technologies work? Will people give up their personal private information readily? Time will tell. Some professionals are giving discounts to those who will pay cash under the table creating a black market of sorts. This new system may create more problems than it was designed to solve.
Article first published in A.M. Costa Rica on September 3, 2018.