It is tax time again. Tax returns for individuals and companies are due on Friday. Yes, this Friday.
Every company is required to register with the taxman. This registration happens when one gets a set of legal books approved at the tax authority, Tributación Directa. The form to do so changed this year from one without a number to Form 406. The old form had no number and was clumsy looking. It can still be used until Friday, but starting Monday, to register a company to get legal books authorized one must use the new form.
There are several important deadlines for taxpayers in Costa Rica. The most important ones for expats are Dec. 15 when Form 101 for income taxes is due and March 31 when Form 110 for education and cultural taxes is due.
To be a contributor to the tax system one identifies him or herself on Form 140.
Registering to get legal books approved is not the same as identifying oneself as a taxpayer. However, getting legal books approved adds a company or individual to the computer system.
Many expats do not file Form 140 because they do not feel they are involved in financial activities as defined by the tax code. Others do not know about Form 140, and others just feel that if they do not file it the tax collector will not catch them.
Article 2 of the Tax Law 7092 states that every entity involved in a financial activity must file tax information in Costa Rica. However, owning a piece of property and selling it, making a bundle on the transaction, is not considered a financial activity.
Renting or leasing the land, renting out a house, villa, or condo over the Internet to others like tourists, as many homeowners here do, is considered an income-generating activity and profits are taxable. Many expats that do this type of rentals collect the money here or outside of Costa Rica and do not pay tax on the profits.
A broker who sells real estate in Costa Rica and makes a commission is also involved in an income-generating endeavor, and taxes are due on the commission earned. However, many real estate people selling properties to foreigners do not declare their earnings or pay taxes on them. Some are not even legal residents.
Tax hikes are in Costa Rica’s future. The current administration is working hard on new tax legislation. The last tax bill died due to technicalities not content. This is true even though the content would surely have destroyed the country.
More importantly, taxes in the future will have more of a bite. The tax dodging games of today will meet harsh penalties.
When a new tax law is reality, the country will be ready.
Things are changing fast in Costa Rica regarding taxes and most people are not aware of what is happening around them. Banks are perfecting their computer systems to enhance electronic banking. The reason for this is due to the worldwide movement toward transparency.
Transparency in itself is scary, but when it comes to a collection vehicle for taxes, it is a spine-chilling nightmare.
Bank accounts now are monitored very closely. Bank officers now regularly call clients asking questions regarding common transactions. All banking information is available to the tax authorities.
Moreover, the tax authorities are now doing the checks and balances matching tax returns to money movements. When the results do not look right, strange people show up at the door requesting to look at records.
Many expats play games with the money they are
making in Costa Rica. They feel they will never be caught because the country is very disorganized in its collection of taxes. Others hide their earnings from their home country’s tax department too.
Costa Rica may not currently have a capital gains tax, but the United States as well as other countries do, and citizens are required to pay it even if the money is made here.
The common prescription for a good night’s sleep is adequate doses of tax planning and staying on the up and up with all tax authorities.