Exclusive to A.M. Costa Rica
Nov. 1 was the deadline for everyone doing business in Costa Rica to give and accept electronic invoices. Much to the chagrin of Ticos and expats alike, this includes the renting of rooms, homes, villas, and any other type of temporary lodging for vacationers.
It does not matter if Airbnb, Vacation Rental by Owner, Booking.com, HomeAway or another firm provided the service to the customer. Costa Rica still wants the sale input into its system.
Electronic invoicing is all about better control over taking in sales taxes and improving income tax collection. Many people renting to tourists or those here in transit believe in tax avoidance and even outright evasion.
One person who rents to others said, “I use Airbnb, which is transparent to the tax people. I have no intention of using the new system.” This person does not know about the La Dirección de Inteligencia Tributaria. That is the intelligence division of the tax department.
Another expat who does not believe that the electronic invoicing requirement has a bite said: “I collect cash and only rent to tourists who find me online. Let the tax police catch me if they can.”
Here is a review of Costa Rica’s sales tax law. The rules are simple and governed by Ley 6826. In effect, all products sold are taxable, and services are not, except for the exceptions.
Certain products are exempt from tax such as those deemed in the social interest like the canasta básica, the basic food basket. If the law does not exclude a product or group, it is taxable. Services, on the other hand, are not taxable, again except for the exceptions.
What some property owners and managers are willingly evading is a section of Article 1 of the law that assesses a tax on the value added in the sale of goods and the supply of the following: hotels, motels, boarding houses or temporary stays.
The section does not include rents and long-term leases mentioned in Article 4 of Ley 7527, the rental law: “This law applies to any contract, verbal or written lease of real property, wherever located and are intended for home or the exercise of a commercial, industrial, craft, professional, technical, health care, cultural, recreational activities or public services.”
“Recreational activities” does not mean short-term rentals to tourists or motel rooms. Both are taxable, along with parking spaces and storage areas. Rental agreements in Costa Rica by default are for three years. So, it is pretty easy to figure out if a property is being rented using the rental law where there is a clear landlord-tenant relationship, and the transaction does not require sales tax.
La Dirección de Inteligencia Tributaria is the tax department’s C.I.A. Its job is to find tax cheats. The division increased its productivity over the past few years many-fold. A report that came out in May noted that in 2012 8,791 tax suspects were tagged. In 2016 there were 945,619, an increase of over 10,000 percent.
Anyone renting to others will recognize immediately what a pain this new requirement is going to be. Imagine getting a renter from Airbnb, collecting the money in a PayPal account in the United States and then have to navigate the local tax department’s electronic invoicing system to send the customer another invoice from Costa Rica.
Rental customers are going to be confused too. They will get an invoice from Airbnb and an even a more cryptic one from Hacienda, Costa Rica’s tax department.
A local accountant tells a story about his mother-in-law who made bikinis as a home business and sold them online using Facebook and Instagram. One day she received a call from the tax department asking for her tax return. She played dumb and was amazed that the tax inspector had copies of every ad she had placed on social media.
In 2016 Airbnb approached Hacienda trying to make a deal to collect sales taxes to guarantee their collection. Kevin Chavarria, a C.P.A. and a very active accounting professional, said in an interview that “Hacienda was too hard-headed to negotiate, and there was no deal reached.”
Amazon collects sales taxes and sends the money to individual states making tax collection a breeze for Amazon products and services. Other online retailers do not, which creates a problem for tax collectors. Amazon found its policy a benefit for sales because customers feel better knowing the company is taking care of any tax liability.
Costa Rica’s new electronic invoicing system is not very friendly for those renting vacation properties. Most accountants agree it would better for the country to make deals with those firms providing the service internationally, like Airbnb.
To sum-up, income from anything rented in Costa Rica that is transitory or temporary generates a sales tax. Every transaction now requires an electronic invoice run through the tax department’s system. Those thinking about not abiding by the rules need to be aware Hacienda has an investigative department designed exclusively to find tax cheaters. The fines for not using the new system are outrageous and bank-breaking. Up to 43.1 million colons (over $70,000). Those numbers do not include additional penalties and jail time for tax evasion.
There is a new tax law on the horizon referred to as the ‘nuevo plan fiscal.’ It will not change the electronic invoicing requirement. It will change sales taxes to value-added taxes, and they will apply to many more products and include services.
Article first published in A.M.Costa Rica on November 5, 2018.