Expected today, Thursday, is the government’s final draft of its tax reform that establishes two Value Added Tax (VAT) rates – Impuesto Sobre el Valor Agregado (IVA) in Spanish – one 13% and the other 4%, with the aim of alleviating the deterioration of the public finances.
Originally, the intention of the Executive Branch was to transform the current sales tax into a VAT, raising the rate for the current 13% to 15%. However, after weighing that majority of the legislative parties would oppose the increase, the Ministerio de Hacienda (Treasury) opted for the 13%.
But, although the tax rate does not change, what is covered (taxed) does.
Currently, a 13% sales tax is applied to all purchases of goods. The VAT proposal adds a number of services that are currently not taxed, such as digital services, lawyer fees, gyms, entertainment such as movie tickets, Netflix, Spotify and Amazon, property rentals of more than ¢425,000 monthly (US$760 dollars at the current exchange rate) and transportation services (except public service, such as buses).
Under the proposal, higher rents are taxe, so are the services of plumber or washing machine repairs, for example.
To compensate for the shortfall of the lower tax rate (13%), the Government proposes a list of goods and service that will be taxed the 4% VAT rate: books (in all formats), airline tickets leaving Costa Rica, packaging and as well raw materials to make them, equipment and machinery (except where there is an express exemption), planting, harvesting, fumigation, fertilization, mechanical and chemical weed control, transport and product classification services, land rental, storage (warehousing), and agricultural production services, among others.
The task of presenting and defending the proposal to the Legislative Assembly will be on the Deputy Minister of the Presidency, Luis Paulino Mora, who has been negotiating between the different political factions and the Government.
The Deputy Minister emphasized that the government aims to fast-track the bill. “We will not submit it if it isn’t to be fast-tracked,” said Mora.
Currently, the purchase of air tickets has a 5% tax charged by the Instituto Costarricense de Turismo (ICT) – tourism board, that would remain and be separate from the VAT if the tax bill is approved.