Wednesday, March 6, 2019

Costa Rica: What Happens to Sales Tax Exemptions Once the VAT Law is Enforced?

As of July 1, the value added tax will be enforced, and one of the big questions is whether the exemptions to the sales tax granted through different laws in favor of companies and State Offices, will remain alive.

The analysis must start from the rule established by article 63 of the Tax Code, which stipulates that tax benefits do not extend to taxes established after their creation.

Therefore, if it is considered that with the enforcement of the Law to Strengthen Public Finances, No. 9635, the sales tax has been repealed and a new value added tax arises, the tax benefits related to sales tax would loose effect.

Article 1 of Law No. 9635 remarks that its issuance responds to a “comprehensive reform” of the former Sales Tax Law. Therefore, it may be interpreted that a repealing of said tax has not taken place, but simply an update of its legal regime.

It would not be the first time that a similar situation happened. When the Property Tax Law No. 7509 was published back in 1995, the Judicial Court and the State Attorney considered at first, that it was the same Territorial Tax of 1939, whose legal status was modernized. Therefore, the limitation contained in article 63 of the Tax Code was not applicable.

In a similar way, in the sales tax and the value added tax, the essential elements of the tax such as the tariff (13%), and the creditor (State) remain the same, lengthening some others such as the taxpayer and the generating event, in order to adjust its legal regime to the national context. Such interpretation, would maintain alive the previously recognized exemptions

However, the analysis complicates when reading the Transitory Disposition XIV of Law No. 9635 which indicates that “Public institutions, which upon the entry into force of Title I of this law were exempt from sales tax, shall maintain said benefit during the current budgetary year and shall include within their budgets, for the immediately following fiscal year, the amounts for value added tax corresponding to the acquisition of goods and services under their charge “.

In this sense, although there is no legal disposition that repeals the sales tax, the transitory norm seems to suppose that an elimination of the exemptions associated to this tax granted in favor of public institutions has taken place, giving them a peremptory term of life.

The above mentioned, has an additional particularity. The Law to Strengthen Public Finances does not include a definition for public institution. Therefore, the scope of such transitory norm is not clear, will it include central government, decentralized entities, public non-state entities, public companies, administrative organs? All of these could, in one way or another fit into the concept used by the Law.

Taking into account what the rest of the Law states, the transitory norm will not be applicable to the Costa Rican Social Security System and the Municipal Corporations, since article 9 considers such entities not subjected to the added value tax in relation to the goods and services that sell, lend or acquire. Likewise, it would not be suitable to the entities of the Executive Branch covered by the Tax Immunity Principle, where a tax exemption technically does not operate, but an extinction of the tax duty in accordance to article 49 of the Tax Code.

In this sense it must be remembered that in a legal tax relationship, the State may not assume both the character of creditor and taxpayer. Therefore, the collection of the value added tax is not possible regarding the different institutions which comprise the Executive Branch.

The relevance of this issue extends to determine which of these transactions will give right to the tax credit. Article 21 of The Law to Strengthen Public Finances, as a general rule, states that only the tax paid on the acquisition of goods and services used in carrying out operations subject to and not exempt from taxation, gives the right to a tax credit

However, this norm also indicates that taxpayers who have carried out transactions with State Institutions, by virtue of tax immunity, or with public or private entities that by virtue of the provision in special laws enjoy exemption from value added tax will be entitled to the tax credit.

Based on the literality of the Law, transactions with the Costa Rican Social Security System and the Municipalities, in principle, will not generate a tax credit as they are considered not subjected to the tax, which technically is different from being exempt.

In relation to the other public institutions, a case-by-case analysis of the transactions must necessarily be carried out to determine whether or not they are subject to an exemption regime or are covered by the Principle of Tax Immunity.

Consortium Legal – Anayansi Mora

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