The Chinchilla administration tax proposal now being considered in the Asamblea Legislativa will have a major effect on the construction and real estate markets, two sectors that still are struggling to recover from the economic downturn.
The construction chamber estimates that the proposed 14 percent value-added tax will add between 8 and 12 percent to the cost of a home. Similar percentages will be tacked on commercial construction.
In addition, the tax plan proposes to raise the real estate transfer tax from 1.5 percent to 3 per cent. That alone will result in $1,500 more tax on the sale of a relatively modest $100,000 home or condo. The construction of such a dwelling would mean $8,000 to $12,000 more investment, and none of that is profit to the builder or developer.
The chamber, the Cámara Costarricense de la Construcción, seeks a special and lower value-added tax rate for construction projects and the continuation of the existing 1.5 percent transfer tax. However, the organization has not been able to present its views to the nine-member legislative committee that is studying the measure. It said the most recent request to be heard was rejected by the committee.
The chamber also said that contractors seek to pay the value-added tax over three months instead of immediately to improve cash flow.
The value-added tax being considered now is a product of negotiations between Casa Presidencial, the administration’s political party, Liberación Nacional, and opposition parties that now control the legislature. A package with higher taxes appears to be highly likely, and lawmakers have sought to consider the measure on what they call the fast track where debate and amendments are limited.
Under the current proposal, engineering and architectural fees would be subject to the higher value-added tax. Such professional services are not taxed now, and building supplies are taxed at the current 13 percent rate.
A construction chamber statement also said that its members were worried about how construction in progress would be treated if the tax passed quickly. It suggested that these jobs be exempted from the broader taxes.
Some lawmakers have challenged in court the treatment of the fast track for the proposal.
That procedure was set up to limit debate on proposed laws linked to the free trade treaty with the United States and served to expedite passage against strong opposition.
Although new construction would be made more costly by the tax proposals, they would seem to have a favorable effect on resales where the owners of existing properties do not have to pay taxes on professional services.
Buyers still would have to pay a higher transfer tax if the proposal becomes law.
Still unclear is the way real estate commissions would be treated. Such professional income would seem to be subject to the proposed value-added tax, but commissions are not all profit.
President Laura Chinchilla Miranda is anxious for passage of the bill because the central government is deep in the red.