Tax plan covers many services previously untaxed

Many expats still do not understand the impact of President Laura Chinchilla’s tax plan. The draft, if passed, would assess a 14 percent value-added tax on commercial rents, some residential rents and contract services.

Such transactions are not taxed now. These would include the services of an auto mechanic, a Web page designer, a private driver (but not a taxi driver or bus driver), plumbers, electricians, house painters, security guards, personal trainers and even maids and babysitters. The exception would be if the worker were an employee and not a contract laborer.

Many expats hire individuals as contract workers to avoid paying the otherwise obligatory social charges.

Rents other than for homes with an estimated monthly payment under about $1,400 a month would be subject to the tax. The owner would be required to collect the 14 percent value-added levy and remit it to the tax collector.

The only exception in the law is for gardening services. So the contract worker who mows the lawn or cuts the hedges would not have to charge and collect the tax.

Many expat homeowners who contract for household services now would suddenly find themselves obligated to collect the levy and file monthly tax reports.

That lawyers and medical practitioners, such as dentists and physicians, would have to pay the tax has been reported extensively. But the tax also will be assessed on work by accountants, consultants, independent salespeople, residency experts and online service providers who are not taxed now.

Also on the hook for the tax would be artists and craft goods commissioned when the product goes directly to the end user. Any items that pass through a retail outlet would be subject to a 14 percent sales tax, but the artist or artisan would collect and remit 14 percent on the wholesale price. That is why the tax is called value added. Each individual or entity in the product cycle charges the tax on the value they have added to the product.

Some, like barbers and beauticians originate the service, so they collect the entire amount, although they may get a deduction from the tax for the tax they paid to purchase the hair products they use. The bill promises full employment for cost accountants.

Presumably, expats who work here on contract for foreign firms would be subject to the tax. This would include the legions of software designers, sales representatives and even free-lance writers. As a practical matter, many of these workers would seek to evade the tax, and the Direccíón General de Tributación, the tax collecting agency, would be hard-pressed to track them down and probably would not do so unless the amount were large.

Many expats from the United States work here for foreign firms to take advantage of the U.S. earned income exemption that was $92,900 in 2011. Many of these workers do not report their income to Costa Rica tax collectors either even though the work was done here. That is becoming harder with the proliferation of international tax treaties.

International call center contracts would be subject to the 14 percent value-added tax according to the draft of the proposed law. Although the workers probably are full-time employees, the firm is offering a service that seems to be subject to the tax. This could represent significant income to the central government. But it may put the firms at a competitive disadvantage compared to similar operations elsewhere offshore.

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