Today is the end of fiscal year 2012-2013. This is important for Costa Ricans and expats alike doing business in this country. It is also noteworthy for individuals and retired persons who are not in the Costa Rica tax system. There are more tax collectors beating the streets, making phone calls and performing audits like no time in Costa Rican history. Fines have increased dramatically too, making it very expensive not to follow the rules.
Businesses must complete their accounting for the fiscal year that started on Oct. 1, 2012, to prepare their income tax returns, form D-101, due on Dec. 16. Usually, the tax filing date is Dec. 15, but this year that day falls on a Sunday. They must also begin accumulating the totals to file their D-151 reports, which will be due Dec. 2. This form is normally due Nov. 30, but this year that date falls on a Saturday. The D-151 is an informational form used to report sales and purchases to the tax department. It is used to cross check information and the key in finding tax cheats.
The days of the tax department’s Web site not being helpful and of disorganized tax collections are over. Fiscal transparency,collaboration between government agencies,lotteries and better computer systems have improved Costa Rica’s tax collection system many-fold.
Kevin Chavarria of KCPATAX, a bilingual certified public accountant, said in an interview he is impressed by the progress of the Dirección General de Tributación in its tax collection practices. This entity is a department of the Ministerio de Hacienda and is usually referred to by most as Tributación Directa. Sergio Rojas, a private accountant working in Cartago, confirmed the assertions.
Many countries, including the United States, have been assisting Costa Rica in improving its tax structure. Agreements between countries have also been negotiated to share tax information.
Chavarria and Rojas outlined the ways tax dodgers are caught. They said that not filing the required tax forms is a sure way to send up red flags because of the check and balance system designed into informational forms like the D-151. The tax department analyses gross and net profit margins and changes in owners’ equity that do not match with taxes paid against profits to find companies that are not paying their taxes fairly, they said. Random audits are also always a possibility as well, they added.
The Costa Rican tax department is somewhat lenient for those who fess up and want to go straight. Voluntary disclosure of tax sins have reduced fines up to 80 percent. Fines are based on a Costa Rican base salary because these amounts change periodically due to inflation. Today, a base salary is equal to 379,400 colons or $767 U.S.. Not signing up with the tax department is a fine of three base salaries or $2,301. Not filing a D-151 is two base salaries or $1,534. A full list of the sanctions, reductions and base salaries due to voluntary disclosures can be found on the Dirección General de Tributación’s Web site.
Why is this important to people like retired expats not in the tax system? Because they can be audited and fined too. Here is an example. Mr. and Mrs. Retired Expat contract the remodeling of their house. The suppliers of materials and contractor services for the remodeling put Mr. and Mrs. Expat on their D-151 declaration forms. However, the retired couple do not file the forms because they are not in the Costa Rican tax system.
The tax department calls them on the telephone and asks why they are spending money because they were reported. Mr. and Mrs. Retired Expat have to prove where their money came from outside the country and that it was not taxable or they will be severely fined.
Both accountants interviewed have had to go to bat for expats to justify to the tax department expenses for things like, remodeling, large electric and phone bills, and professional services payment to attorneys and accountants.
In some cases, rents were being received and not reported to the local tax authorities which is tax evasion. They were caught because of the information form D-151. Some expats forget that making money in Costa Rica on any activity like work, rents, leases, lending money or any profitable activity is taxable.
What to do to sleep at night so the men in black are not knocking at the door? Find a licensed public or private accountant who speaks English when one does not speak Spanish, who has extensive experience working with foreigners and who knows their unique tax requirements.
The statues of limitations for tax sins is five years. If fraud is proven, it is longer, and convictions include jail time. In the past, it was somewhat easy to get away with shoddy reporting, non-filing and hiding income earned in Costa Rica. It is not anymore, and it is going to get worse. Every year over the past several years, the government has passed decree after decree to tighten up its tax structure. It must do so, because the countries of the world want to see Costa Rica doing its best to get tax revenue before they lend Costa Rica more money.
There are more forms to file than the D-101 and the D-151, including but not limited to sales tax and withholding forms. The list is long, but these two are the key forms used to catch the majority of tax dodgers.
Unexperienced accountants are a dime a dozen in this country like inexperienced attorneys. Expats need to find one who knows what he or she is doing. They should get references, call them, and find one who has a good reputation in the local community. They need to read up and stay up-to-date on the country’s new tax rules. That makes for a more peaceful life.
Garland M. Baker is a 42-year resident and naturalized citizen of Costa Rica who provides multidisciplinary professional services to the international community. Reach him at firstname.lastname@example.org. Baker has undertaken the research leading to these series of articles in conjunction with A.M. Costa Rica. Find the collection at http://crexpertise.info, a complimentary reprint is available at the end of each article. Copyright 2004-2013, use without permission prohibited.