Costa Rica has set up its tax agreement with the U.S. federal government so that officials here can keep an eye on expat finances.
Gonzalo Gallegos, the chargé d’affaires at the U.S. Embassy, and Edgar Ayales, minister of Hacienda, signed the agreement Tuesday. Ostensibly, the pact gives the U.S. Internal Revenue Service access to information about the finances of U.S. citizens here.
But a description also said that all the data would be channeled through the Ministerio de Hacienda, which is where the Costa Rican tax collectors are located. The alternative would have been to let banks make the reports individually to the U.S. officials themselves.
This means that banks will be notifying the ministry of expats who are receiving money here. Many are employed in the gray economy and do not pay Costa Rican taxes. The information about their income will become apparent to the tax collectors.
The logical alternative would be for expats who work here for U.S. companies to have the funds deposited in a stateside bank where the wage earner could be eligible for an earned income exemption each year. Some firms already pay their U.S. employes through a bank in Panamá.
An unknown number of expats are working here online and are not registered with the Costa Rican tax authorities.
Costa Rica said Tuesday that it had become the second country in Latin America to make an agreement with the U.S. government over the Foreign Account Tax Compliance Act. México was the first.
The United States is one of the few countries in the world that taxes its citizens for money earned overseas. The tax compliance legislation was designed to find accounts that U.S. residents had stashed cash. Foreign banks that do not comply with the U.S. law can be penalized 30 percent of any remittances they receive from American banks.
The agreement still requires legislative action to put it into force. Costa Rican officials said they would seek such action. Some lawmakers are sure to question if this pact does not intrude on the country’s sovereignty.
Costa Rica does not tax its nationals and residents on money earned outside the country. But there is a good chance that this will change as the country struggles to create more taxes and raise more money for its sagging finances. There has been a suggestion that money should be taxed when it comes into Costa Rica from a foreign source. For some lawmakers, this is not good enough. They seek to impose taxes when the money is earned.
U.S. legislation about foreign banks has caused some to stop handling accounts for Americans.